**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **WASHINGTON,
        D.C. 20549**
 
 **FORM
        10-K**
 
 **x
        ANNUAL REPORT PURSUANT
        TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
        1934**
 
 For
        the
        fiscal year ended December 31, 2007
 
 OR
 
 **o
        TRANSITIONAL REPORT
        UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
        1934**
 
 For
        the
        transition period from _______ to _______.
 
 **COMMISSION
        FILE NUMBER**  **000-32985**
 
 **WACCAMAW
        BANKSHARES, INC.**
 (Exact
        name of registrant as specified in its charter)
 
 **NORTH
                  CAROLINA**
              
              **52-2329563**(State
                  or Other Jurisdiction of
              
              (I.R.S.
                  EmployerIncorporation
                  or Organization)
              
              Identification
                  No.)
 
 **110
        NORTH J. K. POWELL BOULEVARD**
 **WHITEVILLE,
        NORTH CAROLINA** **** **28472**
 (Address
        of Principal Executive Offices) (Zip
        Code)
 
 Registrant’s
        Telephone number, including area code: **(910)
        641-0044**
 
 Securities
        registered pursuant to Section 12(b) of the Act
 
 **NONE**
 
 Securities
        registered pursuant to Section 12(g) of the Act:
 
 **COMMON
        STOCK, NO PAR VALUE**
 
 Indicate
        by check mark if the registrant is a well-known seasoned issuer, as defined
        in
        Rule 405 of the Securities Act.
 o
        Yes x No
 
 Indicate
        by check mark if the registrant is not required to file reports pursuant
        to
        Section 13 or Section 15(d) of the Act.
 o
        Yes x No
 
 Indicate
        by check mark whether the registrant (1) has filed all reports required to
        be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the
        preceding 12 months (or for such shorter period that the registrant was required
        to file such reports), and (2) has been subject to such filing requirements
        for
        the past 90 days.
 x
        Yes o No
 
 Indicate
        by check mark if disclosure of delinquent filers pursuant to Item 405 of
        Regulation S-K is not contained herein, and will not be contained, to the
        best
        of the registrant’s knowledge, in definitive proxy or information statements
        incorporated by reference in Part III of this Form 10-K or any amendment
        to this
        Form 10-K x
  Indicate
          by check mark whether the registrant is a large accelerated filer, an
          accelerated filer, a non-accelerated filer or a smaller reporting company.
          See
          the definitions of “large accelerated filer,” “accelerated filer,” and “smaller
          reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
 Large
          accelerated filer o   Accelerated
          filer o   Non-accelerated
          filer oSmaller reporting company
x
 
 Indicate
          by check mark whether the registrant is a shell company (as defined in
          Rule
          12b-2 of the Act).
 o
          Yes x No
 
 State
          the
          aggregate market value of the voting and non-voting common equity held
          by
          non-affiliates computed by reference to the price at which the common equity
          was
          last sold, or the average bid and asked price of such common equity, as
          of the
          last business day of the registrant's most recently completed second fiscal
          quarter. $ 63,768,978.
 
 Indicate
          the number of shares outstanding of each of the registrant’s classes of Common
          Stock as of the latest practicable date. 5,436,970 shares
          of Common Stock outstanding as of March 20, 2008:
 
 **Documents
          Incorporated by Reference.**
  The
          Registrant’s Annual Report to stockholders for the fiscal year ended December
          31, 2007, incorporated in Part II of this Form 10-K
  Registrant’s
          Proxy Statement for the 2008 Annual Meeting of Stockholders, incorporated
          into
          Part III of this Form 10-K


FORM
      10-K
      CROSS-REFERENCE INDEX




PART
                I
            
            FORM
                10-K
            
            PROXY
                STATEMENT
            
            ANNUAL
              REPORTItem
                1 - Business
            
            XItem
                1A - Risk Factors
            
            XItem
                1B - Unresolved Staff Comments
            
            XItem
                2 - Properties
            
            XItem
                3 - Legal Proceedings
            
            XItem
                4 - Submission of Matters to a Vote
              Of
                Security Holders
            
            XPART
                IIItem
                5-Market for Registrant’sCommon
                Equity,
              RelatedStockholder
                Matters and Issuer
              Purchases
                of Equity Securities
            
            XItem
                6 - Selected Financial Data
            
            XItem
                7 - Management’s Discussion andAnalysis
                of
              Financial
                Conditionand
                Results of Operations
            
            
            
            
            
            XItem
                7A - Quantitative and QualitativeDisclosures
              About
                Market Risk
            
            
            
            
            
            XItem
                8 - Financial Statements andSupplementary
                Data
            
            
            
            
            
            XItem
                9 - Changes in and Disagreementswith
              Accountants
                onAccounting
                and Financial
              Disclosures
            
            XItem
                9A - Controls and Procedures
            
            XItem
                9B - Other Information
            
            XPART
                IIIItem
                10 - Directors, ExecutiveOfficers
                and
              CorporateGovernance
            
            X
            
            XItem
                11 - Executive Compensation
            
            
            
            XItem
                12 - Security Ownership of CertainBeneficial
              Owners
                andManagement
                and Related
              Stockholder
                Matters
            
            
            
            XItem
                13 - Certain Relationships andRelated
              Transactions,
                and Director Independence
            
            
            
            XItem
                14 - Principal Accounting Fees andServices
            
            
            
            XPART
                IVItem
                15 - Exhibits, Financial StatementSchedules
            
            X







**PART
        1**
 
 **ITEM
        1 - BUSINESS**
 
 **General**
 
 Waccamaw
        Bankshares, Inc. (the “Company”) was formed during 2001 as a financial holding
        company chartered in the State of North Carolina. On July 1, 2001, the Company
        acquired all the outstanding shares of Waccamaw Bank (the “Bank”) in a tax-free
        exchange. To date, the only business activities of the Company consist of
        the
        activities of the Bank.
 
 Waccamaw
        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, Brunswick County through seven banking offices,
        New Hanover County through one banking office, Bladen County through one
        banking
        office, Lancaster County, South Carolina through one banking office and Horry
        County, South Carolina through three banking offices. As a state-chartered
        bank
        which is a member of the Federal Reserve, the Bank is subject to regulation
        by
        the North Carolina Commissioner of Banks and the Federal Reserve.
 
 **Location
        and Service Area**
 
 The
        Company’s primary service area is Columbus, Brunswick, Bladen and New Hanover
        Counties of North Carolina and Lancaster and Horry Counties of South Carolina.
        The principal business of the Company is to provide comprehensive individual
        and
        corporate banking services to its main service area. These services include
        demand and time deposits as well as commercial, installment, mortgage and
        other
        consumer lending services that are traditionally available from community
        banks.
 
 Columbus
        County is located in the southeastern portion of North Carolina near the
        South
        Carolina border. Whiteville, the largest city in the county is approximately
        45
        miles west of Wilmington, North Carolina, 150 miles southeast of Charlotte,
        North Carolina, and 45 miles north of Myrtle Beach, South Carolina. These
        cities
        all have national or regional airports.
 
 Brunswick
        County is adjacent to Columbus County to the southeast and also borders South
        Carolina. Shallotte, the largest city in the county, is approximately 35
        miles
        southwest of Wilmington and 35 miles northeast of Myrtle Beach.
 
 New
        Hanover County is a coastal county and adjacent to Brunswick County to the
        north. Wilmington, the largest city in the county, has a diversified economy
        which includes shipping, manufacturing, medical and retail industries.
 
 Bladen
        County is adjacent to Columbus County to the northeast. Elizabethtown, the
        largest city in the county is approximately 50 miles northwest of Wilmington
        and
        80 miles northwest of Myrtle Beach.
 
 Lancaster
        County is located near the middle of the state near the North Carolina border
        and approximately 40 miles south of Charlotte, NC and fifty miles north of
        Columbia, South Carolina. These cities all have national or regional airports.
 
 Horry
        County is located in the northeastern portion of South Carolina near the
        North
        Carolina border. Myrtle Beach, the largest city in the county, has a diversified
        economy which includes tourism, manufacturing, medical and retail industries.
 
 The
        principal components of the economy in the Company’s primary service area are
        manufacturing, agriculture and tourism. Manufacturing employment is concentrated
        in the wood products and textile industries. The primary agriculture products
        are tobacco and hogs.
 
 **Competition**
 
 The
        primary business activity of the Company is commercial banking. This activity
        is
        conducted by the Bank which is the wholly owned subsidiary of the
        Company.




2




Banking
        is a highly competitive industry. The principal areas and methods of competition
        in the banking industry are the services that are offered, the pricing of
        those
        services, the convenience and availability of the services and the degree
        of
        expertise and personal manner with which those services are offered. The
        Bank
        encounters strong competition from other commercial banks, including the
        largest
        North Carolina banks, operating in the Bank’s market area. There are 16 offices
        of 5 other commercial banks operating in Columbus County, 35 offices of 7
        other
        commercial banks operating in Brunswick County, 71 offices of 16 other
        commercial banks operating in New Hanover County, 8 offices of 6 other
        commercial banks operating in Bladen County, 9 offices of 5 other commercial
        banks operating in Lancaster County and 113 offices of 17 other commercial
        banks
        operating in Horry County. In the conduct of certain aspects of its business,
        the Bank also competes with credit unions, money market mutual funds, and
        other
        non-bank financial institutions, some of which are not subject to the same
        degree of regulation as the Bank. Many of these competitors have substantially
        greater resources and lending abilities than the Bank and offer certain
        services, such as investment banking, trust, interstate and international
        banking services, that the Bank cannot or will not provide.
 
 **Supervision
        and Regulation**
 
 The
        Company and the Bank are subject to state and federal banking laws and
        regulations. These impose specific requirements and restrictions and provide
        for
        general regulatory oversight with respect to virtually all aspects of
        operations. These laws and regulations are generally intended to protect
        depositors, not stockholders. To the extent that the following summary describes
        statutory or regulatory provisions, it is qualified in its entirety by reference
        to the particular statutory and regulatory provisions. Any change in applicable
        laws or regulations may have a material effect on the business and prospects
        of
        the Company. Beginning with the enactment of the Financial Institutions Reform,
        Recovery and Enforcement Act of 1989 ("FIRREA") and following with the Federal
        Deposit Insurance Corporation Improvement Act ("FDICIA"), enacted in 1991,
        numerous additional regulatory requirements have been placed on the banking
        industry in the past five years, and additional changes have been proposed.
        The
        operations of the Company and the Bank may be affected by legislative changes
        and the policies of various regulatory authorities. The Company is unable
        to
        predict the nature or the extent of the effect on its business and earnings
        that
        fiscal or monetary policies, economic control, or new federal or state
        legislation may have in the future.
 
 **Federal
        Bank Holding Company Regulation (Financial Holding Company
        Regulations)**
 
 The
        Company is a financial holding company within the meaning of the
        Gramm-Leach-Bliley Act of 1999 (the "GLB Act"). Under the GLB Act, which
        became
        effective on March 11, 2000, the types of activities in which a bank holding
        company may engage were significantly expanded. Subject to various limitations,
        the GLB Act generally permits a bank holding company to elect to become a
        “financial holding company.” A financial holding company may affiliate with
        securities firms and insurance companies and engage in other activities that
        are
        "financial in nature." Among the activities that are deemed "financial in
        nature" are, in addition to traditional lending activities, securities
        underwriting, dealing in or making a market in securities, sponsoring mutual
        funds and investment companies, insurance underwriting and agency activities,
        certain merchant banking activities and activities that the Federal Reserve
        considers to be closely related to banking.
 
 A
        bank
        holding company may become a financial holding company under the GLB Act
        if each
        of its subsidiary banks is "well capitalized" under the Federal Deposit
        Insurance Corporation Improvement Act prompt corrective action provisions,
        is
        well managed and has at least a satisfactory rating under the Community
        Reinvestment Act. In addition, the bank holding company must file a declaration
        with the Federal Reserve if it falls out of compliance with these requirements
        and may be required to cease engaging in some of its activities.
 
 Under
        the
        GLB Act, the Federal Reserve serves as the primary "umbrella" regulator of
        financial holding companies, with supervisory authority over each parent
        company
        and limited authority over its subsidiaries. Expanded financial activities
        of
        financial holding companies generally will be regulated according to the
        type of
        such financial activity- banking activities by banking regulators, securities
        activities by securities regulators and insurance activities by insurance
        regulators. The GLB Act also imposes additional restrictions and heightened
        disclosure requirements regarding information collected by financial
        institutions.
  The
          Company is also still subject to the Bank Holding Company Act (the "BHCA").
          Under the BHCA, the Company is subject to periodic examination by the Federal
          Reserve and is required to file periodic reports of its operations and
          such
          other information as the Federal Reserve may require.
  3




*Investments,
        Control, and Activities.* With
        certain limited exceptions, the BHCA requires every holding company to obtain
        the prior approval of the Federal Reserve before (i) acquiring substantially
        all
        the assets of any bank, (ii) acquiring direct or indirect ownership or control
        of any voting shares of any bank if after such an acquisition it would own
        or
        control more than 5% of the voting shares of such bank (unless it already
        owns
        or controls the majority of such shares), or (iii) merging or consolidating
        with
        another holding company.
 
 In
        addition, and subject to certain exceptions, the BHCA and the Change in Bank
        Control Act, together with regulations thereunder, require Federal Reserve
        approval (or, depending on the circumstances, no notice of disapproval) prior
        to
        any person or company acquiring "control" of a holding company, such as the
        Company. Control is conclusively presumed to exist if an individual or company
        acquires 25% or more of any class of voting securities of the holding company.
        In the case of the Company, under Federal Reserve regulations control will
        be
        rebuttably presumed to exist if a person acquires at least 10% of the
        outstanding shares of any class of voting securities.
 
 *Source
        of Strength; Cross-Guarantee.* In
        accordance with Federal Reserve policy, the Company is expected to act as
        a
        source of financial strength to the Bank and to commit resources to support
        the
        Bank in circumstances in which the Company might not otherwise do so. Under
        the
        BHCA, the Federal Reserve may require a holding company to terminate any
        activity or relinquish control of a nonbank subsidiary (other than a nonbank
        subsidiary of a bank) upon the Federal Reserve's determination that such
        activity or control constitutes a serious risk to the financial soundness
        or
        stability of any subsidiary depository institution of the bank holding company.
        Further, federal bank regulatory authorities have additional discretion to
        require a holding company to divest itself of any bank or nonbank subsidiary
        if
        the agency determines that divestiture may aid the depository institution's
        financial condition. The Bank may be required to indemnify, or cross-guarantee,
        the FDIC against losses it incurs with respect to any other bank which the
        Company controls, which in effect makes the Company's equity investments
        in
        healthy bank subsidiaries available to the FDIC to assist any failing or
        failed
        bank subsidiary of the Company. The Bank is the only bank currently controlled
        by the Company.
 
 **The
        Bank**
 
 The
        Company is the holding company for the Bank, which is a North Carolina banking
        corporation. Substantially all Company revenues are earned through the
        operations of the Bank. The Bank is subject to examination and supervision
        by
        the Federal Reserve and the North Carolina Commissioner of Banks (the
“Commissioner”). The Federal Reserve monitors the Bank’s compliance with several
        federal statutes such as the Community Reinvestment Act of 1977 and the
        Depository Institution Management Interlocks Act. The Federal Reserve has
        broad
        enforcement authority to prevent the continuance or development of unsafe
        and
        unsound banking practices, including the issuance of cease and desist orders
        and
        the removal of officers and directors. The Federal Reserve must approve the
        establishment of branch offices, conversions, mergers, assumptions of deposit
        liabilities between insured and uninsured institutions, and the acquisition
        or
        establishment of certain subsidiary corporations. The Federal Reserve can
        prevent capital or surplus diminution in such transactions where the deposit
        accounts of the resulting, continuing or assuring bank are federally
        insured.
 
 The
        Bank
        is subject to capital requirements and limits on activities established by
        the
        Federal Reserve. Under the capital regulations, the Bank generally is required
        to maintain Tier 1 risk-based capital, in such terms as defined therein,
        of 4.0%
        and total risk-based capital of 8.0%. In addition, the Bank is required to
        provide a minimum leverage ratio Tier 1 capital to adjusted average quarterly
        assets (leverage ratio) equal to 3.0%, plus an additional cushion of one
        to two
        percent if the Bank has less than the highest regulatory rating. The Bank
        is not
        permitted to engage in any activity not permitted for a national bank unless
        (i)
        it is in compliance with its capital requirement and (ii) the FDIC determines
        that the activity would not pose a risk to the deposit insurance fund. With
        certain exceptions, the Bank also is not permitted to acquire equity investments
        of a type, or in an amount, not permitted for a national
        bank.




4




Federal
        banking law requires the federal banking agencies to take “prompt corrective
        action” in respect of insured depository institutions that do not meet minimum
        capital requirements. There are five tiers: “well capitalized,” “adequately
        capitalized,” “undercapitalized,” “significantly undercapitalized” and
“critically undercapitalized,” as defined by regulations promulgated by the FDIC
        and the other federal depository institution regulatory agencies. A depository
        institution is well capitalized if it significantly exceeds the minimum level
        required by regulation for each relevant capital measure, adequately capitalized
        if it meets each such measure, undercapitalized if it fails to meet any such
        measure, significantly undercapitalized if it is below such measures, and
        critically undercapitalized if it fails to meet any critical capital level
        set
        forth in the regulations. The critical capital level must be a level of tangible
        equity capital equal to not more than 65.0% of the minimum leverage ratio
        prescribed by regulation. A depository institution may be deemed to be in
        a
        capitalization category that is lower than is indicated by its actual capital
        position if it receives an unsatisfactory examination rating.
 
 The
        Bank
        is required to pay deposit insurance assessments set by the FDIC. Under the
        current assessment rate schedule, the Bank assessment will range from no
        assessment to .27% of the Bank’s average deposit base, with the exact assessment
        determined by the Bank’s capital and the FDIC’s supervisory opinion of the
        Bank’s operations. Only the strongest banks are not required to pay an
        assessment. The insurance assessments rate may change periodically. Changes
        in
        the assessment rate may have a material effect on the Bank’s operating results.
        The FDIC has the authority to terminate deposit insurance.
 
 The
        earnings of the Bank are affected significantly by the policies of the Federal
        Reserve Board, a federal agency which regulates the money supply in order
        to
        mitigate recessionary and inflationary pressures. Among the techniques used
        to
        implement these objectives are open market transactions in United States
        government securities, changes in the rate paid by banks on bank borrowings,
        and
        changes in reserve requirements against bank deposits. These techniques are
        used
        in varying combinations to influence overall growth and distribution of bank
        loans, investments, and deposits, and their use may also affect interest
        rates
        charged on loans or paid on deposits.
 
 The
        monetary policies of the Federal Reserve Board have had a significant effect
        on
        the operating results of commercial banks in the past and are expected to
        continue to do so in the future. In view of changing conditions in the national
        economy and money markets, as well as the effect of actions by monetary and
        fiscal authorities, no prediction can be made as to possible future changes
        in
        interest rates, deposit levels, loan demand or the business and earnings
        of the
        Bank.
 
 The
        Bank
        is chartered by the State of North Carolina and is subject to extensive
        supervision and regulation by the Commissioner. The Commissioner enforces
        state
        laws that set specific requirements for bank capital, the payment of dividends,
        loans to officers and directors, record keeping, and types and amounts of
        loans
        and investments made by commercial banks. Among other things, the approval
        of
        the Commissioner is generally required before a North Carolina chartered
        commercial bank may establish branch offices. North Carolina banking law
        requires that any merger, liquidation or sale of substantially all of the
        assets
        of the Bank must be approved by the Commissioner and the holders of two-thirds
        of the Bank’s outstanding common stock.
 
 Pursuant
        to North Carolina banking laws, no person may directly or indirectly purchase
        or
        acquire voting stock of the Bank which would result in the change of control
        of
        the Bank unless the Commissioner has approved the acquisition. A person will
        be
        deemed to have acquired “control” of the Bank if that person directly or
        indirectly (i) owns, controls or has power to vote 10% or more of the voting
        stock of the Bank, or (ii) otherwise possesses the power to direct or cause
        the
        direction of the management and policy of the Bank.
 
 In
        its
        lending activities, the Bank is subject to North Carolina usury laws which
        generally limit or restrict the rates of interest, fees and charges and other
        terms and conditions in connection with various types of loans.
 
 North
        Carolina banking law requires that bank holding companies register with the
        Commissioner. The Commissioner must also approve any acquisition of control
        of a
        state-chartered bank by a bank holding company.
  5


In
      1994,
      Congress adopted new legislation which generally permits an adequately
      capitalized and managed bank holding company to acquire control of a bank in
      any
      state, subject to certain state law requirements. North Carolina banking law
      has
      been amended to authorize banking organizations in any state to acquire North
      Carolina banking institutions on a reciprocal basis. North Carolina banking
      law
      authorizes North Carolina banks to establish branches in other states and
      permits out-of-state banks to establish branches in North Carolina on a
      reciprocal basis. The overall effect of this legislation will increase
      competition in the banking industry in North Carolina, however, the State of
      South Carolina does not allow North Carolina chartered banks to establish
      branches in South Carolina. As a result, North Carolina chartered banks may
      only
      establish offices within the State of South Carolina through acquisitions of
      existing South Carolina institutions effected in compliance with South Carolina
      banking law.





**Material
      Customers**





Deposits
      are derived from a broad base of customers in the Company’s trade area. No
      material portion of deposits have been obtained from a single person or a group
      of persons. Management does not believe the loss of any one customer would
      have
      a material adverse effect on the business of the Company.





The
      majority of loans and commitments to extend credit have been granted to
      customers in the Company’s market area. The majority of such customers are
      depositors. The Bank generally does not extend credit to any single borrower
      or
      group of related borrowers in excess of approximately $4.0 million.





**Rights**





No
      patents, trademarks, licenses, franchises or concessions held are of material
      significance to the Company.





**Environmental
      Laws**





Compliance
      with Federal, State, or local provisions regulating the discharge of materials
      into the environment has not had, nor is it expected to have in the future,
      a
      material effect upon the Company’s capital expenditures, earnings or competitive
      position.





**Employees**





The
      Company had no compensated employees. The Bank presently has 150 full-time
      equivalent employees consisting of 143 full-time employees and 13 part-time
      employees.




6


**ITEM
        1A - RISK FACTORS**
 
 *An
        investment in the registrant’s common stock involves a number of risks. We urge
        you to read all of the information contained in this annual report on Form
        10-K.
        In addition, we urge you to consider carefully the following factors before
        you
        invest in shares of the registrant’s common stock.*
 
 **We
        may not be able to maintain and manage our growth, which may adversely affect
        our results of operations and financial condition and the value of our common
        stock.**
  Our
        strategy has been to increase the size of our company by opening new offices,
        acquiring other banks and by pursuing business development opportunities.
        We
        have grown rapidly since we commenced operations. We can provide no assurance
        that we will continue to be successful in increasing the volume of loans
        and
        deposits at acceptable risk levels and upon acceptable terms while managing
        the
        costs and implementation risks associated with our growth strategy. There
        can be
        no assurance that our further expansion will be profitable or that we will
        continue to be able to sustain our historical rate of growth, either through
        internal growth or through successful expansion of our markets, or that we
        will
        be able to maintain capital sufficient to support our continued growth. If
        we
        grow too quickly, however, and are not able to control costs and maintain
        asset
        quality, rapid growth also could adversely affect our financial performance.
 
 **Changes
        in interest rates affect our interest margins, which can adversely affect
        our
        profitability.**
 
 We
        may
        not be able to effectively manage changes in interest rates that affect what
        we
        charge as interest on our earning assets and the expense we must pay on
        interest-bearing liabilities, which may significantly reduce our earnings.
        Since
        rates charged on our loans often tend to react to market conditions faster
        than
        do rates paid on our deposit accounts, these rate cuts have had a negative
        impact on our earnings until we could make appropriate adjustments in our
        deposit rates. Fluctuations in interest rates are not predictable or
        controllable and, therefore, there can be no assurances of our ability to
        continue to maintain a consistent positive spread between the interest earned
        on
        our earning assets and the interest paid on our interest-bearing
        liabilities.
 
 **Our
        profitability depends significantly on economic conditions in our market
        area.**
  Our
        success depends to a large degree on the general economic conditions in our
        market areas. The local economic conditions in these areas have a significant
        impact on the amount of loans that we make to our borrowers, the ability
        of our
        borrowers to repay these loans and the value of the collateral securing these
        loans. A significant decline in general economic conditions caused by inflation,
        recession, unemployment or other factors beyond our control would impact
        these
        local economic conditions and could negatively affect our financial condition
        and performance.
 
 **If
        we lose key employees with significant business contacts in our market area,
        our
        business may suffer.**
 
 Our
        success is largely dependent on the personal contacts of our officers and
        employees in our market area. If we lose key employees temporarily or
        permanently, our business could be hurt. We could be particularly hurt if
        our
        key employees went to work for our competitors. Our future success depends
        on
        the continued contributions of our existing senior management personnel.
  **If
        we experience greater loan losses than anticipated, it will have an adverse
        effect on our net income.**
  While
        the
        risk of nonpayment of loans is inherent in banking, if we experience greater
        nonpayment levels than we anticipate, our earnings and overall financial
        condition, as well as the value of our common stock, could be adversely
        affected.
  We
        cannot
        assure you that our monitoring procedures and policies will reduce certain
        lending risks or that our allowance for loan losses will be adequate to cover
        actual losses. In addition, as a result of the rapid growth in our loan
        portfolio, loan losses may be greater than management’s estimates. Loan losses
        can cause insolvency and failure of a financial institution and, in such
        an
        event, our stockholders could lose their entire investment. In addition,
        future
        provisions for loan losses could materially and adversely affect our
        profitability. Any loan losses will reduce the loan
        loss allowance. A reduction in the loan loss allowance will be restored by
        an
        increase in our provision for loan losses. This would reduce our earnings,
        which
        could have an adverse effect on our stock price.




7


**In
      order to be profitable, we must compete successfully with other financial
      institutions which have greater resources and capabilities than we do.**




The
      banking business in North Carolina in general is extremely competitive. Most
      of
      our competitors are larger and have greater resources than we do and have been
      in existence a longer period of time. We must overcome historical bank-customer
      relationships to attract customers away from our competition. We compete with
      the following types of institutions:






·other
                commercial
                banks
              ·savings
                banks
              ·thrifts
              ·credit
                unions
              ·consumer
                finance
                companies
            
            ·securities
                brokerage
                firms
              ·mortgage
                brokers
              ·insurance
                companies
              ·mutual
                funds
              ·trust
                companies




Some
      of
      our competitors are not regulated as extensively as we are and, therefore,
      may
      have greater flexibility in competing for business. Some of these competitors
      are subject to similar regulation but have the advantages of larger established
      customer bases, higher lending limits, extensive branch networks, numerous
      automated teller machines, greater advertising-marketing budgets or other
      factors.




Our
      legal
      lending limit is determined by law. The size of the loans which we offer to
      our
      customers may be less than the size of the loans that larger competitors are
      able to offer. This limit may affect to some degree our success in establishing
      relationships with the larger businesses in our market.





**New
      or acquired branch facilities and other facilities may not be
      profitable.**





We
      may
      not be able to correctly identify profitable locations for new branches and
      the
      costs to start up new branch facilities or to acquire existing branches, and
      the
      additional costs to operate these facilities, may increase our noninterest
      expense and decrease earnings in the short term. If other banks or branches
      of
      other banks become available for sale, we may acquire them. It may be difficult
      to adequately and profitably manage our growth through the establishment of
      these branches. In addition, we can provide no assurance that these branch
      sites
      will successfully attract enough deposits to offset the expenses of operating
      these branch sites. Any new or acquired branches will be subject to regulatory
      approval, and there can be no assurance that we will succeed in securing such
      approvals.





**Government
      regulations may prevent or impair our ability to pay dividends, engage in
      additional acquisitions, or operate in other ways.**





Current
      and future legislation and the policies established by federal and state
      regulatory authorities will affect our operations. We are subject to supervision
      and periodic examination by the Federal Reserve Board and the North Carolina
      Commissioner of Banks. Our principal subsidiary, Waccamaw Bank, as a
      state-chartered member bank, also receives regulatory scrutiny from the North
      Carolina Commissioner of Banks and the Federal Reserve. Banking regulations
      are
      designed primarily for the protection of depositors rather than stockholders,
      and they may limit our growth and the return to you as an investor by
      restricting its activities, such as:





·
            the
                payment of dividends to stockholders;·
            possible
                transactions with or acquisitions by other institutions;·
            desired
                investments;·
            loans
                and interest rates;·
            interest
                rates paid on deposits;·
            the
                possible expansion of branch offices; and·
            the
                ability to provide securities or trust services.




We
      are
      registered with the Federal Reserve Board as a financial holding company. We
      cannot predict what changes, if any, will be made to existing federal and state
      legislation and regulations or the effect that such changes may have on our
      business. The cost of compliance with regulatory requirements may adversely
      affect our ability to operate profitably.




8


**Our
      stock trading volume has been low compared with larger financial holding
      companies.**




The
      trading volume in our common stock on the Nasdaq Global Market has been
      comparable to other similarly sized bank holding companies since trading on
      the
      Global Market began. Nevertheless, this trading volume does not compare with
      more seasoned companies listed on other stock exchanges. Thus, the market in
      our
      common stock is somewhat limited in scope relative to some other companies.
      In
      addition, we can provide no assurance that a more active and liquid trading
      market for our stock will develop in the future.




**Our
      articles of incorporation include anti-takeover provisions that may prevent
      stockholders from receiving a premium for their shares or effecting a
      transaction favored by a majority of stockholders.**




Our
      articles of incorporation include anti-takeover provisions, including a
      supermajority vote requirement for a merger under certain circumstances as
      well
      as a provision allowing our Board of Directors to consider the social and
      economic effects of a proposed merger. Such provisions may have the effect
      of
      preventing Stockholders from receiving a premium for their shares of common
      stock and discouraging a change of control by allowing management to prevent
      a
      transaction favored by a majority of the Stockholders.




**Our
      securities are not FDIC insured.**





Our
      common stock is not a savings or deposit account or other obligation of the
      Bank, and is not insured by the Federal Deposit Insurance Corporation or any
      other governmental agency and is subject to investment risk, including the
      possible loss of principal.





**ITEM
      1B - UNRESOLVED STAFF COMMENTS**





Not
      applicable





**ITEM
      2 - PROPERTIES**





The
      Company purchased a 2.44 acre tract of real estate in March of 1999 for $233,318
      from a Company director to be used as a construction site for a banking
      facility. This transactions was effected at arm’s length and management believes
      that the purchase price was at or below fair market value. The construction
      was
      completed in April of 2001 at a cost of $1.8 million. The two story building
      has
      approximately 12,000 finished square feet. In addition to the tellers inside
      the
      building, the Bank utilizes 3 drive-up lanes and an ATM to service the needs
      of
      customers.





The
      Bank
      has two additional branches in Columbus County located at 105 Hickman Road,
      Tabor City, North Carolina and 111 Strawberry Boulevard, Chadbourn, North
      Carolina. The Tabor City Branch is located in a 3,800 square foot building
      that
      includes two drive-up lanes and an ATM. The property is leased for $33,474
      per
      year. The lease was assumed from the prior tenant and expires in 2011. The
      Bank
      has the option to extend the lease for four additional five year
      terms.





The
      Chadbourn branch is a one-story brick building with approximately 2,500 square
      feet of floor space that was leased following a Centura branch acquisition.
      The
      Bank has a five year lease with the option to renew for five additional terms
      of
      five years each. The branch also has drive-up facilities.





The
      Bank
      has seven branches located in Brunswick County, two in Shallotte, North
      Carolina, one in Holden Beach, North Carolina, two in Southport, North Carolina,
      one in Ocean Isle, North Carolina and one in Oak Island, North Carolina. The
      Shallotte Main Street branch is housed in a 2,521 square foot facility that
      includes two drive-up lanes and an ATM. The building is leased for a term of
      ten
      years beginning on February 1, 2000. The Bank has the option to renew the lease
      for three additional terms of five years.





The
      Shallotte Smith Street branch is housed in a 3,515 square foot facility that
      includes one drive-up lane and an ATM. The land and building were purchased
      at a
      cost of $2.2 million in September 2007 from BB&T.





The
      Holden Beach branch is housed in a 1,200 square foot facility that includes
      one
      drive-up lane and an ATM. The building is leased for a term of five years
      beginning on October 10, 2000. The Bank has the option to renew the lease for
      five additional terms of five years.




9





The
      Southport Howe Street branch is housed in a 1,860 square foot facility. The
      land
      and building are leased for a term of five years beginning on March 1, 2005.
      The
      Bank has the option to renew the lease for five additional terms of five
      years.





The
      Southport Supply Road branch is housed in a 3,858 square foot facility. The
      construction was completed in December 2006 at a cost of $1.2 million. The
      land
      is leased for a term of five years beginning on March 1, 2005. The Bank has
      the
      option to renew the lease for five additional terms of five years.





The
      Oak
      Island branch is housed in a 2,490 square foot facility. The land and building
      were purchased from BB&T at a cost of $1.5 million and has one drive-up lane
      and an ATM.





The
      Elizabethtown branch is housed in a 2,016 square foot facility. The land is
      leased for a term of five years beginning on November 7, 2005.





The
      Kerr
      Avenue branch in Wilmington is housed in a 3,000 square foot facility that
      includes two drive-up lanes and an ATM. The building is leased for a term of
      five years beginning on August 1, 2004. The Bank has a five year lease with
      the
      option to renew for five additional terms of five years.





The
      Heath
      Springs branch is housed in a 5,500 square foot facility. The building was
      purchased from The Bank of Heath Springs for $463,168.





The
      Ocean
      Isle branch is housed in a 2,982 square foot facility and has one drive-up
      lane
      and an ATM. The construction was completed in July 2007 at a cost of $921,000.
      The land is leased for a term of ten years beginning on March 1, 2007. The
      bank
      has the option to renew the lease for four additional terms of five years.





The
      Conway 16 th Avenue
      branch is housed in a 1,350 square foot facility. The Bank has a five year
      lease
      beginning on September 1, 2006. The Conway branch is also leasing a 1,536 square
      foot facility for a term of eighteen months beginning on July 1, 2007.





The
      Conway Medical Center branch is housed in a 1,508 square foot facility. The
      building was purchased for $600,000 from BB&T and has one drive-up lane and
      an ATM.





The
      Myrtle Beach branch is housed in a 2,400 square foot facility and has one
      drive-up lane and an ATM. The lease was assumed from BB&T and expires in
      2010 with the option to renew the lease for an additional term of five
      years.





The
      bank
      has an operations center located on Madison Street in Whiteville which is housed
      in a 7,700 square foot facility. The building is leased for a term of seven
      years beginning on January 1, 2006. The Bank has the option to renew the lease
      for five additional terms of five years.





**ITEM
      3 - LEGAL PROCEEDINGS**





The
      Company is not party to, nor is any of its property the subject of, any material
      pending legal proceeding incidental to the business of the Company or the Bank.





**ITEM
      4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**





No
      matter
      was submitted to a vote of security holders during the fourth quarter of the
      fiscal year covered by this report.




10


**PART
      II**





**ITEM
      5 - MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
      ISSUER PURCHASES OF EQUITY SECURITIES**





The
      Company’s articles of incorporation authorize it to issue up to 25,000,000
      shares of common stock, no par value, of which 5,436,970 shares
      were issued and outstanding as of March 20, 2008. The stock is listed on the
      NASDAQ Global Market under the symbol “WBNK”





The
      approximate number of holders of the Company’s shares of common stock as of
      March 20, 2008 is 1,900. There were 45,978 shares
      issued and outstanding of the Company’s Series A convertible preferred stock as
      of March 20, 2008.





The
      Board
      of Directors anticipates that all or substantially all of the Company’s earnings
      in the foreseeable future will be required for use in the development of the
      Company’s business. The payment of future cash dividends will be determined by
      the Board of Directors and is dependent upon the receipt of dividends from
      the
      Bank. To
      date,
      the Company has not paid any cash dividends.





The
      availability of dividends from the Bank is dependant on the Bank’s earnings,
      financial condition, business projections, and other pertinent factors. In
      addition, North Carolina banking law will prohibit the payment of cash dividends
      if the bank’s surplus is less than 50% of its paid-in capital. Also, under
      federal banking law, no cash dividend may be paid if the Bank is
      undercapitalized, or insolvent or if payment of the cash dividend would render
      the Bank undercapitalized or insolvent, and no cash dividend may be paid by
      the
      Bank if it is in default of any deposit insurance assessment due to the
      FDIC.





Set
      forth
      below are the approximate high and low (bid quotations/sales price), known
      to
      the management of the Company, for each quarter in the last three fiscal years.
      These quotations reflect inter-dealer prices, without retail mark-up, mark-down,
      or commissions and may not represent actual transactions.





2007
            
            2006
            
            2005High
            
            Low
            
            High
            
            Low
            
            High
            
            LowFirst
                Quarter
            
            $
            15.90
            
            $
            14.00
            
            $
            17.27
            
            $
            15.91
            
            $
            17.50
            
            $
            15.68Second
                Quarter
            
            
            14.75
            
            
            12.91
            
            
            16.12
            
            
            14.77
            
            
            17.05
            
            
            15.91Third
                Quarter
            
            
            13.86
            
            
            11.69
            
            
            16.58
            
            
            13.81
            
            
            18.86
            
            
            16.36Fourth
                Quarter
            
            
            14.00
            
            
            10.25
            
            
            16.36
            
            
            13.75
            
            
            17.77
            
            
            15.91





See
      Item
      12 of this report for disclosure regarding securities authorized for issuance
      and equity compensation plans required by Item 201(d) of Regulation
      S-K.


On
        December 20, 2006, the Company sold 59,192 units, each consisting of one
        share
        of the Company’s Series A Preferred Stock and one warrant to purchase one share
        of common stock at $24.00. The units were sold for $17.00 each for an aggregate
        offering price of $1,006,264. The units were privately placed in accordance
        with, and in a transaction exempt from registration under the Securities
        Act of
        1933 by, Section 4(2) of the Securities Act, Regulation D and Rule 506
        thereunder. The units were sold to 20 individuals or entities, inclusive
        of
        accredited and non-accredited investors as those terms are defined by Regulation
        D.
 
 The
        Series A Preferred Stock, issued in connection with the unit placement, is
        convertible to shares of common stock of the Company at the election of the
        holder of the Series A Preferred Stock on a date which is not before one
        year
        and one day after the units were first issued or at the election of the Company
        if the holders of the Preferred Stock would be afforded any voting rights
        under
        North Carolina law. The warrants may be converted into shares of common stock
        upon the payment by the holder of the exercise price of $21.82 per share
        (adjusted for 11 for 10 stock split in 2007). The warrants may be exercised
        at
        any time before 5:00 p.m., Eastern Standard Time, September 30, 2009.




11


**ITEM
      6 - SELECTED FINANCIAL DATA**





**2007**
            ****
            **2006**
            ****
            **2005**
            ****
            **2004**
            ****
            **2003****(thousands,
                except share data and ratios)****Summary
                of Operations:**Interest
                income
            
            $
            31,637
            
            $
            25,379
            
            $
            18,228
            
            $
            11,450
            
            $
            9,957Interest
                expense
            
            
            16,296
            
            
            11,226
            
            
            7,536
            
            
            3,766
            
            
            3,627Net
                interest income
            
            
            15,341
            
            
            14,153
            
            
            10,692
            
            
            7,684
            
            
            6,330Provision
                for credit losses
            
            
            386
            
            
            1,450
            
            
            1,370
            
            
            819
            
            
            730Net
                interest income after provisionfor
                loan losses
            
            
            14,955
            
            
            12,703
            
            
            9,322
            
            
            6,865
            
            
            5,600Total
                non-interest income
            
            
            3,443
            
            
            2,581
            
            
            2,269
            
            
            2,445
            
            
            2,053Total
                non-interest expense
            
            
            12,440
            
            
            9,422
            
            
            6,967
            
            
            5,687
            
            
            4,436Income
                before income taxes
            
            
            5,958
            
            
            5,862
            
            
            4,624
            
            
            3,623
            
            
            3,217Income
                tax (expense) benefit
            
            
            (2,049
            )
            
            (2,210
            )
            
            (1,589
            )
            
            (1,209
            )
            
            (1,210
            )Net
                income
            
            $
            3,909
            
            $
            3,652
            
            $
            3,035
            
            $
            2,414
            
            $
            2,007**Per
                Common Share Data: 1**Basic
                earnings per share
            
            $
            .73
            
            $
            .71
            
            $
            .61
            
            $
            .49
            
            $
            .41Diluted
                earnings per share
            
            
            .72
            
            
            .69
            
            
            .58
            
            
            .47
            
            
            .39Market
                PriceHigh
            
            
            15.90
            
            
            17.27
            
            
            18.86
            
            
            24.68
            
            
            10.98Low
            
            
            10.25
            
            
            13.81
            
            
            15.68
            
            
            9.85
            
            
            6.31Close
            
            
            10.50
            
            
            14.88
            
            
            16.14
            
            
            16.36
            
            
            10.32Book
                value
            
            
            6.44
            
            
            5.77
            
            
            4.48
            
            
            3.99
            
            
            3.45**Selected
                Average Balances:**Total
                assets
            
            $
            438,579
            
            $
            356,675
            
            $
            302,381
            
            $
            217,035
            
            $
            177,563Loans,
                net
            
            
            332,451
            
            
            279,625
            
            
            238,579
            
            
            168,757
            
            
            137,403Securities
            
            
            65,454
            
            
            46,561
            
            
            31,257
            
            
            29,068
            
            
            19,663Interest-earning
                assets
            
            
            404,329
            
            
            331,713
            
            
            284,320
            
            
            200,982
            
            
            165,847Deposits
            
            
            354,512
            
            
            298,324
            
            
            252,994
            
            
            169,162
            
            
            147,663Interest-bearing
                liabilities
            
            
            366,266
            
            
            295,596
            
            
            256,492
            
            
            179,696
            
            
            146,438Shareholders’
                equity
            
            
            33,501
            
            
            25,945
            
            
            20,254
            
            
            17,941
            
            
            15,633**Selected
                Year-End Balance Sheet Data:**Total
                assets
            
            $
            508,368
            
            $
            399,581
            
            $
            322,792
            
            $
            258,412
            
            $
            193,207Loans,
                net
            
            
            355,138
            
            
            312,253
            
            
            257,575
            
            
            206,666
            
            
            142,342Securities
            
            
            102,644
            
            
            52,986
            
            
            35,214
            
            
            30,232
            
            
            24,053Interest-earning
                assets
            
            
            458,695
            
            
            374,047
            
            
            306,987
            
            
            247,432
            
            
            181,648Deposits
            
            
            378,179
            
            
            327,352
            
            
            271,035
            
            
            207,642
            
            
            154,796Interest-bearing
                liabilities
            
            
            437,207
            
            
            315,346
            
            
            273,171
            
            
            218,592
            
            
            158,828Shareholders’
                equity
            
            
            35,023
            
            
            31,703
            
            
            22,499
            
            
            19,899
            
            
            16,963**Selected
                Performance Ratios:**Return
                on average assets
            
            
            .89
            %
            
            1.02
            %
            
            1.00
            %
            
            1.11
            %
            
            1.13
            %Return
                on average equity
            
            
            11.67
            %
            
            14.07
            %
            
            14.98
            %
            
            13.46
            %
            
            12.84
            %Net
                interest margin
            
            
            3.79
            %
            
            4.27
            %
            
            3.76
            %
            
            3.82
            %
            
            3.82
            %**Asset
                Quality Ratios:**Nonperforming
                loans to period-end loans
            
            
            1.24
            %
            
            .49
            %
            
            80
            %
            
            1.16
            %
            
            .93
            %Allowance
                for loan losses to period-end loans
            
            
            1.49
            %
            
            1.54
            %
            
            1.50
            %
            
            1.33
            %
            
            1.53
            %Net
                loan charge-offs to average loans
            
            
            (.03
            )%
            
            .20
            %
            
            .09
            %
            
            0.15
            %
            
            0.27
            %**Capital
                Ratios:**Total
                risk-based capital
            
            
            10.88
            %
            
            11.82
            %
            
            12.36
            %
            
            13.64
            %
            
            14.24
            %Tier
                1 risk-based capital
            
            
            9.63
            %
            
            10.57
            %
            
            11.11
            %
            
            10.53
            %
            
            12.91
            %Leverage
                ratio
            
            
            8.70
            %
            
            9.61
            %
            
            9.37
            %
            
            9.44
            %
            
            10.47
            %Equity
                to assets ratio
            
            
            6.89
            %
            
            7.93
            %
            
            6.97
            %
            
            7.70
            %
            
            8.78
            %**Capital
                Ratios:**Number
                of banking offices
            
            
            16
            
            
            11
            
            
            8
            
            
            6
            
            
            5Number
                of full time equivalent employees
            
            
            150
            
            
            109
            
            
            85
            
            
            73
            
            
            58





1
            Adjusted
                for the effects of 6 for 5 stock splits in 2003 and 2004, 2 for 1
                stock
                split in 2004 and 11 for 10 stock split in
                2007.




12


**ITEM
        7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF
        OPERATION**
 
 The
        information required by this item is incorporated by reference to the Company’s
        2007 annual report to stockholders.
 
 **ITEM
        7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
        RISK**
 
 The
        Company’s profitability is dependent to a large extent upon its net interest
        income, which is the difference between its interest income on interest-bearing
        assets, such as loans and investments, and its interest expense on
        interest-bearing liabilities, such as deposits and borrowings. The Company’s
        primary market risk is interest rate risk, which is the result of differing
        maturities or repricing intervals of interest-earning assets and
        interest-bearing liabilities with the goals of minimizing interest rate
        fluctuations in its net interest income. The Company does not maintain a
        trading
        account, nor is it subject to currency exchange risk or commodity price risk.
 
 The
        Company’s Asset/Liability Committee (“ALCO”) meets on a monthly basis in order
        to assess interest rate risk, liquidity, capital and overall balance sheet
        management through rate shock analysis measuring various interest rate scenarios
        over the future 12 months. Through ALCO, the Company is able to determine
        fluctuations to net interest income from changes in the Prime Rate of up
        to 300
        basis points up or down during a 12-month period. ALCO also reviews policies
        and
        procedures related to funds management and interest rate risk based on local,
        national and global economic conditions along with funding strategies and
        balance sheet management to minimize the potential impact of earnings and
        liquidity from interest rate movements.
 
 The
        following table presents information about the contractual maturities, average
        interest rates and estimated fair values of the Company’s financial instruments
        that are considered market risk sensitive.
 
 **Expected
        Maturities of Market Sensitive Instruments Held at December 31,
        2007**
 **($
        in thousands)**
 
 **Average**
              
              **Estimated****1-3**
              
              **4-12**
              
              **13-60**
              
              **Over
                    60**
              
              
              
              **Interest**
              
              **Fair****Months**
              
              **Months**
              
              **Months**
              
              **Months**
              
              **Total**
              
              **Rate**
              
              **Value****Earning
                  Assets:**Loans
              
              $
              213,459
              
              $
              21,851
              
              $
              88,671
              
              $
              36,996
              
              $
              360,977
              
              
              8.27
              %
              $
              361,047Investments
              
              
              794
              
              
              14
              
              
              5,881
              
              
              95,955
              
              
              102,644
              
              
              5.81
              %
              
              102,644Deposits
                  with banks
              
              
              912
              
              
              -
              
              
              -
              
              
              -
              
              
              912
              
              
              5.19
              %
              
              912Total
              
              
              215,165
              
              
              21,865
              
              
              94,552
              
              
              132,951
              
              
              464,533
              
              
              7.82
              %
              
              464,603**Interest-bearing
                  liabilities:**Demand
                  accounts
              
              
              24,841
              
              
              -
              
              
              -
              
              
              -
              
              
              24,841
              
              
              .62
              %
              
              24,841Savings
                  and money market
              
              
              71,760
              
              
              -
              
              
              -
              
              
              -
              
              
              71,760
              
              
              3.35
              %
              
              71,760Time
                  deposits
              
              
              63,399
              
              
              165,871
              
              
              16,314
              
              
              3,624
              
              
              249,208
              
              
              5.05
              %
              
              249,715Repurchase
                  agreements andpurchased
                  funds
              
              
              24,651
              
              
              10,000
              
              
              10,000
              
              
              -
              
              
              44,651
              
              
              5.08
              %
              
              44,651Other
                  borrowings
              
              
              14,248
              
              
              7,000
              
              
              11,500
              
              
              14,000
              
              
              46,748
              
              
              5.96
              %
              
              45,698Total
              
              $
              198,899
              
              $
              182,871
              
              $
              37,814
              
              $
              17,624
              
              $
              437,208
              
              
              4.46
              %
              $
              436,665




13


**ITEM
        8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**
 
 The
        following financial statements of the Company and the Report of independent
        registered public accounting firm set forth on pages 6 through 39 of the
        Company’s 2007 Annual Report to Stockholders are incorporated herein by
        reference:
 
 1.
              Consolidated
                  Balance Sheets as of December 31, 2007 and
                  2006
 
 2.
              Consolidated
                  Statements of Income for the years ended December 31, 2007, 2006
                  and
                  2005
 
 3.
              Consolidated
                  Statements of Changes in Stockholders’ Equity for the years ended December
                  31, 2007, 2006 and 2005
 
 4.
              Consolidated
                  Statements of Cash Flows for the years ended December 31, 2007,
                  2006 and
                  2005
 
 5.
              Notes
                  to Consolidated Financial Statements
 
 6.
              Report
                  of independent registered public accounting
                  firm
 
 **ITEM
        9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
        DISCLOSURE**
 
 None.
 
 **ITEM
        9A(T) -** **CONTROLS
        AND PROCEDURES**
 
 **Evaluation
        of Disclosure Controls and Procedures**
  At
        the
        end of the period covered by this report, the Company carried out an evaluation,
        under the supervision and with the participation of the Company’s management,
        including the Company’s Chief Executive Officer and Chief Financial Officer, of
        the effectiveness of the design and operation of the Company’s disclosure
        controls and procedures pursuant to Securities Exchange Act Rule 13a-14.
  Based
        upon that evaluation, the Chief Executive Officer and Chief Financial Officer
        concluded that the Company’s disclosure controls and procedures were effective
        (1) to provide reasonable assurance that information required to be
        disclosed by the Company in the reports filed or submitted by it under the
        Securities Exchange Act was recorded, processed, summarized and reported
        within
        the time periods specified in the SEC’s rules and forms, and (2) to provide
        reasonable assurance that information required to be disclosed by the Company
        in
        such reports is accumulated and communicated to the Company’s management,
        including its Chief Executive Officer and Chief Financial Officer, as
        appropriate to allow for timely decisions regarding required
        disclosure.
 
 **Management's
        Report on Internal Control over Financial Reporting**
  Management
        is responsible for establishing and maintaining adequate internal control
        over
        financial reporting for the Company. The Company's internal control over
        financial reporting is a process designed under the supervision of the Company's
        CEO and CFO to provide reasonable assurance regarding the reliability of
        financial reporting and the preparation of the Company's financial statements
        for external reporting purposes in accordance with U.S. generally accepted
        accounting principles. Management has made a comprehensive review, evaluation
        and assessment of the Company's internal control over financial reporting
        as of
        December 31, 2007. In making its assessment of internal control over financial
        reporting, management used the criteria issued by the Committee of Sponsoring
        Organizations of the Treadway Commission (“COSO”) in Internal
        Control−−Integrated Framework. In accordance with Section 404 of the
        Sarbanes−Oxley Act of 2002, management makes the following
        assertions:
 
 ·
              Management
                  has implemented a process to monitor and assess both the design
                  and
                  operating effectiveness of internal control over financial
                  reporting.
 
 14
 ·
              All
                  internal control systems, no matter how well designed, have inherent
                  limitations. Therefore, even those systems determined to be effective
                  can
                  provide only reasonable assurance with respect to financial statement
                  preparation and presentation.
 
 ·
              The
                  Company’s management assessed the effectiveness of the company’s internal
                  control over financial reporting as of December 31, 2007. In making
                  this assessment, it used the criteria set forth by the Committee
                  of
                  Sponsoring Organizations of the Treadway Commission (COSO) in Internal
                  Control—Integrated Framework. Based on that assessment, we believe that,
                  as of December 31, 2007, the company’s internal control over
                  financial reporting is effective based on those criteria.
  This
        annual report does not include an attestation report of the company's registered
        public accounting firm regarding internal control over financial reporting.
        Management's report was not subject to attestation by the company's registered
        public accounting firm pursuant to temporary rules of the Securities and
        Exchange Commission that permit the company to provide only management's
        report
        in this annual report.
 
 **Changes
        in Internal Control over Financial Reporting**
  Management
        of the Company has evaluated, with the participation of the Company's CEO
        and
        CFO, changes in the Company's internal controls over financial reporting
        (as
        defined in Rule 13a−15(f) and 15d−15(f) of the Exchange Act) during the fourth
        quarter of 2007. In connection with such evaluation, the Company has determined
        that there have been no changes in internal control over financial reporting
        during the fourth quarter that have materially affected or are reasonably
        likely
        to materially affect, the Company's internal control over financial
        reporting.
 
 **ITEM
        9B - OTHER INFORMATION**
 
 None.
 
 **PART
        III**
 
 **ITEM
        10 - DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
        GOVERNANCE**
 
 The
        information required by this item is incorporated by reference to the Company’s
        proxy statement for the 2008 Annual Meeting of Stockholders, pages 4-10 and
        19-20.
 
 **Code
        of Ethics**
 
 The
        Company’s Board of Directors has adopted a Code of Ethics that applies to its
        directors and to all of its executive officers, including without limitation
        its
        principal executive officer and principal financial officer. A copy of the
        Company’s Code of Ethics is provided at the Company’s website: www.waccamawbank.com .
 
 **ITEM
        11 - EXECUTIVE COMPENSATION**
 
 The
        information required by this item is incorporated by reference to the Company’s
        proxy statement for the 2008 Annual Meeting of Stockholders, pages
        11-18.
  15


**ITEM
        12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
        STOCKHOLDER MATTERS**
 
 Certain
        information required by this item is incorporated by reference to the Company’s
        proxy statement for the 2008 Annual Meeting of Stockholders, pages 3-4.
 
 Set
        forth
        below is certain information regarding the Company’s various stock option
        plans.
 
 **Plan
                  Category**
              
              **Number
                  of securities to be issued upon exercise of outstanding options,
                  warrants,
                  and**
                **rights**
                **(a)**
              
              **Weighted-average
                  exercise price of outstanding options, warrants, and**
                **rights**
                **(b)**
              
              **Number
                  of securities remaining available for future issuance under equity
                  compensation plans (excluding securities reflected in column (a))****(c)**Equity
                  compensation plans approved by security holders
              
              
              367,656
              
              $
              12.72
              
              
              154,524Equity
                  compensation plans not approved by security holders
              
              
              None
              
              
              None
              
              
              NoneTotal
              
              
              367,656
              
              $
              12.72
              
              
              154,524
 
 **ITEM
        13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
        INDEPENDENCE**
 
 The
        information required by this item is incorporated by reference to the Company’s
        proxy statement for the 2008 Annual Meeting of Stockholders, pages 6 and
        9.
 
 **ITEM
        14 - PRINCIPAL ACCOUNTING FEES AND SERVICES**
 
 The
        information required by this item is incorporated by reference to the Company’s
        proxy statement for the 2008 Annual Meeting of Stockholders, pages
        18-19.
  16


**PART
        IV**
 
 **ITEM
        15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES**
 
 (a)
              The
                  following documents are filed as part of this
                  report:
 
 1.
              Financial
                  statements from the Registrant’s Annual Report to stockholders for the
                  fiscal year ended December 31, 2007, which are incorporated herein
                  by
                  reference:
 
 Consolidated
        Balance Sheets as of December 31, 2007 and 2006.
 
 Consolidated
        Statements of Income for the years ended December 31, 2007, 2006 and
        2005.
 
 Consolidated
        Statements of Changes in Stockholders’ Equity for the years ended December 31,
        2007, 2006 and 2005.
 
 Consolidated
        Statements of Cash Flows for the years ended December 31, 2007, 2006 and
        2005.
 
 Notes
        to
        Consolidated Financial Statements.
 
 Report
        of
        independent registered public accounting firm.
 
 2.
              Financial
                  statement schedules required to be filed by Item 8 of this
                  Form:
 
 None
  17
 
 3.
              Exhibits
  **EXHIBIT
                    NUMBER**
                
                **DESCRIPTION
                    OF EXHIBIT**3.1
                
                Registrant’s
                    Articles of Incorporation*3.2
                
                Registrant’s
                    Bylaws*4.1
                
                Specimen
                    Stock Certificate**10.1
                
                Employment
                    Agreement of James G. Graham***10.2
                
                Waccamaw
                    Bank 1998 Incentive Stock Option Plan***10.3
                
                Waccamaw
                    Bank 1998 Nonstatutory Stock Option Plan***10.4
                
                Supplemental
                    Executive Retirement Plan13
                
                Annual
                    Report to Stockholders (Filed herewith)21
                
                Subsidiaries
                    of Registrant (Filed herewith)31(i)31(ii)
                
                Certification
                    of Principal Accounting Officer Pursuant to Section 302 of the
                    Sarbanes
                    Oxley Act (Filed herewith)32
                
                Certification
                    Pursuant to Section 906 of the Sarbanes Oxley Act (Filed
                    herewith)99
                
                Registrant’s
                    Definitive Proxy
                    Statement****
  *
              Incorporated
                  by reference from exhibits 3(i) and 3(ii) to Registrant’s Current Report
                  on Form 8-K12g3, as filed with the Commission on July 1,
                  2001.
 
 **
              Incorporated
                  by reference from exhibit 4.1 to Registrant’s Annual Report on Form 10-KSB
                  for the year ended December 31,
                  2001.
 
 ***
              Incorporated
                  by reference from Exhibits 10.2, 10.3 and 10.4 to Annual Report
                  on Form
                  10-KSB of Waccamaw Bank, as filed with the
                  FDIC.
 
 ****
              Filed
                  with the Commission pursuant to Rule
                  14a-6.




18


**SIGNATURES**
 
 Pursuant
        to the requirements of Section 13 or 15(d) of the Securities Exchange Act
        of
        1934, the registrant has duly caused this report to be signed on its behalf
        by
        the undersigned, thereunto duly authorized
  **WACCAMAW
                  BANKSHARES, INC.**March
                28, 2007
              
              /s/
                James G. GrahamJames
                G. GrahamPresident
                and
                Chief Executive Officer
  March
                28, 2007
              
              /s/
                David A. GodwinDavid
                A. GodwinVice-President
                and
                Chief Financial Officer
 
 Pursuant
        to the requirements of the Securities Exchange Act of 1934, this report has
        to
        be signed below by the following persons on behalf of the registrant and
        in the
        capacities and on the dates indicated.
 
 **Signature**
              
              **Title**
              
              **Date**/s/
                    James G. Graham
              
              President
                  and
              
              March
                  20, 2008James
                    G. Graham
              
              Chief
                  Executive Officer/s/
                    M. B. “Bo” Biggs
              
              Director
              
              March
                  20, 2008M.
                  B. “Bo” Biggs/s/
                    Dr. Maudie M. Davis
              
              Director
              
              March
                  20, 2008Dr.
                  Maudie M. Davis/s/
                    E. Autry Dawsey, Sr.
              
              Director
              
              March
                  20, 2008E.
                  Autry Dawsey, Sr./s/
                    Monroe Enzor, III
              
              Director
              
              March
                  20, 2008Monroe
                  Enzor, III/s/
                    James E. Hill, Jr.
              
              Director
              
              March
                  20, 2008James
                  E. Hill, Jr./s/
                    Alan W. Thompson
              
              Director,
                  Chairman
              
              March
                  20, 2008Alan
                    W. Thompson
              
              of
                  the Board/s/
                    Dale Ward
              
              Director
              
              March
                  20, 2008Dale
                  Ward/s/
                    J. Densil Worthington
              
              Director
              
              March
                  20, 2008J.
                  Densil Worthington/s/
                Brian Campbell
              
              Director
              
              March
                20, 2008Brian
                Campbell




19


**EXHIBIT
        INDEX**
 **EXHIBIT****NUMBER**
                
                **DESCRIPTION
                    OF EXHIBIT**3.1
                
                Registrant’s
                    Articles of Incorporation*3.2
                
                Registrant’s
                    Bylaws*4.1
                
                Specimen
                    Stock Certificate**10.1
                
                Employment
                    Agreement of James G. Graham***10.2
                
                Waccamaw
                    Bank 1998 Incentive Stock Option Plan***10.3
                
                Waccamaw
                    Bank 1998 Nonstatutory Stock Option Plan***10.4
                
                Supplemental
                    Executive Retirement Plan13
                
                Annual
                    Report to Stockholders (Filed herewith)21
                
                Subsidiaries
                    of Registrant (Filed herewith)31(i)
                
                Certification
                    of Principal Executive Officer Pursuant to Section 302 of the
                    Sarbanes
                    Oxley Act (Filed herewith)31(ii)
                
                Certification
                    of Principal Accounting Officer Pursuant to Section 302 of the
                    Sarbanes
                    Oxley Act (Filed herewith)32
                
                Certification
                    Pursuant to Section 906 of the Sarbanes Oxley Act (Filed
                    herewith)99
                
                Registrant’s
                    Definitive Proxy
                    Statement****
 *
              Incorporated
                  by reference from exhibits 3(i) and 3(ii) to Registrant’s Current Report
                  on Form 8-K12g3, as filed with the Commission on July 1,
                  2001.
 
 **
              Incorporated
                  by reference from exhibit 4.1 to Registrant’s Annual Report on Form 10-KSB
                  for the year ended December 31,
                  2001.
 
 ***
              Incorporated
                  by reference from Exhibits 10.2, 10.3 and 10.4 to Annual Report
                  on Form
                  10-KSB of Waccamaw Bank, as filed with the
                  FDIC.
 
 ****
              Filed
                  with the Commission pursuant to Rule
                  14a-6.




20


**INTRODUCTION**
  **Table
                    of Contents**Introduction
                
                1Statement
                    of Mission
                
                2Stock
                    Performance
                
                2Significant
                    Trends
                
                3Financial
                    Highlights
                
                4Shareholder
                    Letter
                
                5Consolidated
                    Balance Sheets
                
                7Consolidated
                    Statements of Income
                
                8Consolidated
                    Statements of Changes in Stockholders' Equity and Comprehensive
                    Income
                
                9Consolidated
                    Statements of Cash Flows
                
                10Notes
                    to Consolidated Financial Statements
                
                12Report
                    of Independent Registered Public Accounting Firm
                
                39Management’s
                    Discussion and Analysis
                
                40Stockholder
                    Information
                
                57





1





**STATEMENT
      OF MISSION**





Waccamaw
      Bank serves a principled mission:


•
to
      be
      the strongest independent bank in the coastal Carolina region;


•
to
      offer fairly priced products and services that meet the financial needs of
      our
      community;


•
to
      operate in an efficient manner designed for customer convenience;


•
to
      be a
      good corporate neighbor within our communities;


•
to
      maintain safety, soundness and profitability;


•
to
      care
      for a quality staff that supports this mission.








**STOCK
      PERFORMANCE**







***Period
                  Ending******Index***
              
              
              **12/31/02**
              
              
              **12/31/03**
              
              
              **12/31/04**
              
              
              **12/31/05**
              
              
              **12/31/06**
              
              
              **12/31/07**Waccamaw
                  Bankshares, Inc.
              
              
              100.00
              
              
              181.60
              
              
              288.00
              
              
              284.00
              
              
              261.92
              
              
              184.80NASDAQ
                  Composite
              
              
              100.00
              
              
              150.01
              
              
              162.89
              
              
              165.13
              
              
              180.85
              
              
              198.60SNL
                  Southeast Bank Index
              
              
              100.00
              
              
              125.58
              
              
              148.92
              
              
              152.44
              
              
              178.75
              
              
              134.65




2




**Significant
      Trends**
















3




**Financial
      Highlights Summary** **1**


**2007**
                
                **2006**
                
                **2005**
                
                **2004**
                
                **2003****Summary
                    of Operations**Interest
                    income
                
                $
                31,637
                
                $
                25,379
                
                $
                18,228
                
                $
                11,450
                
                $
                9,957Interest
                    expense
                
                
                (16,296
                )
                
                (11,226
                )
                
                (7,536
                )
                
                (3,766
                )
                
                (3,627
                )Net
                    interest income
                
                
                15,341
                
                
                14,153
                
                
                10,692
                
                
                7,684
                
                
                6,330Provision
                    for loan losses
                
                
                (386
                )
                
                (1,450
                )
                
                (1,370
                )
                
                (819
                )
                
                (730
                )Other
                    income
                
                
                3,443
                
                
                2,581
                
                
                2,269
                
                
                2,445
                
                
                2,053Other
                    expense
                
                
                (12,440
                )
                
                (9,422
                )
                
                (6,967
                )
                
                (5,687
                )
                
                (4,436
                )Income
                    tax expense
                
                
                (2,049
                )
                
                (2,210
                )
                
                (1,589
                )
                
                (1,209
                )
                
                (1,210
                )Net
                    income
                
                $
                3,909
                
                $
                3,652
                
                $
                3,035
                
                $
                2,414
                
                $
                2,007**Per
                    Share Data****2**Basic
                    earnings per share
                
                $
                .73
                
                $
                .71
                
                $
                .61
                
                $
                .49
                
                $
                .41Diluted
                    earnings per share
                
                
                .72
                
                
                .69
                
                
                .58
                
                
                .47
                
                
                .39Book
                    value
                
                
                6.44
                
                
                5.77
                
                
                4.48
                
                
                3.99
                
                
                3.45**Average
                    Balance Sheet Summary**Loans,
                    net
                
                $
                332,451
                
                $
                279,625
                
                $
                238,579
                
                $
                168,757
                
                $
                137,403Securities
                
                
                65,454
                
                
                46,561
                
                
                31,257
                
                
                29,068
                
                
                19,663Total
                    assets
                
                
                438,579
                
                
                356,675
                
                
                302,381
                
                
                217,035
                
                
                177,563Deposits
                
                
                354,512
                
                
                298,324
                
                
                252,994
                
                
                169,162
                
                
                147,663Shareholders’
                    equity
                
                
                33,501
                
                
                25,945
                
                
                20,254
                
                
                17,941
                
                
                15,633**Selected
                    Ratios**Average
                    equity to average assets
                
                
                7.64
                %
                
                7.27
                %
                
                6.70
                %
                
                8.27
                %
                
                8.80
                %Return
                    on average assets
                
                
                .89
                %
                
                1.02
                %
                
                1.00
                %
                
                1.11
                %
                
                1.13
                %Return
                    on average equity
                
                
                11.67
                %
                
                14.07
                %
                
                14.98
                %
                
                13.46
                %
                
                12.84
                %


1  In
          thousands of dollars, except per share data.


2  Adjusted
        for the effects of 6 for 5 stock splits in 2003 and 2004, 2 for 1 stock split
        in
        2004 and 11 for 10 stock split in 2007.
  4


To
      Our
      Shareholders, Clients and Friends:





We
      are
      pleased to report 2007 proved to be a significant year in the progress of
      Waccamaw Bankshares, Inc. It was a year in which the bank celebrated its tenth
      year of operations and saw significant growth and expansion as we worked hard
      to
      position the bank for the future. As you will find in this report we achieved
      another year of record earnings and created a much stronger franchise as we
      took
      advantages of opportunities within our market to open five new offices prior
      to
      the end of 2007. Waccamaw Bankshares, Inc. is optimistic about our company’s
      expansion as we continue to grow Coastal Carolina Strong.





With
      assets over $500 million dollars, it is with significant pride the directors,
      management and staff report record profits for the year end of December 31,
      2007—$3.9 million dollars—a 7.04% increase over the $3,652,016 earned in 2006.
      It is significant to note that Waccamaw Bankshares, Inc. assets passed the
      major
      $500 million dollar milestone and closed the year at $508,367,919 in total
      assets; a 27.2% increase over 2006.





The
      banking industry faced many challenges during the year with declining interest
      rates, questionable credit quality in some segments of our industry and a
      slowing national economy. We are pleased to report that the bank has absolutely
      no exposure to sub prime mortgages and continues to work very hard to protect
      what we believe is strong asset quality.





In
      addition to the financial performance of 2007, we continued to branch in the
      very strongest markets available to the bank. We strengthened the bank’s
      franchise by opening three additional offices in fast growing Brunswick County,
      North Carolina with offices in Sunset Beach, Oak Island and a second office
      in
      Shallotte. The bank also took the opportunity to continue our expansion into
      economically attractive Horry County, South Carolina with a second office in
      the
      Conway area and a new office in south Myrtle Beach. This expansion gives us
      four
      offices in South Carolina with three in Horry County. Our fourth office in
      Horry
      County, South Carolina will be located in Little River and is currently under
      construction with a second quarter 2008 scheduled opening. At the close of
      2007,
      the bank operates a total of 16 full service offices in a footprint not
      duplicated by any other community banking franchise. It is our belief this
      creates substantial value for our shareholders and well positions the bank
      for
      the years to come. The bank began a significant new marketing effort in
      September as we celebrated our tenth anniversary. The marketing effort that
      began simultaneously with our tenth anniversary, Simply Free Checking is the
      centerpiece of the realignment of our entire consumer checking offerings. The
      response to date has been tremendous. This effort is bringing hundreds of new
      clients to our bank and gives us an opportunity to form solid relationships
      with
      these clients as well as supporting a much larger customer base.




5


It
      is
      without question that the national financial turmoil has served to weaken the
      values of financial companies and is likely to continue into 2008. While the
      bank enjoys a strong franchise, it cannot insulate itself from the interest
      rate
      environment which is causing a very rapid narrowing in net interest margins
      or
      other external economic factors. Asset quality for the bank remains satisfactory
      while net losses declined in 2007. The management and staff are working hard
      to
      provide the best possible financial results for the company as we proceed to
      capitalize on the new opportunities afforded to us by our branch expansion.
      We
      know that the new offices will perform well in the future and anticipate
      bringing them to a profitable status as quickly as possible.





While
      the
      national economy in 2008 provides a generous amount of uncertainties, we are
      optimistic that the staff and management of the bank will perform well despite
      these challenges. I would like to take this opportunity to thank you for your
      confidence and support. Each shareholder, client, and friend carries great
      value
      for Waccamaw Bankshares, Inc. We would like to thank our staff and the entire
      Waccamaw Bank family for the performance and for the value they add everyday.
      As
      you review this report, please feel free to contact us with any questions or
      comments. Thank you for banking with Waccamaw Bank.





Sincerely,


James
      G.
      Graham


President
      and Chief Executive Officer


Alan
      W.
      Thompson


Chairman
      of the Board




6





**Consolidated
      Balance Sheets**




***December
      31, 2007 and 2006***


**2007**
              
              **2006****Assets**Cash
                  and due from banks
              
              $
              11,809,251
              
              $
              9,183,383Interest-bearing
                  deposits with banks
              
              
              912,195
              
              
              790,360Total
                  cash and cash equivalents
              
              
              12,721,446
              
              
              9,973,743Federal
                  funds sold
              
              
              -
              
              
              2,598,000Investment
                  securities, available for sale
              
              
              99,302,322
              
              
              50,529,163Restricted
                  equity securities
              
              
              3,342,006
              
              
              2,457,206Loans,
                  net of allowance for loan lossesof
                  $5,385,782 in 2007 and $4,885,992 in 2006
              
              
              355,138,167
              
              
              312,253,190Property
                  and equipment, net
              
              
              14,537,739
              
              
              6,671,773Goodwill
              
              
              2,727,152
              
              
              2,665,602Intangible
                  assets, net
              
              
              673,374
              
              
              930,555Accrued
                  income
              
              
              2,939,264
              
              
              2,627,020Bank
                  owned life insurance
              
              
              11,777,361
              
              
              5,419,130Other
                  assets
              
              
              5,209,088
              
              
              3,455,911Total
                  assets
              
              $
              508,367,919
              
              $
              399,581,293**Liabilities
                  and Stockholders' Equity*****Liabilities***Noninterest-bearing
                  deposits
              
              $
              32,371,173
              
              $
              49,163,297Interest-bearing
                  deposits
              
              
              345,808,162
              
              
              278,188,470Total
                  deposits
              
              
              378,179,335
              
              
              327,351,767Securities
                  sold under agreements to repurchase
              
              
              29,222,000
              
              
              5,410,000Federal
                  funds purchased
              
              
              15,429,300
              
              
              -Short-term
                  borrowings
              
              
              13,000,000
              
              
              -Long-term
                  debt
              
              
              25,500,000
              
              
              23,500,000Guaranteed
                  preferred beneficial interest in thecompany’s
                  junior subordinated debentures
              
              
              8,248,000
              
              
              8,248,000Accrued
                  interest payable
              
              
              2,125,673
              
              
              1,412,300Other
                  liabilities
              
              
              1,640,470
              
              
              1,956,596Total
                  liabilities
              
              
              473,344,778
              
              
              367,878,663Commitments
                  and contingencies
              
              
              -
              
              
              -***Stockholders’
                  equity***Preferred
                  stock, Series A, non-cumulative, non-voting,no
                  par value; 1,000,000 shares authorized;48,178
                  and 65,111 issued and outstanding atDecember
                  31, 2007 and 2006, respectively
              
              
              793,967
              
              
              993,112Common
                  stock, no par; 25,000,000 shares authorized;5,434,770
                  and 5,320,666 shares issued and outstandingat
                  December 31, 2007 and 2006, respectively
              
              
              23,785,199
              
              
              17,338,231Retained
                  earnings
              
              
              11,124,589
              
              
              13,216,891Accumulated
                  other comprehensive (loss) income
              
              
              (680,614
              )
              
              154,396Total
                  stockholders’ equity
              
              
              35,023,141
              
              
              31,702,630Total
                  liabilities and stockholders’ equity
              
              $
              508,367,919
              
              $
              399,581,293***See
                  Notes to Consolidated Financial Statements***




7


**Consolidated
      Balance Sheets**




**2007**
              
              **2006**
              
              **2005*****Interest
                  income***Loans
                  and fees on loans
              
              $
              27,492,792
              
              $
              22,584,611
              
              $
              16,330,154Investment
                  securities, taxable
              
              
              3,231,060
              
              
              2,195,843
              
              
              1,338,903Investment
                  securities, nontaxable
              
              
              574,181
              
              
              330,656
              
              
              95,806Federal
                  funds sold
              
              
              289,740
              
              
              226,152
              
              
              436,147Deposits
                  with banks
              
              
              48,892
              
              
              42,205
              
              
              26,949Total
                  interest income
              
              
              31,636,665
              
              
              25,379,467
              
              
              18,227,959***Interest
                  expense***Deposits
              
              
              13,669,795
              
              
              9,488,101
              
              
              6,313,174Federal
                  funds purchased and securitiessold
                  under agreements to repurchase
              
              
              468,792
              
              
              225,725
              
              
              76,247Other
                  borrowed funds
              
              
              2,157,460
              
              
              1,512,314
              
              
              1,146,161Total
                  interest expense
              
              
              16,296,047
              
              
              11,226,140
              
              
              7,535,582Net
                  interest income
              
              
              15,340,618
              
              
              14,153,327
              
              
              10,692,377***Provision
                  for loan losses***
              
              
              385,864
              
              
              1,450,000
              
              
              1,370,000Net
                  interest income after provision for loan losses
              
              
              14,954,754
              
              
              12,703,327
              
              
              9,322,377***Noninterest
                income***Service
                  charges on deposit accounts
              
              
              1,325,296
              
              
              1,100,378
              
              
              1,094,649Mortgage
                  origination income
              
              
              467,089
              
              
              373,726
              
              
              270,321Income
                  from financial services
              
              
              304,383
              
              
              289,958
              
              
              87,084Earnings
                  on bank owned life insurance
              
              
              390,160
              
              
              239,998
              
              
              193,639Net
                  realized gains (losses) on sale or maturityof
                  investment securities
              
              
              246,128
              
              
              (890
              )
              
              (1,062
              )Net
                  realized gains on sale of interestin
                  mortgage banking investee
              
              
              -
              
              
              44,094
              
              
              36,848Other
                  operating income
              
              
              710,094
              
              
              533,906
              
              
              587,267Total
                  noninterest income
              
              
              3,443,150
              
              
              2,581,170
              
              
              2,268,746***Noninterest
                  expense***Salaries
                  and employee benefits
              
              
              6,856,453
              
              
              5,274,052
              
              
              3,733,723Occupancy
                  and equipment
              
              
              1,513,300
              
              
              1,105,461
              
              
              805,095Data
                  processing
              
              
              1,000,694
              
              
              809,187
              
              
              629,080Amortization
                  expense
              
              
              281,819
              
              
              272,712
              
              
              252,712Other
                  expense
              
              
              2,787,949
              
              
              1,960,683
              
              
              1,545,972Total
                  noninterest expense
              
              
              12,440,215
              
              
              9,422,095
              
              
              6,966,582Income
                  before income taxes
              
              
              5,957,689
              
              
              5,862,402
              
              
              4,624,541***Income
                  tax expense***
              
              
              2,048,741
              
              
              2,210,386
              
              
              1,589,168Net
                  income available to common stockholders
              
              $
              3,908,948
              
              $
              3,652,016
              
              $
              3,035,373***Basic
                  earnings per common share***
              
              $
              .73
              
              $
              .71
              
              $
              .61***Diluted
                  earnings per common share***
              
              $
              .72
              
              $
              .69
              
              $
              .58***Weighted
                  average common shares outstanding***
              
              
              5,365,617
              
              
              5,127,107
              
              
              4,997,725***Weighted
                  average dilutive common shares outstanding***
              
              
              5,463,633
              
              
              5,319,464
              
              
              5,242,615***See
                  Notes to Consolidated Financial Statements***




8


**Consolidated
      Statements of Changes in Stockholders' Equity and**


**Comprehensive
      Income**




***Years
      ended December 31, 2007, 2006 and 2005***


**Accumulated****Other****Preferred****Stock**
              
              
              **Common****Stock**
              
              
              **Retained****Earnings**
              
              
              **Comprehensive****Income
                  (Loss)**
              
              
              **Total*****December
                  31, 2004***
              
              $
              -
              
              $
              13,142,612
              
              $
              6,529,502
              
              $
              226,443
              
              $
              19,898,557***Comprehensive
                  income***Net
                  income
              
              
              -
              
              
              -
              
              
              3,035,373
              
              
              -
              
              
              3,035,373Net
                  change in unrealized appreciationon
                  investment securities available forsale,
                  net of income taxes of ($283,507)
              
              
              -
              
              
              -
              
              
              -
              
              
              (550,336
              )
              
              (550,336
              )Reclassification
                  adjustment,net
                  of income taxes of $361
              
              
              -
              
              
              -
              
              
              -
              
              
              701
              
              
              701***Total
                  comprehensive income***
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,485,738Exercise
                  of stock options
              
              
              -
              
              
              114,349
              
              
              -
              
              
              -
              
              
              114,349***December
                  31, 2005***
              
              
              -
              
              
              13,256,961
              
              
              9,564,875
              
              
              (323,192
              )
              
              22,498,644***Comprehensive
                  income***Net
                  income
              
              
              -
              
              
              -
              
              
              3,652,016
              
              
              -
              
              
              3,652,016Net
                  change in unrealized appreciationon
                  investment securities available forsale,
                  net of income taxes of $245,728
              
              
              -
              
              
              -
              
              
              -
              
              
              477,001
              
              
              477,001Reclassification
                  adjustment,net
                  of income taxes of $303
              
              
              -
              
              
              -
              
              
              -
              
              
              587
              
              
              587***Total
                  comprehensive income***
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              4,129,604Issuance
                  of common stock
              
              
              -
              
              
              3,582,019
              
              
              -
              
              
              -
              
              
              3,582,019Issuance
                  of preferred stock
              
              
              1,006,264
              
              
              -
              
              
              -
              
              
              -
              
              
              1,006,264Stock
                  based compensation
              
              
              -
              
              
              88,063
              
              
              -
              
              
              -
              
              
              88,063Exercise
                  of stock options
              
              
              -
              
              
              255,654
              
              
              -
              
              
              -
              
              
              255,654Excess
                  tax benefits from stock-basedcompensation
              
              
              -
              
              
              201,151
              
              
              -
              
              
              -
              
              
              201,151Stock
                  issuance costs
              
              
              (13,152
              )
              
              (45,617
              )
              
              -
              
              
              -
              
              
              (58,769
              )***December
                  31, 2006***
              
              
              993,112
              
              
              17,338,231
              
              
              13,216,891
              
              
              154,396
              
              
              31,702,630***Comprehensive
                  income***Net
                  income
              
              
              -
              
              
              -
              
              
              3,908,948
              
              
              -
              
              
              3,908,948Net
                  change in unrealized appreciationon
                  investment securities available forsale,
                  net of income taxes of ($346,473)
              
              
              -
              
              
              -
              
              
              -
              
              
              (672,565
              )
              
              (672,565
              )Reclassification
                  adjustment,net
                  of income taxes of ($83,683)
              
              
              -
              
              
              -
              
              
              -
              
              
              (162,445
              )
              
              (162,445
              )***Total
                  comprehensive income***
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              3,073,938Effect
                  of 10% common stock dividend
              
              
              -
              
              
              5,921,341
              
              
              (5,921,341
              )
              
              -
              
              
              -Effect
                  of 10% preferred stock dividend
              
              
              79,909
              
              
              -
              
              
              (79,909
              )
              
              -
              
              
              -Stock
                  based compensation
              
              
              -
              
              
              98,729
              
              
              -
              
              
              -
              
              
              98,729Exercise
                  of stock options
              
              
              -
              
              
              97,979
              
              
              -
              
              
              -
              
              
              97,979Excess
                  tax benefits from stock-basedcompensation
              
              
              -
              
              
              60,029
              
              
              -
              
              
              -
              
              
              60,029Conversion
                  of preferred stock tocommon
                  stock
              
              
              (279,054
              )
              
              279,054
              
              
              -
              
              
              -
              
              
              -Redemption
                  of fractional shares
              
              
              -
              
              
              (10,164
              )
              
              -
              
              
              -
              
              
              (10,164
              )***December
                  31, 2007***
              
              $
              793,967
              
              $
              23,785,199
              
              $
              11,124,589
              
              $
              (680,614
              )
              $
              35,023,141***See
                  Notes to Consolidated Financial
                  Statements***




9


**Consolidated
        Statements of Cash Flows**
  ***Years
        ended December 31, 2007, 2006 and 2005***




**2007**
              
              
              **2006**
              
              
              **2005*****Cash
                  flows from operating activities***Net
                  income
              
              $
              3,908,948
              
              $
              3,652,016
              
              $
              3,035,373Adjustments
                  to reconcile net income to netcash
                  provided by operations:Depreciation
                  and amortization
              
              
              800,845
              
              
              630,247
              
              
              522,383Stock-based
                  compensation
              
              
              98,729
              
              
              88,063
              
              
              -Provision
                  for loan losses
              
              
              385,864
              
              
              1,450,000
              
              
              1,370,000Accretion
                  of discount on securities, net ofamortization
                  of premiums
              
              
              31,555
              
              
              72,027
              
              
              87,726(Gain)loss
                  on sale of investment securities
              
              
              (246,128
              )
              
              890
              
              
              1,062Gain
                  on sale of investment in mortgagebanking
                  investee
              
              
              -
              
              
              (44,094
              )
              
              (36,848
              )Income
                  from bank owned life insurance, net
              
              
              (358,231
              )
              
              (210,201
              )
              
              (178,855
              )Deferred
                  taxes
              
              
              (215,944
              )
              
              (307,088
              )
              
              (456,679
              )Benefit
                  of non-qualified stock option exercise
              
              
              60,029
              
              
              201,151
              
              
              -Changes
                  in assets and liabilities:Accrued
                  income
              
              
              (312,244
              )
              
              (984,604
              )
              
              (467,118
              )Other
                  assets
              
              
              (1,195,987
              )
              
              (581,964
              )
              
              (871,991
              )Accrued
                  interest payable
              
              
              713,373
              
              
              331,924
              
              
              471,007Other
                  liabilities
              
              
              (316,126
              )
              
              1,278,502
              
              
              446,690Net
                  cash provided by operating activities
              
              
              3,354,683
              
              
              5,576,869
              
              
              3,922,750***Cash
                  flows from investing activities***Net
                  (increase) decrease in federal funds sold
              
              
              2,598,000
              
              
              5,683,000
              
              
              (3,752,000
              )Purchases
                  of investment securities
              
              
              (73,818,059
              )
              
              (15,946,980
              )
              
              (14,430,495
              )Maturities
                  of investment securities
              
              
              6,061,233
              
              
              5,877,244
              
              
              7,058,846Net
                  increase in loans
              
              
              (43,270,841
              )
              
              (51,516,853
              )
              
              (52,310,314
              )Proceeds
                  from sales of investment securities
              
              
              17,048,272
              
              
              1,155,000
              
              
              1,468,057Investment
                  in bank owned life insurance
              
              
              (6,000,000
              )
              
              -
              
              
              -Purchases
                  of property and equipment
              
              
              (8,382,268
              )
              
              (3,359,954
              )
              
              (367,814
              )Proceeds
                  from sale of other real estate
              
              
              -
              
              
              82,475
              
              
              371,193Acquisition
                  of The Bank of Heath Springs
              
              
              -
              
              
              (1,627,132
              )
              
              -Net
                  cash used in investing activities
              
              
              (105,763,663
              )
              
              (59,653,200
              )
              
              (61,962,527
              )***Cash
                  flows from financing activities***Net
                  increase (decrease) in noninterest-bearing deposits
              
              
              (16,792,124
              )
              
              19,792,936
              
              
              6,283,014Net
                  increase in interest-bearing deposits
              
              
              67,619,692
              
              
              22,135,837
              
              
              57,110,760Net
                  increase (decrease) in securities sold underagreements
                  to repurchase
              
              
              23,812,000
              
              
              2,674,000
              
              
              (532,000
              )Net
                  increase in federal funds purchased
              
              
              15,429,300
              
              
              -
              
              
              -Net
                  proceeds (repayments) from short-term borrowings
              
              
              13,000,000
              
              
              (10,000,000
              )
              
              -Net
                  proceeds (repayments) from long-term debt
              
              
              2,000,000
              
              
              17,000,000
              
              
              (2,000,000
              )Proceeds
                  from issuance of common stock
              
              
              97,979
              
              
              3,837,673
              
              
              114,349Proceeds
                  from issuance of preferred stock
              
              
              -
              
              
              1,006,264
              
              
              -Stock
                  issuance costs and redemption of fractional shares
              
              
              (10,164
              )
              
              (58,769
              )
              
              -Net
                  cash provided by financing activities
              
              
              105,156,683
              
              
              56,387,941
              
              
              60,976,123Increase
                  in cash and cash equivalents
              
              
              2,747,703
              
              
              2,311,610
              
              
              2,936,346***Cash
                  and cash equivalents, beginning***
              
              
              9,973,743
              
              
              7,662,133
              
              
              4,725,787***Cash
                  and cash equivalents, ending***
              
              $
              12,721,446
              
              $
              9,973,743
              
              $
              7,662,133***Supplemental
                  disclosure of cash flow information***Interest
                  paid
              
              $
              15,582,674
              
              $
              10,879,836
              
              $
              7,064,575Taxes
                  paid
              
              $
              2,099,800
              
              $
              2,505,414
              
              $
              2,068,880***Supplemental
                  disclosure of noncash activities***Real
                  estate acquired in settlement of loans
              
              $
              301,824
              
              $
              68,146
              
              $
              31,411Issuance
                  of stock in exchange for exercised stockoptions
                  and stock already outstanding
              
              $
              271,101
              
              $
              -
              
              $
              -10%
                  common stock dividend
              
              $
              5,921,341
              
              $
              -
              
              $
              -10%
                  preferred stock dividend
              
              $
              79,909
              
              $
              -
              
              $
              -***Continued***




10




**Consolidated
      Statements of Cash Flow, continued**




***For
        the years ended December 31, 2007, 2006 and 2005***


***Schedule
      of noncash investing transactions related to
      acquisition***




**2007**
              
              **2006**
              
              **2005*****Acquisition
                  of The Bank of Heath Springs****Assets
                  acquired*Investment
                  securities
              
              $
              -
              
              $
              8,206,775
              
              $
              -Loans,
                  net of allowance forloan
                  losses $45,942
              
              
              -
              
              
              4,516,371
              
              
              -Property
                  and equipment, net
              
              
              -
              
              
              302,351
              
              
              -Other
                  assets
              
              
              -
              
              
              37,939
              
              
              -Goodwill
              
              
              -
              
              
              2,665,602
              
              
              -Core
                  deposit intangible
              
              
              -
              
              
              300,000
              
              
              --
              
              
              16,029,038
              
              
              -*Liabilities
                  assumed*Deposits
              
              
              -
              
              
              14,387,526
              
              
              -Other
                  liabilities
              
              
              -
              
              
              14,380
              
              
              --
              
              
              14,401,906
              
              
              -Net
                  noncash assets acquired
              
              $
              -
              
              $
              1,627,132
              
              $
              -***Payment
                  for net assets acquired***Cash
                  paid at closing
              
              $
              -
              
              $
              8,000,000
              
              $
              -Less
                  cash acquired at closing
              
              
              -
              
              
              6,372,868
              
              
              -Net
                  cash paid
              
              $
              -
              
              $
              1,627,132
              
              $
              -




***See
        Notes to Consolidated Financial Statements***
  11




**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, Brunswick, Bladen and New Hanover counties
        in
        North Carolina and Lancaster and Horry counties in South Carolina and
        surrounding areas through sixteen full service banking branches. 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 June 30, 2001, Waccamaw Bankshares, Inc.
        acquired all the outstanding shares of Waccamaw Bank in a tax-free exchange.
        Waccamaw Financial Services, Inc. is a wholly owned subsidiary of Waccamaw
        Bank,
        the primary business activity of which is investment and insurance
        services.
 
 The
        accounting and reporting policies of the Company, the Bank, and Waccamaw
        Financial Services 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***
 
 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***
 
 Our
        consolidated financial statements include the accounts of the Company and
        its
        subsidiaries. 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.
 
 ***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, the valuation of deferred
        tax
        assets 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.
  12




**Notes
        to Consolidated Financial Statements**
  **Note
        1. Organization and Summary of Significant Accounting Policies,
        continued**
 
 ***Use
        of Estimates, continued***
 
 The
        Bank’s loan portfolio consists primarily 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.
        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 with Banks***
 
 Interest-bearing
        deposits mature in one year or less 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.
 
 ***Investment
        Securities***
 
 Debt
        securities that management has the positive intent and ability to hold to
        maturity are classified as “held to maturity” and recorded at amortized cost.
        Securities not classified as held to maturity or trading, including equity
        securities with readily determinable fair values, are classified as “available
        for sale” and recorded at fair value, with unrealized gains and losses excluded
        from earnings and reported in other comprehensive income.
 
 Purchase
        premiums and discounts are recognized in interest income using the interest
        method over the terms of the securities. Declines in the fair value of held
        to
        maturity and available for sale securities below their cost that are deemed
        to
        be other than temporary are reflected in earnings as realized losses. In
        determining whether other-than-temporary impairment exists, management considers
        many factors including (1) the length of time and the extent to which the
        fair
        value has been less than cost, (2) the financial condition and near-term
        prospects of the issuer, and (3) the intent and ability of the Company to
        retain
        its investment in the issuer for a period of time sufficient to allow for
        any
        anticipated recovery in fair value. Gains and losses on the sale of securities
        are recorded on the trade date and are determined using the specific
        identification method.
 
 ***Loans***
 
 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.
  13




**Notes
        to Consolidated Financial Statements**
  **Note
        1. Organization and Summary of Significant Accounting Policies,
        continued**
 
 ***Loans,
        continued***
 
 Loan
        origination fees and certain direct origination costs are deferred 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 on the cash-basis or cost-recovery
        method, as appropriate. 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.
 
 The
        allowance consists of specific, general and unallocated components. The specific
        component relates to loans that are classified as impaired. For such loans,
        an
        allowance is established when the discounted cash flows (or collateral value
        or
        observable market price) of the impaired loan is lower than the carrying
        value
        of that loan. The general component covers non-impaired loans and is based
        on
        historical loss experience adjusted for qualitative factors. An unallocated
        component is maintained to cover uncertainties that could affect management’s
        estimate of probable losses. The unallocated component of the allowance reflects
        the margin of imprecision inherent in the underlying assumptions used in
        the
        methodologies for estimating losses in the portfolio.
 
 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.
  14




**Notes
        to Consolidated Financial Statements**




**Note
        1. Organization and Summary of Significant Accounting Policies,
        continued**
 
 ***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:
 YearsLeasehold
                    improvements
                
                
                5-30Automobile
                
                
                5Furniture
                    and equipment
                
                
                3-10Building
                
                
                10-40
 
 ***Goodwill***
 
 Goodwill
        represents the excess of the cost of an acquisition over the fair value of
        the
        net assets acquired. Goodwill is assessed at least annually for impairment.
        No
        impairment charges were necessary for the years presented.
 
 ***Intangible
        Assets***
 
 Intangible
        assets consist primarily of purchased core deposit intangible assets and
        are
        accounted for in accordance with Statement of Financial Accounting Standard
        (“SFAS”) No. 112, *Goodwill
        and Other Intangible Assets* .
        The
        Company evaluates the remaining useful life of each intangible asset that
        is
        being amortized to determine whether events and circumstances warrant a revision
        to the remaining period of amortization. Intangible assets are currently
        being
        amortized over estimated useful lives of 10 years.
 
 ***Foreclosed
        Assets***
 
 Assets
        acquired through, or in lieu of, loan foreclosure are held for sale and are
        initially recorded at fair value at the date of foreclosure, establishing
        a new
        cost basis. Subsequent to foreclosure, valuations are periodically performed
        by
        management and the assets are 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 net expenses from foreclosed assets.
        Foreclosed assets are included in other assets on the balance
        sheet.
 
 ***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.
  ***Stock
        Compensation Plans***
 
 In
        December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
        No.
        123 (revised 2004), *Share-Based
        Payment.* SFAS
        No.
        123(R) requires that the compensation cost relating to share-based payment
        transactions be recognized in financial statements. That cost will be measured
        based on the fair value of the equity or liability instruments issued. SFAS
        No.
        123(R) covers a wide range of share-based compensation arrangements including
        stock options, restricted share plans, performance-based awards, share
        appreciation rights, and employee share purchase plans. SFAS No. 123(R) is
        a
        replacement of SFAS No. 123, *Accounting
        for Stock-Based Compensation,* and
        supersedes Accounting Principles Board (“APB”) Opinion No. 25, *Accounting
        for Stock Issued**to
        Employees,*and its related interpretive guidance. The effect of the
        Statement is to require entities to measure the cost of employee services
        received in exchange for stock options based on the grant-date fair value
        of the
        award, and to recognize the cost over the period the employee is required
        to
        provide services for the award. SFAS No. 123(R) permits entities to use any
        option-pricing model that meets the fair value objective in the
        Statement.
  15


**Notes
          to Consolidated Financial Statements**
  **Note
          1. Organization and Summary of Significant Accounting Policies,
          continued**


The
        Company elected to adopt SFAS No. 123(R) on January 1, 2006 under the modified
        prospective method. Compensation cost has been measured using the fair value
        of
        an award on the grant date and is recognized over the service period, which
        is
        usually the vesting period. Compensation cost related to the non-vested portion
        of awards outstanding as of that date was based on the grant-date fair value
        of
        those awards as calculated under the original provisions of SFAS No. 123;
        that
        is, the Company was not required to re-measure the grant-date fair value
        estimate of the unvested portion of awards granted prior to the effective
        date
        of SFAS No. 123(R).
 
 The
        Company had applied APB 25 and related Interpretations in accounting for
        the
        stock option plan prior to January 1, 2006. Under APB 25, stock options issued
        under the Company’s stock option plan have no intrinsic value at the grant date,
        and therefore, no compensation cost is recognized for them.
 
 ***Advertising
        Expense***
 
 The
        Company expenses advertising costs as they are incurred. Advertising expense
        for
        the years ended December 31, 2007, 2006, and 2005 was approximately $593,000,
        $308,000 and $187,000, respectively.
 
 ***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.
 
 In
        2006,
        the FASB issued Interpretation No. 48 (FIN 48), *Accounting
        for Uncertainty in Income Taxes - an Interpretation of SFAS No.
        109* .
        FIN 48
        clarifies the accounting for uncertainty in income taxes recognized in an
        enterprise’s financial statements in accordance with SFAS No. 109, *Accounting
        for Income Taxes* .
        FIN 48
        also prescribes a recognition threshold and measurement of a tax position
        taken
        or expected to be taken in an enterprise’s tax return. FIN 48 is effective for
        fiscal years beginning after December 15, 2006. Accordingly, the Company
        adopted
        FIN 48 effective January 1, 2007. The adoption of FIN 48 did not have any
        impact
        on the Company’s net income or consolidated financial position.
 
 16




**Notes
        to Consolidated Financial Statements**
 **Note
          1. Organization and Summary of Significant Accounting Policies,
          continued**
 
 ***Comprehensive
          Income***
 
 Comprehensive
          income consists of net income and other comprehensive income. Unrealized
          gains
          and losses on securities available for sale are included in other comprehensive
          income. Gains and losses on available for sale securities are reclassified
          to
          income as they are realized upon sale of the securities.
 
 *Basic
          Earnings per Common Share*
 
 Basic
          earnings per common 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 Common Share***
 
 The
          computation of diluted earnings per common share is similar to the computation
          of basic earnings per common 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.
 
 ***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 the risk
          attributed to a particular exposure, 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. SFAS 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.
  17
 **Notes
          to Consolidated Financial Statements**
 **Note
          1. Organization and Summary of Significant Accounting Policies,
          continued**
 
 ***Fair
          Value of Financial Instruments, continued***
 
 *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.
 
 *Federal
          funds:* Carrying
          amount of federal funds sold and purchased approximate fair values.
 
 *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* :
          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
          non-performing 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.
 
 *Bank
          owned life insurance* :
          The
          carrying amount of bank owned life insurance, net of accumulated earnings,
          reflects fair value.
 
 *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
          borrowings and securities sold under agreements to repurchase:* The
          carrying amounts of short-term borrowings approximate their fair
          values.
 
 *Long-term
          debt and junior subordinated debentures:* The
          fair
          values of the Company’s long-term debt and junior subordinated debentures are
          estimated using discounted cash flow analysis based on the Bank’s current
          incremental borrowing rates for similar types of borrowings.
 
 ***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.
 
 ***Recent
          Accounting Pronouncements***
 
 The
          following is a summary of recent authoritative pronouncements that could
          impact
          the accounting,
          reporting, and/or disclosure of financial information by the
          Company.
 
 In
          September 2006, the FASB issued SFAS No. 157, *Fair
          Value Measurements* ( *SFAS
          157* ).
          SFAS
          157 defines fair value, establishes a framework for measuring fair value
          in
          generally accepted accounting principles, and expands disclosures about
          fair
          value measurements. This standard eliminates inconsistencies found in various
          prior pronouncements but does not require any new fair value measurements.
          SFAS
          157 is effective for the Company on January 1, 2008 and will not impact
          the
          Company’s accounting measurements but it is expected to result in additional
          disclosures.
  18




**Notes
        to Consolidated Financial Statements**
 **Note
          1. Organization and Summary of Significant Accounting Policies,
          continued**
 
 *Recent
          Accounting Pronouncements**,
          continued*
 
 In
          September 2006, The FASB ratified the consensuses reached by the FASB’s Emerging
          Issues Task Force (“EITF”) relating to EITF 06-4, *Accounting
          for the Deferred Compensation and Postretirement Benefit Aspects of Endorsement
          Split-Dollar Life Insurance Arrangements* (“EITF
          06-4”). Entities purchase life insurance for various reasons including
          protection against loss of key employees and to fund postretirement benefits.
          The two most common types of life insurance arrangements are endorsement
          split
          dollar life and collateral assignment split dollar life. EITF 06-4 covers
          the
          former and EITF 06-10 (discussed below) covers the latter. EITF 06-4 states
          that
          entities with endorsement split-dollar life insurance arrangements that
          provide
          a benefit to an employee that extends to postretirement periods should
          recognize
          a liability for future benefits in accordance with SFAS No.106, *Employers'
          Accounting for Postretirement Benefits Other Than Pensions,* (if,
          in
          substance, a postretirement benefit plan exists) ** or
          Accounting Principles Board (“APB”) Opinion No. 12, “Omnibus Opinion - 1967” (if
          the arrangement is, in substance, an individual deferred compensation
          contract). ** Entities
          should recognize the effects of applying this Issue through either (a)
          a change
          in accounting principle through a cumulative-effect adjustment to retained
          earnings or to other components of equity or net assets in the statement
          of
          financial position as of the beginning of the year of adoption or (b) a
          change
          in accounting principle through retrospective application to all prior
          periods.
          EITF 06-4 is effective for the Company on January 1, 2008. The Company
          does not
          believe the adoption of EITF 06-4 will have a material impact on its financial
          position, results of operations or cash flows.
 
 In
          March
          2007, the FASB ratified the consensus reached on EITF 06-10, *Accounting
          for Collateral Assignment Split-Dollar Life Insurance
          Arrangements* (“EITF
          06-10”). The postretirement aspect of this EITF is substantially similar to EITF
          06-4 discussed above and requires that an employer recognize a liability
          for the
          postretirement benefit related to a collateral assignment split-dollar
          life
          insurance arrangement in accordance with either FASB Statement No. 106
          or APB
          Opinion No. 12, as appropriate, if the employer has agreed to maintain
          a life
          insurance policy during the employee's retirement or provide the employee
          with a
          death benefit based on the substantive agreement with the employee. In
          addition,
          a consensus was reached that an employer should recognize and measure an
          asset
          based on the nature and substance of the collateral assignment split-dollar
          life
          insurance arrangement. EITF 06-10 is effective for the Company on January
          1,
          2008. The Company does not believe the adoption of EITF 06-10 will have
          a
          material impact on its financial position, results of operations or cash
          flows.
  In
          February 2007, the FASB issued SFAS No. 159, *The
          Fair Value Option for Financial Assets and Financial Liabilities - Including
          an
          amendment of FASB Statement No. 115* (“SFAS
          159”). This statement permits, but does not require, entities to measure many
          financial instruments at fair value. The objective is to provide entities
          with
          an opportunity to mitigate volatility in reported earnings caused by measuring
          related assets and liabilities differently without having to apply complex
          hedge
          accounting provisions. Entities electing this option will apply it when
          the
          entity first recognizes an eligible instrument and will report unrealized
          gains
          and losses on such instruments in current earnings. This statement 1) applies
          to
          all entities, 2) specifies certain election dates, 3) can be applied on
          an
          instrument-by-instrument basis with some exceptions, 4) is irrevocable
          and 5)
          applies only to entire instruments. One exception is demand deposit liabilities
          which are explicitly excluded as qualifying for fair value. With respect
          to SFAS
          115, available-for-sale and held-to-maturity securities at the effective
          date
          are eligible for the fair value option
 at
          that
          date. If the fair value option is elected for those securities at the effective
          date, cumulative unrealized gains and losses at that date shall be included
          in
          the cumulative-effect adjustment and thereafter, such securities will be
          accounted for as trading securities. SFAS 159 is effective for the Company
          on
          January 1, 2008. The Company is currently analyzing the fair value option
          that
          is permitted, but not required, under SFAS 159.
 
 In
          November 2007, the Securities and Exchange Commission (“SEC”) issued Staff
          Accounting Bulletin No. 109, *Written
          Loan Commitments Recorded at Fair Value Through Earnings* (“SAB
          109”). SAB 109 expresses the current view of the SEC staff that the expected
          net
          future cash flows related to the associated servicing of the loan should
          be
          included in the measurement of all written loan commitments that are accounted
          for at fair value through earnings.  SEC registrants are expected to apply
          this guidance on a prospective basis to derivative loan commitments issued
          or
          modified in the first quarter of 2008 and thereafter. The Company is currently
          analyzing the impact of this guidance, which relates to the Company’s mortgage
          loans held for sale.
  19
  **Notes
          to Consolidated Financial Statements**
 **Note
          1. Organization and Summary of Significant Accounting Policies,
          continued**
 
 ***Recent
          Accounting Pronouncements, continued***
 
 In
          December 2007, the FASB issued SFAS No. 141(R), *Business
          Combinations* ,
          (“SFAS
          141(R)”) which replaces SFAS 141. SFAS 141(R) establishes principles and
          requirements for how an acquirer in a business combination recognizes and
          measures in its financial statements the identifiable assets acquired,
          the
          liabilities assumed, and any noncontrolling interest; recognizes and measures
          goodwill acquired in the business combination or a gain from a bargain
          purchase;
          and determines what information to disclose to enable users of the financial
          statements to evaluate the nature and financial effects of the business
          combination. FAS 141(R) is effective for acquisitions by the Company taking
          place on or after January 1, 2009. Early adoption is prohibited. Accordingly,
          a
          calendar year-end company is required to record and disclose business
          combinations following existing accounting guidance until January 1, 2009.
          The
          Company will assess the impact of SFAS 141(R) if and when a future acquisition
          occurs.
 
 In
          December 2007, the FASB issued SFAS No. 160, *Noncontrolling
          Interests in Consolidated Financial Statements - an amendment of ARB No.
          51* (“SFAS
          160”). SFAS 160 establishes new accounting and reporting standards for the
          noncontrolling interest in a subsidiary and for the deconsolidation of
          a
          subsidiary. Before this statement, limited guidance existed for reporting
          noncontrolling interests (minority interest). As a result, diversity in
          practice
          exists. In some cases minority interest is reported as a liability and
          in others
          it is reported in the mezzanine section between liabilities and equity.
          Specifically, SFAS 160 requires the recognition of a noncontrolling interest
          (minority interest) as equity in the consolidated financials statements
          and
          separate from the parent’s equity. The amount of net income attributable to the
          noncontrolling interest will be included in consolidated net income on
          the face
          of the income statement. SFAS 160 clarifies that changes in a parent’s ownership
          interest in a subsidiary that do not result in deconsolidation are equity
          transactions if the parent retains its controlling financial interest.
          In
          addition, this statement requires that a parent recognize gain or loss
          in net
          income when a subsidiary is deconsolidated. Such gain or loss will be measured
          using the fair value of the noncontrolling equity investment on the
          deconsolidation date. SFAS 160 also includes expanded disclosure requirements
          regarding the interests of the parent and its noncontrolling interests.
          SFAS 160
          is effective for the Company on January 1, 2009. Earlier adoption is prohibited.
          The Company is currently evaluating the impact, if any, the adoption of
          SFAS 160
          will have on its consolidated financial statements.
 
 Other
          accounting standards that have been issued or proposed by the FASB or other
          standards-setting bodies are not expected to have a material impact on
          the
          Company’s financial position, results of operations or cash flows.
 
 **Note
          2. Business Combinations**
 
 On
          April
          28, 2006, the Company acquired The Bank of Heath Springs, paying $8,000,000
          in
          exchange for all the outstanding shares of common stock of The Bank of
          Heath
          Springs. In conjunction with the acquisition, The Bank of Heath Springs
          was
          merged with and into the Company’s subsidiary, Waccamaw Bank.
 
 The
          acquisition was accounted for as a purchase transaction and accordingly
          the
          results of operations attributable to the acquired company is included
          in our
          consolidated financial statements only from the date of acquisition. The
          excess
          of purchase price over fair value of net tangible and identified intangible
          assets acquired will be evaluated annually for impairment and written down
          as
          those values become impaired. Identified intangible assets will be amortized
          over their expected useful life. The acquisition is summarized as
          follows:
 The
                    Bank of Heath SpringsPurchase
                    price
                
                $
                8,000,000Loans,
                    net
                
                
                4,516,371Investment
                    securities
                
                
                8,206,775Cash
                
                
                6,372,868Identified
                    intangible assets
                
                
                300,000Other
                    assets
                
                
                340,290Deposits
                
                
                (14,387,526
                )Other
                    liabilities
                
                
                (14,380
                )Net
                    tangible and identified intangibleassets
                    acquired (at fair market value)
                
                
                5,334,398Excess
                    of purchase price over net tangible andidentified
                    intangible assets acquired (at fairmarket
                    value)
                
                $
                2,665,602




20




**Notes
        to Consolidated Financial Statements**




**Note
        3. 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
        $2,343,000 and $2,967,000 for the periods including December 31, 2007 and
        2006,
        respectively.
 
 **Note
        4. Investment Securities**
 
 Debt
        and
        equity securities have been classified in the balance sheet according to
        management’s intent. The amortized cost of securities (all available for sale)
        and their approximate fair values follow:
 **Amortized**
                
                **Unrealized**
                
                **Unrealized**
                
                **Fair****Cost**
                
                **Gains**
                
                **Losses**
                
                **Value*****2007***Government
                    sponsored enterprises
                
                $
                15,448,159
                
                $
                172,693
                
                $
                -
                
                $
                15,620,852Mortgage
                    backed securities
                
                
                40,691,655
                
                
                110,691
                
                
                187,341
                
                
                40,615,005Corporate
                    securities
                
                
                27,502,810
                
                
                287,451
                
                
                735,161
                
                
                27,055,100Municipal
                    securities
                
                
                16,690,931
                
                
                17,081
                
                
                696,647
                
                
                16,011,365$
                100,333,555
                
                $
                587,916
                
                $
                1,619,149
                
                $
                99,302,322




**Amortized**
              
              **Unrealized**
              
              **Unrealized**
              
              **Fair****Cost**
              
              **Gains**
              
              **Losses**
              
              **Value*****2006***Government
                  sponsored enterprises
              
              $
              8,629,498
              
              $
              19,578
              
              $
              1,892
              
              $
              8,647,184Mortgage
                  backed securities
              
              
              13,488,543
              
              
              15,615
              
              
              123,380
              
              
              13,380,778Corporate
                  securities
              
              
              18,397,532
              
              
              526,714
              
              
              190,649
              
              
              18,733,597Municipal
                  securities
              
              
              9,779,656
              
              
              25,018
              
              
              37,070
              
              
              9,767,604$
              50,295,229
              
              $
              586,925
              
              $
              352,991
              
              $
              50,529,163




21




**Notes
        to Consolidated Financial Statements**


**Note
        4. Investment Securities, continued**
 
 Restricted
        equity securities are carried at cost and consist of investments in stock
        of the
        Federal Home Loan Bank of Atlanta (FHLB), The Bankers Bank and The Federal
        Reserve Bank of Richmond (Federal Reserve). All of those entities are
        correspondents of the Bank. 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 is restricted only in the
        fact that the stock may only be repurchased by the respective
        company.
 
 Investment
        securities with market values of $54,160,471 and $18,187,501 at December
        31,
        2007 and 2006, 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, 2007, 2006 and 2005 are as
        follows:
 **2007**
                
                **2006**
                
                **2005**Realized
                    gains
                
                $
                269,709
                
                $
                -
                
                $
                -Realized
                    losses
                
                
                (23,581
                )
                
                (890
                )
                
                (1,062
                )$
                246,128
                
                $
                (890
                )
                $
                (1,062
                )
 
 The
        scheduled contractual maturities of securities (all available for sale) at
        December 31, 2007 are as follows:
 **Amortized**
                
                **Fair****Cost**
                
                **Value**Due
                    in one year or less
                
                $
                739,337
                
                $
                808,405Due
                    in one through five years
                
                
                6,204,427
                
                
                5,880,699Due
                    in five through ten years
                
                
                6,134,665
                
                
                6,165,961Due
                    after ten years
                
                
                87,255,126
                
                
                86,447,257$
                100,333,555
                
                $
                99,302,322
 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,
        2007.
 ***Less
                    Than 12 Months***
                
                ***12
                    Months or More***
                
                ***Total*****Fair**
                
                **Unrealized**
                
                **Fair**
                
                **Unrealized**
                
                **Fair**
                
                **Unrealized*****December
                      31, 2007***
                
                **Value**
                
                **Losses**
                
                **Value**
                
                **Losses**
                
                **Value**
                
                **Losses**Mortgage
                    backed securities
                
                $
                24,752,710
                
                $
                (172,649
                )
                $
                755,806
                
                $
                (14,692
                )
                $
                25,508,516
                
                $
                (187,341
                )Corporate
                    securities
                
                
                11,653,112
                
                
                (358,489
                )
                
                4,027,860
                
                
                (376,672
                )
                
                15,680,972
                
                
                (735,161
                )Municipal
                    securities
                
                
                10,753,110
                
                
                (669,521
                )
                
                2,462,781
                
                
                (27,126
                )
                
                13,215,891
                
                
                (696,647
                )Total
                    temporarily impaired securities
                
                $
                47,158,932
                
                $
                (1,200,659
                )
                $
                7,246,447
                
                $
                (418,490
                )
                $
                54,405,379
                
                $
                (1,619,149
                )
 Management
        evaluates securities for other-than-temporary impairment at least on a quarterly
        basis, and more frequently when economic or market concerns warrant such
        evaluation. Consideration is given to (1) the length of time and the extent
        to
        which the fair value has been less than cost, (2) the financial condition
        and
        near-term prospects of the issuer, and (3) the intent and ability of the
        Company
        to retain its investment in the issuer for a period of time sufficient to
        allow
        any anticipated recovery in fair value.
  22




**Notes
        to Consolidated Financial Statements**


**Note
        5. Loans Receivable**


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


**2007**
              
              **2006****In
                  thousands**Commercial
              
              $
              43,617
              
              $
              48,858Real
                  estate:Construction
                  and land development
              
              
              121,760
              
              
              109,036Residential,
                  1-4 families
              
              
              75,671
              
              
              64,475Residential,
                  5 or more families
              
              
              3,670
              
              
              3,650Farmland
              
              
              3,806
              
              
              2,412Nonfarm,
                  nonresidential
              
              
              93,222
              
              
              73,529Agricultural
              
              
              671
              
              
              675Consumer
              
              
              13,950
              
              
              13,172Other
              
              
              4,610
              
              
              1,783360,977
              
              
              317,590Deferred
                  loan fees, net of costs
              
              
              (453
              )
              
              (451
              )Allowance
                  for loan losses
              
              
              (5,386
              )
              
              (4,886
              )$
              355,138
              
              $
              312,253




Approximately
        $18,000,000 in 1-4 family residential loans, $33,000,000 in commercial real
        estate loans and $17,000,000 in home equity line of credit loans were pledged
        as
        collateral securing Federal Home Loan Bank advances included in long-term
        debt
        at December 31, 2007.
 **Note
          6. Allowance for Loan Losses**
 
 Changes
          in the allowance for loan losses are as follows:
 **2007**
                
                **2006**
                
                **2005*****Balance,
                    beginning***
                
                $
                4,885,992
                
                $
                3,939,002
                
                $
                2,791,008Provision
                    charged to expense
                
                
                385,864
                
                
                1,450,000
                
                
                1,370,000Allowance
                    acquired in purchase transaction
                
                
                -
                
                
                45,942
                
                
                -Recoveries
                    of amounts charged off
                
                
                401,717
                
                
                36,247
                
                
                47,685Amounts
                    charged off
                
                
                (287,791
                )
                
                (585,199
                )
                
                (269,691
                )***Balance,
                    ending***
                
                $
                5,385,782
                
                $
                4,885,992
                
                $
                3,939,002
 **2007**
                
                **2006**Impaired
                    loans without a valuation allowance
                
                $
                2,504,192
                
                $
                1,135,984Impaired
                    loans with a valuation allowance
                
                
                -
                
                
                -Total
                    impaired loans
                
                $
                2,504,192
                
                $
                1,135,984Valuation
                    allowance related to impaired loans
                
                $
                -
                
                $
                -Total
                    nonaccrual loans
                
                $
                1,534,208
                
                $
                1,180,641Total
                    loans past due ninety days or more and still accruing
                    interest
                
                $
                2,608,432
                
                $
                340,106
  23
 **Notes
          to Consolidated Financial Statements**
  **Note
          6. Allowance for Loan Losses, continued**
 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:
  **2007**
                
                **2006**
                
                **2005**Average
                    investment in impaired loans
                
                $
                927,305
                
                $
                1,016,932
                
                $
                1,172,568Interest
                    income recognized on impaired loans
                
                $
                206,057
                
                $
                236,913
                
                $
                134,546Interest
                    income recognized on a cash basis on impaired loans
                
                $
                93,351
                
                $
                40,384
                
                $
                98,622
 No
          additional funds are committed to be advanced in connection with impaired
          loans.
 
 **Note
          7. Property and Equipment**
 
 ***Components
          of Property and Equipment***
 
 Property
          and equipment and total accumulated depreciation consisted of the following
          at
          December 31:
 **2007**
                  
                  **2006**Land
                  
                  $
                  2,384,393
                  
                  $
                  1,308,698Buildings
                  
                  
                  7,021,830
                  
                  
                  3,735,432Construction
                      in progress
                  
                  
                  3,205,990
                  
                  
                  22,660Leasehold
                      improvements
                  
                  
                  908,454
                  
                  
                  766,810Automobiles
                  
                  
                  55,818
                  
                  
                  24,018Furniture
                      and equipment
                  
                  
                  3,227,824
                  
                  
                  2,564,23216,804,309
                  
                  
                  8,421,850Less
                      accumulated depreciation
                  
                  
                  2,266,570
                  
                  
                  1,750,077$
                  14,537,739
                  
                  $
                  6,671,773
 **Note
          7. Property and Equipment, continued**
 
 Depreciation
          expense reported in net income was approximately $544,000, $383,000, and
          $295,000 for the years ended December 31, 2007, 2006 and 2005,
          respectively.
  ***Leases***
 
 The
          Bank
          leases several banking facilities and its operations center under agreements
          accounted for as operating leases. Rent expense was approximately $378,000,
          $260,000, and $178,000 in 2007, 2006, and 2005, respectively. Future minimum
          lease payments under non-cancelable commitments are as
          follows.
 2008
                
                $
                323,2682009
                
                
                304,2462010
                
                
                185,8292011
                
                
                81,6122012
                
                
                60,550Thereafter
                
                
                183,750$
                1,139,255




24




**Notes
        to Consolidated Financial Statements**
  **Note
          8. Intangible Assets**
 
 The
          book
          value of purchased intangible assets at December 31, 2007 and 2006 was
          $673,374
          and $930,555, respectively. Details are as follows:


**As
                  of December 31, 2007**
              
              **As
                  of December 31, 2006****Gross
                  Carrying**
              
              **Accumulated**
              
              **Gross
                  Carrying**
              
              **Accumulated****Amount**
              
              **Amortization**
              
              **Amount**
              
              **Amortization**Amortized
                  intangible assetsDeposit
                  premium
              
              $
              2,439,919
              
              $
              1,813,210
              
              $
              2,439,919
              
              $
              1,576,030Other
              
              
              200,000
              
              
              153,335
              
              
              200,000
              
              
              133,334Total
              
              $
              2,639,919
              
              $
              1,966,545
              
              $
              2,639,919
              
              $
              1,709,364Unamortized
                  intangible assetsGoodwill
                  from The Bank ofHeath
                  Springs merger
              
              $
              2,727,152
              
              $
              n/a
              
              $
              2,665,602
              
              $
              n/a


Amortization
        expense is calculated on a straight-line basis over a period of ten years
        and
        was approximately $257,000,
        $247,000, and $227,000 in 2007, 2006, and 2005, respectively. Management expects amortization expense to be approximately $257,000 in each
        of
        the next three years.
 
 **Note
        9. Deposits**
 
 The
        aggregate amount of time deposits in denominations of $100,000 or more at
        December 31, 2007 and 2006 was approximately $142,532,000 and $101,499,000,
        respectively. At December 31, 2007, the scheduled maturities of time deposits
        (in thousands) are as follows:
 Three
                    months or less
                
                $
                63,399Four
                    months to one year
                
                
                165,871Two
                    to three years
                
                
                16,314Over
                    three years
                
                
                3,624$
                249,208


**Note
        10. Borrowed Funds**
  ***Short-term
        borrowings***
  Securities
        sold under agreements to repurchase and federal funds purchased generally
        mature
        within one day to 24 months from the transaction date. Also included in
        short-term borrowings are three variable rate FHLB advances of $5,000,000,
        $2,000,000 and $6,000,000 at December 31, 2007. There were no advances at
        December 31, 2006. Additional information is summarized
        below:


**2007**
              
              **2006**Outstanding
                  balance at December 31
              
              $
              57,651,300
              
              $
              5,410,000Year-end
                  weighted average rate
              
              
              4.24
              %
              
              4.59
              %Daily
                  average outstanding during the period
              
              $
              13,351,081
              
              $
              5,142,348Average
                  rate for the year
              
              
              4.60
              %
              
              4.39
              %Maximum
                  outstanding at any month-end during the period
              
              $
              57,651,300
              
              $
              6,644,000




25


**Notes
        to Consolidated Financial Statements**


**Note
        10. Borrowed Funds, continued**
 
 Securities
        sold under agreements to repurchase are reflected at the amount of cash received
        in connection with the transaction. The Company may be required to provide
        additional collateral based on the fair value of the underlying securities.
  ***Unused
        lines of credit***
 
 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
        $20,500,000 and a secured line of credit with a correspondent bank for
        $51,000,000. 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. There was $15,429,300 and
        $0
        outstanding at December 31, 2007 and December 31, 2006, respectively, under
        these credit facilities.
  ***Long-term
        debt***
 
 At
        December 31, 2007 and 2006, $25,500,000 and $23,500,000, respectively was
        outstanding under Federal Home Loan Bank advances. Approximately $18,000,000
        in
        1-4 family residential loans, $33,000,000 in commercial real estate loans
        and $17,000,000
        in home equity line of credit loans were pledged as collateral for
        the
        FHLB advances at December 31, 2007.


**Maturity
                  Date**
              
              **Advance**
              
              **Rate**02/10/10
              
              
              2,500,000
              
              
              Fixed
                  at 5.85
              
              
              Convertible
                  quarterly07/12/12
              
              
              9,000,000
              
              
              1
                  Month LIBOR - .50%12/02/13
              
              
              5,000,000
              
              
              3
                  Month LIBOR - .50%09/29/15
              
              
              4,000,000
              
              
              Fixed
                  at 4.06%
              
              
              Convertible
                  9/29/0904/22/19
              
              
              5,000,000
              
              
              3
                  Month LIBOR - .50%
              
              
              Convertible
                  4/22/09$
              25,500,000


**Note
        11. Fair Value of Financial Instruments**
 
 The
        estimated fair values of the Bank's financial instruments are as follows
        (dollars in thousands):
 **December
                      31, 2007**
                  
                  **December
                      31, 2006****Carrying**
                  
                  **Fair**
                  
                  **Carrying**
                  
                  **Fair****Amount**
                  
                  **Value**
                  
                  **Amount**
                  
                  **Value*****Financial
                      Assets***Cash
                      and due from banks
                  
                  $
                  11,809
                  
                  $
                  11,809
                  
                  $
                  9,183
                  
                  $
                  9,183Interest-bearing
                      deposits with banks
                  
                  
                  912
                  
                  
                  912
                  
                  
                  790
                  
                  
                  790Federal
                      funds sold
                  
                  
                  -
                  
                  
                  -
                  
                  
                  2,598
                  
                  
                  2,598Investment
                      securities
                  
                  
                  99,302
                  
                  
                  99,302
                  
                  
                  50,529
                  
                  
                  50,529Restricted
                      equity securities
                  
                  
                  3,342
                  
                  
                  3,342
                  
                  
                  2,457
                  
                  
                  2,457Loans,
                      net of allowance for loan losses
                  
                  
                  355,138
                  
                  
                  355,661
                  
                  
                  312,253
                  
                  
                  316,540***Financial
                      Liabilities***Deposits
                  
                  
                  378,179
                  
                  
                  378,783
                  
                  
                  327,352
                  
                  
                  327,724Securities
                      sold under agreements torepurchase
                      and federal funds purchased
                  
                  
                  44,651
                  
                  
                  44,651
                  
                  
                  5,410
                  
                  
                  5,410Short-term
                      borrowings
                  
                  
                  13,000
                  
                  
                  13,000
                  
                  
                  -
                  
                  
                  -Long-term
                      debt
                  
                  
                  25,500
                  
                  
                  24,698
                  
                  
                  23,500
                  
                  
                  23,509Junior
                      subordinated debentures
                  
                  
                  8,248
                  
                  
                  8,000
                  
                  
                  8,248
                  
                  
                  8,000




26




**Notes
        to Consolidated Financial Statements**
  **Note
          12. Earnings per Share**
 
 The
          following table details the computation of basic and diluted earnings per
          share:


**2007**
              
              **2006**
              
              **2005**Net
                  income (income available to common shareholders)
              
              $
              3,908,948
              
              $
              3,652,016
              
              $
              3,035,373Weighted
                  average common shares outstanding
              
              
              5,365,617
              
              
              5,127,107
              
              
              4,997,725*Effect
                  of dilutive securities, options*
              
              
              33,719
              
              
              127,246
              
              
              244,890*Effect
                  of dilutive securities, preferred stock*
              
              
              64,297
              
              
              65,111
              
              
              -Weighted
                  average common shares outstanding, diluted
              
              
              5,463,633
              
              
              5,319,464
              
              
              5,242,615Basic
                  earnings per common share
              
              $
              .73
              
              $
              .71
              
              $
              .61Diluted
                  earnings per common share
              
              $
              .72
              
              $
              .69
              
              $
              .58




Each
        share of preferred stock may be converted at the election its holder to one
        share of common stock.
 
 The
        Company declared an 11-for-10 stock split in the form of a 10% stock dividend
        payable on September 18, 2007 to the shareholders of record on September
        2, 007.
        To effect the split, the Company’s issued and outstanding stock was increased by
        491,583 shares. The dilutive effects of preferred stock have also been adjusted
        to reflect an 11-for-10 stock split.
 
 At
        December 31, 2007 and 2006, 296,899 warrants were outstanding with a $21.82
        per
        share exercise price. These warrants may be used to purchase one share of
        the
        Company’s common stock at any time until September 30, 2009. Exercise of these
        warrants and 115,755 options are not assumed in computing 2007 diluted earnings
        per share as their exercise price was below market value at December 31,
        2007.
 
 **Note
        13. 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 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
        amount of the Trust’s common securities are held by the Company.
 
 The
        Trust’s preferred 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.
 
 In
        2004,
        the Company adopted FIN 46(R), Consolidation of Variable Interest Entities
        (as
        amended), which resulted in the assets and liabilities, as well as the related
        income and expenses of the Trust being excluded from our consolidated financial
        statements. However, the subordinated debentures issued by the Company and
        purchased by the Trust remain on our balance sheet. In addition, the related
        interest expense continues to be included on our income statement.
  27


**Notes
        to Consolidated Financial Statements**


**Note
        14.**  **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 at least one month 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 who have
        completed at least twelve months of service which vests over a five-year
        period.
        The Bank’s aggregate contribution was $48,000, $48,750 and $42,603 for the years
        ended December 31, 2007, 2006 and 2005, respectively.
 
 ***Supplemental
        Employment Retirement Plan***
 
 Supplemental
        benefits have been approved by the Board of Directors for the directors and
        certain executive officers of Waccamaw Bank. Certain funding is provided
        informally and indirectly by life insurance policies. The cash surrender
        value
        of the life insurance policies are recorded as a separate line item in the
        accompanying balances sheets at $11,777,361 and $5,419,130 at December 31,
        2007
        and 2006, respectively. Income earned on these policies is reflected as a
        separate line item in the Consolidated Statements of Income. The Company
        recorded expenses and a liability related to these benefits of $71,264 in
        2007
        and no expenses or liability in 2006.
 
 ***Stock
        Option Plans***
 
 The
        Company’s Board of Directors 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 504,083 shares may be issued for
        a
        total of 1,008,166 shares (adjusted for stock dividends). Options granted
        under
        both plans expire no more than 10 years from date of grant. Option exercise
        prices under both plans must be set by the Board of Directors at the date
        of
        grant and cannot 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. It is the Company’s policy to issue new shares to satisfy
        option exercises.
 
 As
        described in Note 1, effective January 1, 2006, the Company adopted SFAS
        No.
        123(R) using the modified prospective application. Under this application,
        the
        Company is required to record compensation expense for all rewards granted
        after
        the date of adoption and for the unvested portion of previously granted awards
        that remain outstanding at the date of adoption. Compensation cost charged
        to
        income was approximately $99,000 and $88,000 for the years ended December
        31,
        2007 and 2006, respectively.
 
 Prior
        to
        the adoption of SFAS No. 123(R), the Company used the intrinsic value method
        as
        prescribed by APB No. 25 and thus recognized no compensation expense for
        options
        granted with exercise prices equal to the fair market value of the Company’s
        common stock on the date of grant **.**
 
 The
        weighted average fair value of each stock option grant is estimated on the
        date
        of grant using the Black-Scholes option-pricing model. The weighted average
        estimated fair values of stock options grants and the assumptions that were
        used
        in calculating such fair values were based on estimates at the date of grant
        as
        follows:
  **2007**
                
                **2006**
                
                **2005**Weighted
                    average fair value of options grantedduring
                    the year
                
                $
                5.02
                
                $
                6.88
                
                $
                5.40Assumptions:Average
                    risk free interest rate
                
                
                4.76
                %
                
                6.25
                %
                
                5.25
                %*Average
                    expected volatility*
                
                
                *25.00*
                *%*
                
                *9.10*
                *%*
                
                *17.00*
                *%**Expected
                    dividend rate*
                
                
                *-*
                *%*
                
                *-*
                *%*
                
                *-*
                *%*Expected
                    life in years
                
                
                10
                
                
                10
                
                
                10




28




**Notes
        to Consolidated Financial Statements**


**Note
        14. Employee Benefit Plans, continued**
 
 ***Stock
        Option Plans, continued***
 
 Cash
        received from option exercises under the plans for the year ended December
        31,
        2007 and 2006 was $97,979 and $255,654, respectively. The total intrinsic
        value
        of options exercised during the years ended December 31, 2007 and 2006 was
        $1,105,751 and $773,746, respectively. Also during 2007, 19,956 shares of
        common
        stock with an average market value of approximately $13.58 per share were
        exchanged to exercise 89,395 options with an average exercise price of
        approximately $3.03 per option. No such exchange was exercised during
        2006.
 
 Activity
        under the plans during the years ended December 31, 2007 and 2006 (adjusted
        for
        stock splits) is summarized below:


**Incentive
                  Plan**
              
              **Non
                  statutory Plan****Available**
              
              
              
              **Available****for
                  Grant**
              
              **Granted**
              
              **for
                  Grant**
              
              **Granted*****Balance
                  December 31, 2005***
              
              
              55,937
              
              
              350,046
              
              
              81,897
              
              
              222,033Forfeited
              
              
              38,390
              
              
              (38,390
              )
              
              -
              
              
              -Granted
              
              
              (8,250
              )
              
              8,250
              
              
              -
              
              
              -Exercised
              
              
              -
              
              
              (43,063
              )
              
              -
              
              
              (25,547
              )***Balance
                  December 31, 2006***
              
              
              86,077
              
              
              276,843
              
              
              81,897
              
              
              196,486Forfeited
              
              
              8,700
              
              
              (8,700
              )
              
              -
              
              
              -Granted
              
              
              (22,150
              )
              
              22,150
              
              
              -
              
              
              -Exercised
              
              
              -
              
              
              (106,151
              )
              
              -
              
              
              (12,972
              )***Balance
                  December 31, 2007***
              
              
              72,627
              
              
              184,142
              
              
              81,897
              
              
              183,514




A
        summary
        of option activity under the plans as of and changes during the year ended
        December 31, 2007 is presented below:
 **Weighted**
                
                **Average****Average**
                
                **Remaining**
                
                **Aggregate****Options**
                
                **Exercise**
                
                **Contractual**
                
                **Intrinsic****Outstanding**
                
                **Price**
                
                **Term**
                
                **Value**Outstanding
                    at December 31, 2006
                
                
                473,329
                
                $
                10.29Granted
                
                
                22,150
                
                $
                13.57Forfeited
                
                
                (8,700
                )
                $
                14.58Exercised
                
                
                (119,123
                )
                $
                3.10Outstanding
                    at December 31, 2007
                
                
                367,656
                
                $
                12.72
                
                
                6.0
                    years
                
                $
                663,272Exercisable
                    at December 31, 2007
                
                
                317,510
                
                $
                12.39
                
                
                5.6
                    years
                
                $
                660,154


The
        total
        fair value of options vesting during 2007 and 2006 was $98,729 and $88,063,
        respectively. Total unrecognized compensation cost related to outstanding
        non-vested stock options will be recognized over the following
        periods:
  2008
              
              $
              102,8602009
              
              
              85,4842010
              
              
              43,6792011
              
              
              25,8252012
              
              
              4,652Total
              
              $
              262,500




29


**Notes
        to Consolidated Financial Statements**




**Note
      14. Employee Benefit Plans, continued**





***Stock
      Option Plans, continued***





The
      following table illustrates the effect on net income if the Company had applied
      the fair value recognition provisions of SFAS No. 123 for the year ended
      December 31, 2005:




**2005*****Net
                  income***
              
              $
              3,035,373Deduct:
                  Total stock-based employee compensationexpense
                  determined under fair value basedmethod
                  for all awards, net of tax effects
              
              
              (794,072
              )***Proforma
                  net income***
              
              $
              2,241,301***Earnings
                  per share***Basic
              
              $
              .61Basic
                  - proforma
              
              $
              .45Diluted
              
              $
              .58Diluted
                  - proforma
              
              $
              .43




**Note
      15. Income Taxes**





***Current
      and Deferred Income Tax Components***





The
      components of income tax expense are as follows:




**2007**
              
              **2006**
              
              **2005**Current
              
              $
              2,264,685
              
              $
              2,517,474
                  $
              
              
              2,045,847Deferred
              
              
              (215,944
              )
              
              (307,088
              )
              
              (456,679
              )Income
                  tax expense (benefit)
              
              $
              2,048,741
              
              $
              2,210,386
                  $
              
              
              1,589,168




***Rate
      Reconciliation***





A
      reconciliation of income tax expense computed at the statutory federal income
      tax rate included in the statement of income follows:




**2007**
              
              **2006**
              
              **2005**Tax
                  at statutory federal rate
              
              $
              2,025,614
              
              $
              1,993,217
                  $
              
              
              1,572,344Tax
                  exempt interest
              
              
              (205,562
              )
              
              (123,480
              )
              
              (38,040
              )Tax
                  exempt income from bank owned life insurance
              
              
              (132,654
              )
              
              (81,599
              )
              
              (65,836
              )State
                  income tax, net of federal benefit
              
              
              228,551
              
              
              276,276
              
              
              218,173Other
              
              
              132,792
              
              
              145,972
              
              
              (97,473
              )Income
                  tax expense (benefit)
              
              $
              2,048,741
              
              $
              2,210,386
                  $
              
              
              1,589,168




30




**Notes
      to Consolidated Financial Statements**




**Note
      15. Income Taxes, continued**





***Deferred
      Income Tax Analysis***





The
      components of net deferred federal and state tax assets (included in other
      assets on the balance sheet) are summarized as follows:




**2007**
              
              **2006**Deferred
                  tax assetsAllowance
                  for loan losses
              
              $
              1,914,477
              
              $
              1,690,064Employment
                  benefit liability
              
              
              32,468
              
              
              -Deposit
                  premium amortization
              
              
              285,977
              
              
              245,216Deferred
                  loan fees
              
              
              174,717
              
              
              173,763Unrealized
                  loss on securities available for sale
              
              
              397,582
              
              
              -Deferred
                  tax assets
              
              
              2,805,221
              
              
              2,109,043Deferred
                  tax liabilitiesDepreciation
              
              
              (382,880
              )
              
              (312,661
              )Accretion
                  of bond discount
              
              
              (64,645
              )
              
              (52,212
              )Unrealized
                  gain on securities available for sale
              
              
              -
              
              
              (79,538
              )Deferred
                  tax liabilities
              
              
              (447,525
              )
              
              (444,411
              )Net
                  deferred tax asset
              
              $
              2,357,696
              
              $
              1,664,632




The
      Company does not maintain a valuation allowance. Based on historical and current
      earnings, management believes it is more likely than not the Company will
      realize the benefits of its deferred tax asset.





The
      Company has analyzed the tax positions taken or expected to be taken in its
      tax
      returns and concluded it has no liability related to uncertain tax positions
      in
      accordance with FIN 48.





**Note
      16. 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.





***Financial
      Instruments with Off-Balance-Sheet Risk***




To
      meet
      the financing needs of its customers, the Bank is party to financial instruments
      with off-balance-sheet risk in the normal course of business. 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:




**2007**
              
              **2006**Commitments
                  to extend credit
              
              $
              48,600,000
              
              $
              68,610,000Stand-by
                  letters of credit
              
              
              4,509,000
              
              
              1,825,000$
              53,109,000
              
              $
              70,435,000




31




**Notes
      to Consolidated Financial Statements**




**Note
      16. Commitments and Contingencies, continued**





***Financial
      Instruments with Off-Balance-Sheet Risk, continued***





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
      5. 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 $4,000,000.





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





**Note
      17. Regulatory Restrictions**





***Dividends***





The
      Company’s dividend payments, if any, 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.




***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, 2007 and 2006, that the Company and
      the
      Bank met all capital adequacy requirements to which they are
      subject.





32





**Notes
        to Consolidated Financial Statements**




**Note
      17. Regulatory Restrictions, continued**





***Capital
      Requirements, continued***





As
      of
      December 31, 2007 and 2006, 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 (dollars in thousands).




**Actual**
              
              **Minimum
                  Capital Required**
              
              **Minimum**
                **To
                  Be Well**
                **Capitalized
                  Under**
                **Prompt
                  Corrective**
                **Action
                  Provisions****Amount**
              
              **Ratio**
              
              **Amount**
              
              **Ratio**
              
              **Amount**
              
              **Ratio*****December
                  31, 2007***Total
                  capital to risk-weighted
                  assetsConsolidated
              
              $
              45,591
              
              
              10.88
              %
              $
              33,509
              
              
              8.00
              %
              $
              n/a
              
              
              n/aBank
              
              $
              44,670
              
              
              10.67
              %
              $
              33,585
              
              
              8.00
              %
              $
              41,981
              
              
              10.00
              %Tier
                  1 capital to risk-weighted
                  assetsConsolidated
              
              $
              40,350
              
              
              9.63
              %
              $
              16,755
              
              
              4.00
              %
              $
              n/a
              
              
              n/aBank
              
              $
              39,429
              
              
              9.42
              %
              $
              16,792
              
              
              4.00
              %
              $
              25,189
              
              
              6.00
              %Tier
                  1 capital to averageassetsConsolidated
              
              $
              40,350
              
              
              8.70
              %
              $
              18,547
              
              
              4.00
              %
              $
              n/a
              
              
              n/aBank
              
              $
              39,429
              
              
              8.53
              %
              $
              18,497
              
              
              4.00
              %
              $
              23,121
              
              
              5.00
              %




**Actual**
              
              **Minimum
                  Capital Required**
              
              **Minimum
                  To Be Well Capitalized Under Prompt Corrective Action
                  Provisions****Amount**
              
              **Ratio**
              
              **Amount**
              
              **Ratio**
              
              **Amount**
              
              **Ratio*****December
                  31, 2006***Total
                  capital to risk-weighted
                  assetsConsolidated
              
              $
              40,396
              
              
              11.82
              %
              $
              27,332
              
              
              8.00
              %
              $
              n/a
              
              
              n/aBank
              
              $
              39,082
              
              
              11.41
              %
              $
              27,399
              
              
              8.00
              %
              $
              34,248
              
              
              10.00
              %Tier
                  1 capital to risk-weighted
                  assetsConsolidated
              
              $
              36,108
              
              
              10.57
              %
              $
              13,666
              
              
              4.00
              %
              $
              n/a
              
              
              n/aBank
              
              $
              34,796
              
              
              10.16
              %
              $
              13,699
              
              
              4.00
              %
              $
              20,549
              
              
              6.00
              %Tier
                  1 capital to averageassetsConsolidated
              
              $
              36,108
              
              
              9.61
              %
              $
              15,022
              
              
              4.00
              %
              $
              n/a
              
              
              n/aBank
              
              $
              34,796
              
              
              9.30
              %
              $
              14,974
              
              
              4.00
              %
              $
              18,717
              
              
              5.00
              %




33





**Notes
        to Consolidated Financial Statements**




**Note
      17. Regulatory Restrictions, continued**





***Intercompany
      transactions***





Restrictions
      on loans by the Bank to the Company are imposed by Federal Reserve Act Sections
      23A and 23B, 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 or other affiliate, if the loan is secured and so long as certain
      safety and soundness requirements and market terms requirements are met. 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
      $3,500,000 at December 31, 2007. No 23A transactions existed at December 31,
      2007 or 2006.




**Note
      18. 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:




**2007**
              
              **2006*****Balance,
                  beginning***
              
              $
              750,807
              
              $
              983,643Change
                  in relationships
              
              
              (351,277
              )
              
              (249,352
              )New
                  loans and advances
              
              
              2,368,863
              
              
              423,127Repayments
              
              
              (133,688
              )
              
              (406,611
              )***Balance,
                  ending***
              
              $
              2,634,705
              
              $
              750,807




34





Notes
      to Consolidated Financial Statements




**Note
      19. Parent Company Financial Information**





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




***Balance
                  Sheets******December
                  31, 2007 and
                  2006***




**2007**
              
              **2006*****Assets***Cash
                  and due from banks
              
              $
              95,302
              
              $
              128,735Investment
                  in subsidiary bank at equity
              
              
              42,102,173
              
              
              38,391,412Investment
                  securities, available for sale
              
              
              227,735
              
              
              467,581Other
                  assets
              
              
              897,068
              
              
              1,069,448Total
                  assets
              
              $
              43,322,278
              
              $
              40,057,176***Liabilities***Junior
                  subordinated debt
              
              $
              8,248,000
              
              $
              8,248,000Other
                  liabilities
              
              
              51,137
              
              
              106,546Total
                  liabilities
              
              
              8,299,137
              
              
              8,354,546***Stockholders'
                  equity***Preferred
                  stock
              
              
              793,967
              
              
              993,112Common
                  stock
              
              
              23,785,199
              
              
              17,338,231Retained
                  earnings
              
              
              11,124,589
              
              
              13,216,891Accumulated
                  other comprehensive income (loss)
              
              
              (680,614
              )
              
              154,396Total
                  stockholders' equity
              
              
              35,023,141
              
              
              31,702,630Total
                  liabilities and stockholders' equity
              
              $
              43,322,278
              
              $
              40,057,176




35




Notes
        to Consolidated Financial Statements


**Note
      19. Parent Company Financial Information, continued**





***Statements
      of Operations***


***Years
      ended December 31, 2007 and 2006***




**2007**
              
              **2006*****Income***Loans
                  and fees on loans
              
              $
              14,037
              
              $
              17,698Investment
                  securities, taxable
              
              
              40,208
              
              
              38,665Investment
                  securities, non-taxable
              
              
              5,000
              
              
              5,000Net
                  realized gains on sale or maturityof
                  investment securities
              
              
              131,606
              
              
              -Net
                  realized gains on sale of interestin
                  mortgage banking subsidiary
              
              
              -
              
              
              44,094Total
                  income
              
              
              190,851
              
              
              105,457***Expenses***Salaries
                  and employee benefits
              
              
              98,729
              
              
              88,063Professional
                  fees
              
              
              -
              
              
              490Franchise
                  tax
              
              
              46,096
              
              
              33,478Interest
                  expense
              
              
              691,953
              
              
              663,746Amortization
                  expense
              
              
              24,638
              
              
              25,531Other
                  expenses
              
              
              2,243
              
              
              18,535Total
                  expenses
              
              
              863,659
              
              
              829,843Income
                  (loss) before tax expense and equityin
                  undistributed income of subsidiary
              
              
              (672,808
              )
              
              (724,386
              )***Federal
                  income tax benefit***
              
              
              154,643
              
              
              129,093***State
                  income tax expense***
              
              
              (10,127
              )
              
              -***Total
                  income tax benefit***
              
              
              144,516
              
              
              129,093Loss
                  before equity in undistributed income ofsubsidiary
              
              
              (528,292
              )
              
              (595,293
              )***Equity
                  in undistributed income of subsidiary***
              
              
              4,437,240
              
              
              4,247,309Net
                  income
              
              $
              3,908,948
              
              $
              3,652,016




36




**Notes
        to Consolidated Financial Statements**




**Note
      19. Parent Company Financial Information, continued**





***Statements
      of Cash Flows***


***Years
      ended December 31, 2007 and 2006***




**2007**
              
              **2006*****Cash
                  flows from operating activities***Net
                  income
              
              $
              3,908,948
              
              $
              3,652,016Adjustments:Amortization
              
              
              24,000
              
              
              24,000Stock-based
                  compensation
              
              
              98,729
              
              
              88,063Benefit
                  of non-qualified stock option exercise
              
              
              60,029
              
              
              82,038Accretion
                  of discount on securities, net ofamortization
                  of premiums
              
              
              638
              
              
              1,531Gain
                  on sale of investment securities
              
              
              (131,606
              )
              
              -Deferred
                  taxes
              
              
              -
              
              
              427Increase
                  in equity in undistributed income of subsidiary
              
              
              (4,437,240
              )
              
              (4,247,309
              )Decrease
                  (increase) in other assets
              
              
              148,381
              
              
              (362,008
              )Increase
                  in other liabilities
              
              
              501
              
              
              4,571Net
                  cash used by operating activities
              
              
              (327,620
              )
              
              (756,671
              )***Cash
                  flows from investing activities***Investment
                  in subsidiary
              
              
              -
              
              
              (4,529,514
              )Sales
                  of investment securities
              
              
              206,372
              
              
              -Net
                  decrease in loans
              
              
              -
              
              
              382,696Net
                  cash provided (used) by investing activities
              
              
              206,372
              
              
              (4,146,818
              )***Cash
                  flows from financing activities***Issuance
                  of stock and redemption of fractional shares
              
              
              87,815
              
              
              4,904,281Net
                  cash (used) provided by financing activities
              
              
              87,815
              
              
              4,904,281(Decrease)
                  increase in cash and due from banks
              
              
              (33,433
              )
              
              792***Cash
                  and cash equivalents, beginning***
              
              
              128,735
              
              
              127,943***Cash
                  and cash equivalents, ending***
              
              $
              95,302
              
              $
              128,735





37




Notes
        to Consolidated Financial Statements


**Note
      20. Quarterly Data (in thousands)**




**Years
                  Ended December 31,****2007**
              
              **2006****Fourth
                  Quarter**
              
              **Third
                  Quarter**
              
              **Second
                  Quarter**
              
              **First
                  Quarter**
              
              **Fourth
                  Quarter**
              
              **Third
                  Quarter**
              
              **Second
                  Quarter**
              
              **First**
                **Quarter**Interest
                  income
              
              $
              8,166
              
              $
              8,122
              
              $
              7,907
              
              $
              7,442
              
              $
              7,031
              
              $
              6,718
              
              $
              6,116
              
              $
              5,514Interest
                  expense
              
              
              (4,499
              )
              
              (4,205
              )
              
              (3,919
              )
              
              (3,674
              )
              
              (3,246
              )
              
              (2,943
              )
              
              (2,625
              )
              
              (2,412
              )Net
                  interest income
              
              
              3,667
              
              
              3,917
              
              
              3,988
              
              
              3,768
              
              
              3,785
              
              
              3,775
              
              
              3,491
              
              
              3,102Provision
                  for loan losses
              
              
              -
              
              
              (8
              )
              
              (2
              )
              
              (375
              )
              
              (360
              )
              
              (470
              )
              
              (515
              )
              
              (105
              )Net
                  interest income, afterprovision
                  for loan losses
              
              
              3,667
              
              
              3,909
              
              
              3,986
              
              
              3,393
              
              
              3,425
              
              
              3,305
              
              
              2,976
              
              
              2,997Non
                  interest income
              
              
              882
              
              
              833
              
              
              721
              
              
              1,007
              
              
              654
              
              
              677
              
              
              602
              
              
              648Non
                  interest expenses
              
              
              (3,484
              )
              
              (3,062
              )
              
              (3,083
              )
              
              (2,811
              )
              
              (2,539
              )
              
              (2,550
              )
              
              (2,210
              )
              
              (2,123
              )Income
                  before income taxes
              
              
              1,065
              
              
              1,680
              
              
              1,624
              
              
              1,589
              
              
              1,540
              
              
              1,432
              
              
              1,368
              
              
              1,522Income
                  tax expense
              
              
              (352
              )
              
              (559
              )
              
              (543
              )
              
              (595
              )
              
              (549
              )
              
              (504
              )
              
              (480
              )
              
              (677
              )Net
                  income
              
              $
              713
              
              $
              1,121
              
              $
              1,081
              
              $
              994
              
              $
              991
              
              $
              928
              
              $
              888
              
              $
              845Earnings
                  per common share:Basic
                  earnings per share
              
              $
              .13
              
              $
              .21
              
              $
              .20
              
              $
              .19
              
              $
              .19
              
              $
              .19
              
              $
              .18
              
              $
              .17Diluted
                  earnings per share
              
              $
              .13
              
              $
              .20
              
              $
              .20
              
              $
              .18
              
              $
              .18
              
              $
              .19
              
              $
              .18
              
              $
              .17




38









**Report
      of Independent Registered Public Accounting Firm**




Board
      of
      Directors and Stockholders


Waccamaw
      Bankshares, Inc.


Whiteville,
      North Carolina








We
      have
      audited the consolidated balance sheets of Waccamaw Bankshares, Inc. and
      subsidiary as of December 31, 2007 and 2006 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, 2007. These consolidated
      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 the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence supporting 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 subsidiary at December 31, 2007 and 2006, and the results of its operations
      and its cash flows for each of the three years in the period ended December
      31,
      2007, in conformity with accounting principles generally accepted in the United
      States of America.





We
      were
      not engaged to examine management’s assertion about the effectiveness of
      Waccamaw Bankshares, Inc.’s internal control over financial reporting as of
      December 31, 2007 included herein and, accordingly, we do not express an opinion
      thereon.











Galax,
      Virginia


March
      27,
      2008









**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, 2007
      and
      2006 and the years 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 the Company’s 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 June 30,
      2001.





The
      Company’s total assets were $508.4 million at December 31, 2007 as compared to
      $399.6 million at December 31, 2006. Total deposits at December 31, 2007
      increased 15.5% to $378.2 million. Total deposits were $327.4 million at
      December 31, 2006. The Bank used these resources primarily to fund new loans
      and
      purchase investment securities. The Bank’s net loans increased to $355.1 million
      at the end of 2007, an increase of $42.8 million over the 2006 amount of $312.3
      million. Investment securities were $99.3 million and $50.5 million at December
      31, 2007 and 2006, respectively.





In
      the
      second quarter of 2007, the Company completed construction of a branch in Ocean
      Isle, NC in the second quarter of 2007. The Company acquired three former
      Coastal Financial Corporation bank offices and one former BB&T office from
      BB&T Corporation. The offices are located in Oak Island, NC, Shallotte, NC,
      Myrtle Beach, SC and Conway, SC and opened in the fourth quarter of 2007.





**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-K for the year ended December 31, 2007 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 to be 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”) No. 5, *Accounting
      for Contingencies* ,
      which
      requires that losses be accrued when they are probable of


occurring
      and estimable, and **(ii)** SFAS No.
      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.




21




**Management’s
        Discussion and Analysis**




The
      allowance consists of specific, general and unallocated components. The specific
      component relates to loans that are classified as impaired. For such loans,
      an
      allowance is established when the discounted cash flows (or collateral value
      or
      observable market price) of the impaired loan is lower than the carrying value
      of that loan. The general component covers non-impaired loans and is based
      on
      historical loss experience adjusted for qualitative factors. An unallocated
      component is maintained to cover uncertainties that could affect management’s
      estimate of probable losses. The unallocated component of the allowance reflects
      the margin of imprecision inherent in the underlying assumptions used in the
      methodologies for estimating losses in the portfolio.





Accounting
      for intangible assets is as prescribed by SFAS No. 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.





The
      Company 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 No. 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.





22





**Management’s
      Discussion and Analysis**





***Net
      Interest Income and Average Balances (thousands)***


**Periods
                  Ended December 31,****2007**
              
              **2006**
              
              **2005****Average
                  Balance**
              
              **Income/
                  Expenses**
              
              **Interest
                  Yield/ Cost**
              
              **Average
                  Balance**
              
              **Income/
                  Expenses**
              
              **Yield/
                  Cost**
              
              **Average
                  Balances**
              
              **Interest
                  Income/ Expenses**
              
              **Yield/
                  Cost****Interest-earning
                  assets:**Investment
                  securities
              
              $
              65,454
              
              $
              3,805
              
              
              5.81
              %
              $
              46,561
              
              $
              2,526
              
              
              5.43
              %
              $
              31,257
              
              $
              1,435
              
              
              4.59
              %Federal
                  funds sold
              
              
              5,481
              
              
              290
              
              
              5.29
              %
              
              4,630
              
              
              226
              
              
              4.88
              %
              
              13,595
              
              
              436
              
              
              3.21
              %Deposits
                  with banks
              
              
              943
              
              
              49
              
              
              5.19
              %
              
              897
              
              
              42
              
              
              4.68
              %
              
              889
              
              
              27
              
              
              3.03
              %Loans,
                  net1,2
              
              
              332,451
              
              
              27,493
              
              
              8.27
              %
              
              279,625
              
              
              22,585
              
              
              8.08
              %
              
              238,579
              
              
              16,330
              
              
              6.84
              %Total
                  interest-earningassets
              
              
              404,329
              
              
              31,637
              
              
              
              
              
              331,713
              
              
              25,379
              
              
              
              
              
              284,320
              
              
              18,228Yield
                  on average interest-earning
                  assets
              
              
              
              
              
              
              
              
              7.82
              %
              
              
              
              
              
              
              
              7.65
              %
              
              
              
              
              
              
              
              6.41
              %**Noninterest-earning
                  assets:**Cash
              
              
              8,204
              
              
              
              
              
              
              
              
              6,687
              
              
              
              
              
              
              
              
              5,704Premises
                  and equipment
              
              
              8,475
              
              
              
              
              
              
              
              
              5,395
              
              
              
              
              
              
              
              
              3,397Interest
                  receivable and other
              
              
              17,571
              
              
              
              
              
              
              
              
              12,880
              
              
              
              
              
              
              
              
              8,960Total
                  noninterest-earningassets
              
              
              34,250
              
              
              
              
              
              
              
              
              24,962
              
              
              
              
              
              
              
              
              18,061Total
                  assets
              
              $
              438,579
              
              
              
              
              
              
              
              $
              356,675
              
              
              
              
              
              
              
              $
              302,381**Interest-bearing
                  liabilities:**Demand
                  deposits
              
              $
              26,714
              
              
              167
              
              
              .62
              %
              $
              27,404
              
              
              206
              
              
              .75
              %
              $
              17,803
              
              
              130
              
              
              .73
              %Savings
                  deposits
              
              
              72,620
              
              
              2,436
              
              
              3.35
              %
              
              69,129
              
              
              2,093
              
              
              3.03
              %
              
              52,562
              
              
              1,091
              
              
              2.08
              %Time
                  deposits
              
              
              218,997
              
              
              11,067
              
              
              5.05
              %
              
              168,532
              
              
              7,189
              
              
              4.27
              %
              
              158,227
              
              
              5,093
              
              
              3.22
              %Repurchase
                  agreements andpurchased
                  funds
              
              
              10,513
              
              
              469
              
              
              4.46
              %
              
              5,142
              
              
              226
              
              
              4.40
              %
              
              3,618
              
              
              76
              
              
              2.11
              %Other
                  borrowings
              
              
              37,422
              
              
              2,157
              
              
              5.77
              %
              
              25,389
              
              
              1,512
              
              
              5.96
              %
              
              24,282
              
              
              1,146
              
              
              4.72
              %Total
                  interest-bearingliabilities
              
              
              366,266
              
              
              16,296
              
              
              
              
              
              295,596
              
              
              11,226
              
              
              
              
              
              256,492
              
              
              7,536Cost
                  of average interest-bearing
                  liabilities
              
              
              
              
              
              
              
              
              4.45
              %
              
              
              
              
              
              
              
              3.80
              %
              
              
              
              
              
              
              
              2.94
              %**Noninterest-bearing
                  liabilities:**Demand
                  deposits
              
              
              36,181
              
              
              
              
              
              
              
              
              33,259
              
              
              
              
              
              
              
              
              24,402Interest
                  payable and other
              
              
              2,631
              
              
              
              
              
              
              
              
              1,875
              
              
              
              
              
              
              
              
              1,233Total
                  noninterest-bearing
                  liabilities
              
              
              38,812
              
              
              
              
              
              
              
              
              35,134
              
              
              
              
              
              
              
              
              25,635Total
                  liabilities
              
              
              405,078
              
              
              
              
              
              
              
              
              330,730
              
              
              
              
              
              
              
              
              282,127**Stockholders'
                  equity**
              
              
              33,501
              
              
              
              
              
              
              
              
              25,945
              
              
              
              
              
              
              
              
              20,254Total
                  liabilities andstockholders'
                  equity
              
              $
              438,579
              
              
              
              
              
              
              
              $
              356,675
              
              
              
              
              
              
              
              $
              302,381**Net
                  interest income**
              
              
              
              
              $
              15,341
              
              
              
              
              
              
              
              $
              14,153
              
              
              
              
              
              
              
              $
              10,692**Net
                  yield on interest-earning assets**
              
              
              
              
              3.79
              %
              
              
              
              
              
              
              
              4.27
              %
              
              
              
              
              
              
              
              3.76
              %


1   Average
            loan balances include nonaccrual loans.
  2   Deferred
            loan fees are included in interest income.


23




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 2007 was $31.6 million, an increase of 24.7% over the 2006 total
      of $25.4 million. Interest income for 2005 was $18.2 million. These increases
      are due to the increase in the level of average earning assets in the past
      three
      years. Average earning assets were $404.3 million during 2007, an increase
      of
      21.9% over 2006. Average earning assets increased 16.7% to $331.7 million during
      2006 over the 2005 balance of $284.3 million. Yields on interest-earning assets
      during 2007, 2006, and 2005 were 7.8%, 7.7%, and 6.4%, 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
      8.3%, 8.1% and 6.8% during 2007, 2006, and 2005, respectively. Yields on loans
      increased in 2006 primarily as a result of the rising rate
      environment.





Interest
      expense was $16.3 million during 2007, an increase of 45.2% over 2006. Interest
      expense in 2006 was $11.2 million, an increase of 49.0% over 2005. The increase
      in 2007 and 2006 is a result of the rising rate environment in 2006 and the
      increase in deposit balances in 2007. The average rate paid on interest-bearing
      liabilities during 2007, 2006, and 2005 was 4.5%, 3.8%, and 2.9%,
      respectively.





Net
      interest income was $15.3 million during 2007, an increase of 8.4% over 2006.
      During 2006 net interest income increased to $14.2 million. Net interest income
      was $10.7 million in 2005. These increases are due to increased levels of
      average earning assets and liabilities complemented by increased yields and
      rates. Net interest margin during 2007, 2006, and 2005 was 3.8%, 4.3%, and
      3.8%,
      respectively.




24




Management’s
      Discussion and Analysis





The
      effects of changes in volumes and rates on net interest income for 2007, 2006
      and 2005 are shown in the table below.


***Rate/Volume
                  Variance Analysis (thousands)*****2007
                    Compared to 2006**
              
              
              **2006
                    Compared to 2005****Interest**
              
              
              
              
              
              
              
              
              **Interest****Income/**Expense
              
              
              **Variance**Attributable
                  to
              
              
              Income/Expense
              
              
              **Variance**Attributable
                  to**Variance**
              
              
              **Rate**
              
              
              **Volume**
              
              
              **Variance**
              
              
              **Rate**
              
              
              **Volume**Interest-earning
                  assets:Loans
              
              $
              4,908
              
              $
              551
              
              $
              4,357
              
              $
              6,255
                  $
              
              
              3,198
              
              $
              3,057Investment
                  securities
              
              
              1,279
              
              
              192
              
              
              1,087
              
              
              1,091
              
              
              306
              
              
              785Deposits
                  with banks
              
              
              7
              
              
              5
              
              
              2
              
              
              15
              
              
              15
              
              
              -Federal
                  funds sold
              
              
              64
              
              
              20
              
              
              44
              
              
              (210
              )
              
              794
              
              
              (1,004
              )Total
              
              
              6,258
              
              
              768
              
              
              5,490
              
              
              7,151
              
              
              4,313
              
              
              2,838Interest-bearing
                  liabilities:Demand
                  deposits
              
              
              (39
              )
              
              (34
              )
              
              (5
              )
              
              76
              
              
              5
              
              
              71Savings
                  deposits
              
              
              343
              
              
              234
              
              
              109
              
              
              1,002
              
              
              715
              
              
              287Time
                  deposits
              
              
              3,878
              
              
              1,479
              
              
              2,399
              
              
              2,096
              
              
              1,820
              
              
              276Short-term
                  borrowings
              
              
              243
              
              
              3
              
              
              240
              
              
              150
              
              
              135
              
              
              15Long-term
                  debt
              
              
              645
              
              
              (47
              )
              
              692
              
              
              366
              
              
              327
              
              
              39Total
              
              
              5,070
              
              
              1,635
              
              
              3,435
              
              
              3,690
              
              
              3,002
              
              
              688Net
                  interest income
              
              $
              1,188
              
              $
              (867
              )
              $
              2,055
              
              $
              3,461
                  $
              
              
              1,311
              
              $
              2,150




1.
              The
                  variance in interest attributable to both volume and rate has been
                  allocated to variance attributed to volume and variance attributed
                  to rate
                  in proportion to the absolute value of the change in
                  each.


2.
            Balances
                of nonaccrual loans have been included for computational
                purposes.





**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 allowance consists of specific, general and
      unallocated components. The specific component relates to loans that are
      classified as impaired. For such loans, an allowance is established when the
      discounted cash flows (or collateral value or observable market price) of the
      impaired loan is lower than the carrying value of that loan. The general
      component covers non-impaired loans and is based on historical loss experience
      adjusted for qualitative factors. An unallocated component is maintained to
      cover uncertainties that could affect management’s estimate of probable losses.
      The unallocated component of the allowance reflects the margin of imprecision
      inherent in the underlying assumptions used in the methodologies for estimating
      losses in the portfolio.





The
      provision for loan loss expense was $385,864, $1,450,000, and $1,370,000 during
      2007, 2006, and 2005 respectively. The Bank's allowance for loan losses as
      a
      percentage of gross loans was 1.5%, 1.5% and 1.5% at the end of 2007, 2006,
      and
      2005, respectively. Additional information regarding loan loss provisions is
      discussed in “Nonperforming and Problem Assets.”




25




**Management’s
      Discussion and Analysis**





**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 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 $3.4 million, $2.6 million, and $2.3 million for the years ended
      December 31, 2007, 2006, and 2005, respectively. Noninterest income increased
      in
      2007 primarily due to the increases in mortgage origination, financial services
      fee income, service charges and earnings on bank owned life insurance. Service
      charges on deposit accounts was 38.5% of total noninterest income for 2007.
      Service charges will most likely increase as the number of deposit accounts
      grow. The Bank's fee structure is reviewed annually to determine if adjustments
      to fees are warranted.





Mortgage
      origination fees increased 24.9% to $467,000 from 2007 to 2006 due to strong
      housing demand in the existing market areas. The Bank purchased life insurance
      for certain of its key employees in December, 2004, March 2007 and December
      2007
      providing $390,000, $240,000 and $193,000 of noninterest income for the years
      ended December 31, 2007, 2006 and 2005, respectively.





The
      sources of noninterest income for the past three years are summarized in the
      following table.





***Sources
      of Noninterest Income (thousands)***


**2007**
              
              **2006**
              
              **2005**Service
                  charges on deposit accounts
              
              $
              1,325
              
              $
              1,100
              
              $
              1,095ATM
                  and check cashing fees
              
              
              538
              
              
              439
              
              
              468Gain
                  on sale of investment securities
              
              
              246
              
              
              (1
              )
              
              (1
              )Gain
                  on sale of investment in mortgagebanking
                  investee
              
              
              -
              
              
              44
              
              
              37Mortgage
                  origination
              
              
              467
              
              
              374
              
              
              270Insurance
                  commission
              
              
              14
              
              
              17
              
              
              44Income
                  from financial services
              
              
              305
              
              
              290
              
              
              87Earnings
                  on bank owned life insurance
              
              
              390
              
              
              240
              
              
              193Other
              
              
              158
              
              
              78
              
              
              76Total
                  noninterest income
              
              $
              3,443
              
              $
              2,581
              
              $
              2,269





**Noninterest
      Expense**





Noninterest
      expense for 2007, 2006, and 2005 was $12.4 million, $9.4 million and $7.0
      million, respectively. The majority of the increase in noninterest expense
      for
      2007 can be attributed to personnel and occupancy costs related to four new
      branches, and full year expenses for branches opened in 2006. The Bank opened
      branches in Ocean Isle, Oak Island and Shallotte, North Carolina and Myrtle
      Beach and Conway, South Carolina during 2007.





26




**Management’s
      Discussion and Analysis**





Total
      personnel expenses, the largest component of noninterest expense, were $6.9
      million, $5.3 million and $3.7 million during 2007, 2006 and 2005, respectively.
      Personnel expenses increased 30.0% during 2007 and 41.3% during 2006. This
      was
      due to Bank growth and the addition of senior management. Management expects
      these costs to continue to increase as the Company grows.





Combined
      occupancy and furniture and equipment expense was $1.5 million, $1.1 million
      and
      $805,000, or 12.2%, 11.7% and 11.6% of noninterest expense during 2007, 2006
      and
      2005, respectively. Professional services expense, fees paid to attorneys,
      independent auditors, consultants and state examiners was $315,000, $293,000,
      and $192,000 in 2007, 2006 and 2005, respectively. The increase in 2007 and
      2006
      can be mostly attributed to legal fees related to collection of a
      loan.





Advertising
      and public relations expense increased to $593,000 in 2007 from $308,000 in
      2006
      as these expenses will continue to increase with Bank growth. Data processing
      and credit card processing fees were $1.0 million, $809,000 and $629,000 during
      2007, 2006 and 2005, respectively. These fees relate directly to the number
      of
      accounts serviced and transactions processed.





The
      overhead ratio of noninterest expense to adjusted total revenues (net interest
      income plus noninterest income excluding securities transactions) was 66%,
      56%
      and 54% in 2007, 2006, and 2005, respectively. 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 should outpace growth in
      noninterest expense resulting in improved overhead ratios. The primary elements
      of noninterest expense for the past three years are summarized in the following
      table.





***Sources
      of Noninterest Expense (thousands)***


**2007**
              
              **2006**
              
              **2005**Salaries
                  and wages
              
              $
              5,862
              
              $
              4,440
              
              $
              3,125Employee
                  benefits
              
              
              994
              
              
              834
              
              
              608Total
                  personnel expense
              
              
              6,856
              
              
              5,274
              
              
              3,733Occupancy
                  expense
              
              
              1,074
              
              
              776
              
              
              555Furniture
                  and equipment
              
              
              439
              
              
              329
              
              
              250Printing
                  and supplies
              
              
              164
              
              
              129
              
              
              101Professional
                  services
              
              
              315
              
              
              293
              
              
              192Postage
                  and office supplies
              
              
              116
              
              
              98
              
              
              84Telephone
              
              
              139
              
              
              106
              
              
              73Dues
                  and subscriptions
              
              
              63
              
              
              39
              
              
              30Education
                  and seminars
              
              
              71
              
              
              47
              
              
              35Franchise
                  and local taxes
              
              
              92
              
              
              83
              
              
              56Advertising
                  and public relations
              
              
              593
              
              
              308
              
              
              187Director
                  fees
              
              
              170
              
              
              156
              
              
              119Data
                  processing services
              
              
              1,001
              
              
              809
              
              
              629Amortization
                  of deposit premium
              
              
              282
              
              
              273
              
              
              253Other
                  operating expense
              
              
              1,065
              
              
              702
              
              
              670Total
                  other expenses
              
              $
              12,440
              
              $
              9,422
              
              $
              6,967
  27


**Management’s
        Discussion and Analysis**




**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 and state
      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 $2,049,000, $2,210,000 and $1,589,000 for 2007, 2006 and 2005,
      respectively. Net deferred income tax benefits of approximately $2,358,000
      and
      $1,654,000 at December 31, 2007 and 2006, respectively, were included in other
      assets. At December 31, 2007, $398,000 of the total deferred tax asset is
      applicable to unrealized depreciation on investment securities available for
      sale.





The
      Bank’s deferred income tax benefits and liabilities are the result of temporary
      differences in provisions for loan losses, depreciation, amortization of deposit
      premiums, deferred income, and investment security discount
      accretion.





**Earning
      Assets**





Average
      earning assets were $404.3 million during 2007, an increase of 21.9% over 2006.
      Average earning assets were $331.7 million in 2006, an increase of 16.7% over
      the $284.3 million balance for 2005. Total average earning assets represented
      92.2%, 93.0%, and 94.0% of total average assets during the years ended December
      31, 2007, 2006 and 2005, respectively. A summary of average assets is shown
      in
      the following table.





***Average
      Asset Mix (dollars in thousands)***


**2007**
              
              **2006**
              
              **2005****Average**
              
              
              
              **Average**
              
              
              
              **Average****Balance**
              
              **Percent**
              
              **Balance**
              
              **Percent**
              
              **Balance**
              
              **Percent**Earnings
                  assets:Loans,
                  net
              
              $
              332,451
              
              
              75.80
              %
              $
              279,625
              
              
              78.40
              %
              $
              238,579
              
              
              78.90
              %Investment
                  securities
              
              
              65,454
              
              
              14.92
              %
              
              46,561
              
              
              13.05
              %
              
              31,257
              
              
              10.34
              %Federal
                  funds sold
              
              
              5,481
              
              
              1.25
              %
              
              4,630
              
              
              1.30
              %
              
              13,595
              
              
              4.50
              %Deposits
                  with banks
              
              
              943
              
              
              .21
              %
              
              897
              
              
              .25
              %
              
              889
              
              
              .29
              %Total
                  earning assets
              
              
              404,329
              
              
              92.18
              %
              
              331,713
              
              
              93.00
              %
              
              284,320
              
              
              94.03
              %Nonearning
                  assets:Cash
                  and due from banks
              
              
              8,204
              
              
              1.88
              %
              
              6,687
              
              
              1.88
              %
              
              5,704
              
              
              1.89
              %Premises
                  and equipment
              
              
              8,475
              
              
              1.93
              %
              
              5,395
              
              
              1.51
              %
              
              3,397
              
              
              1.12
              %Other
                  assets
              
              
              17,571
              
              
              4.01
              %
              
              12,880
              
              
              3.61
              %
              
              8,960
              
              
              2.96
              %Total
                  nonearning assets
              
              
              34,250
              
              
              7.82
              %
              
              24,962
              
              
              7.00
              %
              
              18,061
              
              
              5.97
              %Total
                  assets
              
              $
              438,579
              
              
              100.00
              %
              $
              356,675
              
              
              100.00
              %
              $
              302,381
              
              
              100.00
              %





**Loans**





The
      Bank
      makes both consumer and commercial loans to borrowers in all neighborhoods
      within its market area, including low- and moderate-income areas. The Bank’s
      market area is generally defined to be all of Columbus, Brunswick, Bladen and
      New Hanover counties of North Carolina and Lancaster and Horry counties of
      South
      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.





28




**Management’s
        Discussion and Analysis**
  A
        significant portion of the loan portfolio is made up of loans secured by
        various
        types of real estate. Real estate loans represented 82.6%, 79.7%, and 84.2%
        of
        total loans at December 31, 2007, 2006, and 2005, respectively. Total loans
        secured by one-to-four family residential properties represented 21.0%, 20.3%,
        and 24.0% of total loans at the end of 2007, 2006 and 2005, respectively.
        Loans
        for commercial and business purposes were $43.6 million, $48.9 million and
        $29.0
        million, or 12.1%, 15.4% and 11.1% of total loans outstanding at December
        31,
        2007, 2006 and 2005, respectively.





The
      amounts of gross loans outstanding by type at December 31, 2007 through December
      31, 2003 are shown in the following table.





***Loan
      Portfolio Summary (thousands)***


**2007**
              
              **2006**
              
              **2005**
              
              **2004**
              
              **2003**Construction
                  and development
              
              $
              121,760
              
              $
              109,036
              
              $
              83,575
              
              $
              37,529
              
              $
              23,389Farmland
              
              
              3,806
              
              
              2,412
              
              
              2,545
              
              
              2,119
              
              
              2,1411-4
                  family residential
              
              
              75,671
              
              
              64,475
              
              
              62,796
              
              
              58,484
              
              
              38,354Multifamily
                  residential
              
              
              3,670
              
              
              3,650
              
              
              4,495
              
              
              3,600
              
              
              1,899Nonfarm,
                  nonresidential
              
              
              93,222
              
              
              73,529
              
              
              67,199
              
              
              65,156
              
              
              22,130Total
                  real estate
              
              
              298,129
              
              
              253,102
              
              
              220,610
              
              
              166,888
              
              
              87,913Agricultural
              
              
              671
              
              
              675
              
              
              388
              
              
              1,976
              
              
              3,238Commercial
                  and industrial
              
              
              43,617
              
              
              48,858
              
              
              29,036
              
              
              30,928
              
              
              43,068Consumer
              
              
              13,950
              
              
              13,172
              
              
              10,544
              
              
              8,564
              
              
              8,775Other
              
              
              4,610
              
              
              1,783
              
              
              1,327
              
              
              1,471
              
              
              1,819Total
              
              $
              360,977
              
              $
              317,590
              
              $
              261,905
              
              $
              209,827
              
              $
              144,813





The
      maturity/repricing distribution of loans as of December 31, 2007 are set forth
      in the following table.





***Maturity
      Schedule of Loans (dollars in thousands)***


**Commercial**
              
              **Construction****and**
              
              **and**
              
              
              
              **Total****Industrial**
              
              **Development**
              
              **Others**
              
              **Amount**
              
              **Percent**Three
                  months or less
              
              $
              27,496
              
              $
              76,757
              
              $
              109,206
              
              $
              213,459
              
              
              59.13
              %Over
                  three months to twelve months
              
              
              2,985
              
              
              8,332
              
              
              10,534
              
              
              21,851
              
              
              6.05
              %Over
                  one year to five years
              
              
              10,906
              
              
              30,446
              
              
              47,319
              
              
              88,671
              
              
              24.57
              %Over
                  five years
              
              
              2,230
              
              
              6,226
              
              
              28,540
              
              
              36,996
              
              
              10.25
              %Total
                  loans
              
              $
              43,617
              
              $
              121,761
              
              $
              195,599
              
              $
              360,977
              
              
              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 Government sponsored enterprises, Corporate
      securities, municipal securities, 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.




29




**Management’s
        Discussion and Analysis**
  The
        following table presents the investment portfolio 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 (dollars in thousands)***


**December
                  31, 2007****Amortized
                  Cost Due****In
                  One Yr.**
              
              **After
                      One**
                    **Through**
              
              **After
                    Five**
                  **Through**
              
              **After
                  Ten**
              
              
              
              **Fair****Or
                  Less**
              
              **Five
                  Years**
              
              **Ten
                  Years**
              
              **Years**
              
              **Total**
              
              **Value****Investment
                  securities**Government
                  sponsoredenterprises
                  (FHLBand
                  FHLMC)
              
              $
              -
              
              $
              3,452
              
              $
              3,500
              
              $
              8,496
              
              $
              15,448
              
              $
              15,621Municipal
                  securities
              
              
              -
              
              
              256
              
              
              680
              
              
              15,755
              
              
              16,691
              
              
              16,011Corporate
                  securities
              
              
              725
              
              
              2,496
              
              
              1,003
              
              
              23,279
              
              
              27,503
              
              
              27,055Mortgage-backedSecurities
              
              
              14
              
              
              -
              
              
              952
              
              
              39,726
              
              
              40,692
              
              
              40,615Total
              
              $
              739
              
              $
              6,204
              
              $
              6,135
              
              $
              87,256
              
              $
              100,334
              
              $
              99,302**Weighted
                  average yields**Government
                  sponsoredenterprises
                  (FHLBand
                  FHLMC)
              
              
              -
              %
              
              5.18
              %
              
              5.89
              %
              
              6.16
              %
              
              
              
              
              5.88
              %Municipal
                  securities
              
              
              -
              %
              
              2.71
              %
              
              4.00
              %
              
              4.30
              %
              
              
              
              
              4.26
              %Corporate
                  securities
              
              
              -
              %
              
              6.16
              %
              
              6.74
              %
              
              7.52
              %
              
              
              
              
              7.34
              %Mortgage-backedSecurities
              
              
              5.16
              %
              
              -
              %
              
              3.79
              %
              
              5.60
              %
              
              
              
              
              5.56
              %Consolidated
              
              
              5.16
              %
              
              5.47
              %
              
              5.50
              %
              
              5.93
              %
              
              
              
              
              5.83
              %
 **2006****Book**
                
                **Fair****Value**
                
                **Value****Investment
                    securities**Government
                    sponsoredenterprises
                    (FHLBand
                    FHLMC
                
                $
                8,630
                
                $
                8,647Municipal
                    securities
                
                
                9,780
                
                
                9,768Corporate
                    securities
                
                
                18,397
                
                
                18,733Mortgage-backed
                    securities
                
                
                13,488
                
                
                13,381Total
                
                $
                50,295
                
                $
                50,529


The
      interest rate environment and the need for liquidity resulted in an annualized
      average yield on the investment portfolio of 5.8%, 5.4%, and 4.6% during 2007,
      2006 and 2005 ,
      respectively .
      At
      December 31, 2007, 2006 and 2005, the market value of the investment portfolio
      was $99.3 million, $50.5 million, and $33.2 million ,
      respectively .
      Amortized cost was $100.3 million, $50.3 million, and $33.7
      million.




30




**Management’s
        Discussion and Analysis**


**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 $5.5 million, $4.6 million, and $13.6 million in 2007, 2006,
      and 2005, respectively. There were no Federal funds sold at December 31, 2007
      and $2.6 million at December 31, 2006. The decrease from 2006 to 2007 was a
      result of management allocating funds to higher-yielding assets.





**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 $354.5 million during 2007. This is an increase of 18.8%
      over 2006. Average total deposits were $298.3 million for the year ended
      December 31, 2006, an increase of 17.9% over 2005. Substantially all of those
      deposits were core deposits. The percentage of the Bank's average deposits
      that
      were interest bearing in 2007 was 89.8% and 88.9% during 2006 and 90.4% during
      2005. Average demand deposits which earn no interest were $36.1 million, $33.3
      million and $24.4 million for the periods ended December 31, 2007, 2006 and
      2005, 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.




Average
      deposits and related average rates paid for the periods ended December 31,
      2007,
      2006, and 2005 are summarized in the following table.





***Average
      Deposit Mix (dollars in thousands)***


**2007**
              
              
              
              **2006**
              
              
              
              **2005****Amount**
              
              **Rate**
              
              **Amount**
              
              **Rate**
              
              **Amount**
              
              **Rate**Interest
                  bearing deposits:Demand
                  accounts
              
              $
              26,714
              
              
              .62
              %
              $
              27,404
              
              
              .75
              %
              $
              17,803
              
              
              .73
              %Money
                  market
              
              
              66,482
              
              
              3.58
              
              
              62,472
              
              
              2.37
              
              
              45,980
              
              
              2.25Savings
              
              
              6,138
              
              
              .89
              
              
              6,657
              
              
              .67
              
              
              6,582
              
              
              .85Time
                  deposit
              
              
              218,997
              
              
              5.05
              
              
              168,532
              
              
              4.27
              
              
              158,227
              
              
              3.22Total
                  interest bearing deposits
              
              
              318,331
              
              
              4.29
              
              
              265,065
              
              
              3.58
              
              
              228,592
              
              
              2.76Noninterest
                  bearing demand deposits
              
              
              36,181
              
              
              
              
              
              33,259
              
              
              
              
              
              24,402Total
                  deposits
              
              $
              354,512
              
              
              
              
              $
              298,324
              
              
              
              
              $
              252,994





31


**Management’s
        Discussion and Analysis**
  The
        following table provides maturity information relating to time deposits of
        $100,000 or more at December 31, 2007.





***Large
      Time Deposit Maturities, (thousands)***


Remaining
                  maturity of three months or less
              
              $
              34,674Remaining
                  maturity over three through twelve months
              
              
              94,359Remaining
                  maturity over twelve months
              
              
              13,499Total
                  time deposits of $100,000 or more
              
              $
              142,532


**Securities
      Sold Under Agreements to Repurchase**





Other
      borrowed funds consisting of securities sold under agreements to repurchase
      and
      Federal funds purchased were $29.2 million, $5.4 million, and $2.7 million
      at
      December 31, 2007, 2006 and 2005, respectively. The increase from 2006 to 2007
      included $20,000,000 of reverse repurchase agreements at favorable rates used
      to
      purchase $20,000,000 of investments at a favorable spread. Average short-term
      debt was $10.5 million, $5.1 million, and $3.6 million during 2007, 2006 and
      2005, respectively. The related interest expense was $468,792, $225,725, and
      $76,247 during 2007, 2006, and 2005, respectively.





**Short-term
      Borrowings**





There
      were three variable rate FHLB advances of $2,000,000, $6,000,000 and $5,000,000
      at December 31, 2007 and no short-term borrowings at December 31,
      2006.





**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,
      2007 and 2006 advances of $25.5 million and $23.5 million, respectively were
      outstanding. The average amount outstanding during 2007 and 2006 was $26.4
      million and $17.1 million, respectively. Approximately $18,000,000 in 1-4 family
      residential loans, $33,000,000 in commercial real estate loans and 17,000,000
      in
      home equity line of credit loans were pledged as collateral for the FHLB
      advances at December 31, 2007.


**Maturity
                  Date**
              
              
              **Advance**
              
              **Rate**02/10/10
              
              
              2,500,000
              
              Fixed
                  at 5.85%
              
              Convertible
                  quarterly07/12/12
              
              
              9,000,000
              
              1
                  Month LIBOR - .50%12/02/13
              
              
              5,000,000
              
              3
                  Month LIBOR - .50%09/29/15
              
              
              4,000,000
              
              Fixed
                  at 4.06%
              
              Convertible
                  9/29/0904/22/19
              
              
              5,000,000
              
              3
                  Month LIBOR - .50%
              
              Convertible
                  4/22/09$
              25,500,000
  32


**Management’s
        Discussion and Analysis**


**Capital
      Adequacy**





Stockholders’
      equity was $35.0 million at December 31, 2007. This was a 10.5% increase over
      the $31.7 million at the end of 2006. Average stockholders' equity as a
      percentage of average total assets was 7.9%, 7.3% and 6.7% for 2007, 2006,
      and
      2005, respectively.





The
      Company completed a unit offering on August 31, 2006 consisting of one share
      of
      common stock and one warrant to purchase a share of the Company’s common stock
      at a price per share of $21.82 at any time until September 30, 2009. The units
      were offered for sale to the holders of record of the Company’s common stock at
      the close of business on July 12, 2006. The offering raised $3,582,000 less
      expenses of $46,000 of additional capital through the sale of 231,778 units
      (adjusted for stock dividends).





The
      Company also completed a private offering on October 31, 2006 consisting of
      one
      share of Series A convertible preferred stock and one detachable warrant to
      purchase one share of the Company’s common stock at a price per share of $21.82
      at any time until September 30, 2009. The private offering raised $1,006,000
      less expenses of $13,000 of additional capital through the sale of 65,111 units.
      Each share of preferred stock may be converted at the election of its holder
      to
      one share of common stock after November 1, 2007 (adjusted for stock
      dividends).





The
      Company completed its first issuance of Trust Preferred securities in December
      2003 in the amount of $8 million. 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
      1
      capital with the remainder qualifying as Tier 2 capital.





These
      capital transactions are being utilized to capitalize the continued growth
      of
      the Company and the Bank.





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, 2007, the Company’s Tier 1 risk-weighted
      capital ratio and total capital ratio were 8.7% and 10.6%,
      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, 2007, the Bank’s capital ratios were as follows: Tier 1 leverage ratio,
      9.3%, Tier 1 risk-based capital ratio, 10.1% and total risk-based ratio, 11.3%.
      These capital ratios were sufficient at December 31, 2007 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.





33


**Management’s
        Discussion and Analysis**


***Capital
      Requirements (dollars in thousands)***





**Waccamaw
      Bankshares, Inc.**


**Risk-based
                  Capital****Leverage
                  Capital**
              
              **Tier
                  I Capital**
              
              **Total
                  Capital****Amount**
              
              **Percentage**(1)
              
              **Amount**
              
              **Percentage**(2)
              
              **Amount**
              
              **Percentage**(2)Actual
              
              $
              40,350
              
              
              8.70
              %
              $
              40,350
              
              
              9.63
              %
              $
              45,591
              
              
              10.88
              %Required
              
              
              18,547
              
              
              4.00
              %
              
              16,755
              
              
              4.00
              %
              
              33,509
              
              
              8.00
              %


**Waccamaw
      Bank**


**Risk-based
                  Capital****Leverage
                  Capital**
              
              **Tier
                  I Capital**
              
              **Total
                  Capital****Amount**
              
              **Percentage**(1)
              
              **Amount**
              
              **Percentage**(2)
              
              **Amount**
              
              **Percentage**(2)Actual
              
              $
              39,429
              
              
              8.53
              %
              $
              39,429
              
              
              9.42
              %
              $
              44,670
              
              
              10.67
              %Required
              
              
              18,497
              
              
              4.00
              %
              
              16,792
              
              
              4.00
              %
              
              33,585
              
              
              8.00
              %





(1)
            
            Percentage
                of total adjusted average assets. The Federal Reserve Board (“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.





**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.





34


**Management’s
        Discussion and Analysis**


***Allowance
      for Loan Losses (dollars in thousands)***


**2007**
              
              **2006**
              
              **2005**
              
              **2004**
              
              **2003**Balance
                  at beginning of period
              
              $
              4,886
              
              $
              3,939
              
              $
              2,791
              
              $
              2,218
              
              $
              1,854Charge-offs:Construction
                  loans
              
              
              (86
              )
              
              -
              
              
              -
              
              
              -
              
              
              -Commercial
                  and industrial loans
              
              
              (1
              )
              
              (500
              )
              
              (86
              )
              
              (63
              )
              
              (14
              )Consumer
                  and other
              
              
              (201
              )
              
              (85
              )
              
              (184
              )
              
              (210
              )
              
              (378
              )Total
                  charge-offs
              
              
              (288
              )
              
              (585
              )
              
              (270
              )
              
              (273
              )
              
              (392
              )Recoveries:Construction
                  loans
              
              
              379
              
              
              -
              
              
              -
              
              
              -
              
              
              -Commercial
                  and industrial loans
              
              
              -
              
              
              -
              
              
              34
              
              
              17
              
              
              -Consumer
                  and other
              
              
              23
              
              
              36
              
              
              14
              
              
              10
              
              
              26Total
                  recoveries
              
              
              402
              
              
              36
              
              
              48
              
              
              27
              
              
              26Net
                  charge-offs
              
              
              114
              
              
              (549
              )
              
              (222
              )
              
              (246
              )
              
              (366
              )Allowance
                  purchased from The Bankof
                  Heath Springs
              
              
              -
              
              
              46
              
              
              -
              
              
              -
              
              
              -Provision
                  for loan losses
              
              
              386
              
              
              1,450
              
              
              1,370
              
              
              819
              
              
              730Balance
                  at the end of the year
              
              $
              5,386
              
              $
              4,886
              
              $
              3,939
              
              $
              2,791
              
              $
              2,218Total
                  loans outstanding at year-end
              
              $
              360,977
              
              $
              317,590
              
              $
              261,905
              
              $
              209,827
              
              $
              144,813Average
                  net loans outstanding for the year
              
              $
              332,451
              
              $
              279,625
              
              $
              238,579
              
              $
              168,757
              
              $
              137,403Allowance
                  for loan losses toloans
                  outstanding
              
              
              1.49
              %
              
              1.54
              %
              
              1.50
              %
              
              1.33
              %
              
              1.53
              %Ratio
                  of net loan charge-offs toaverage
                  loans outstanding
              
              
              (0.03
              )%
              
              0.20
              %
              
              0.09
              %
              
              0.15
              %
              
              0.27
              %





The
      following table sets forth information about the Bank’s allowance for loan
      losses by asset category at the dates indicated. The allocation of the allowance
      to each category is not necessarily indicative of future losses and does not
      restrict the use of the allowance to absorb losses in any category.





***Allowance
      for Loan Losses by Category (dollars in thousands)***


**2007**
              
              **2006**
              
              **2005**
              
              **2004**
              
              **2003****Amount**
              
              **%(1)**
              
              **Amount**
              
              **%(1)**
              
              **Amount**
              
              **%(1)**
              
              **Amount**
              
              **%(1)**
              
              **Amount**
              
              **%(1)**Construction
                  and development
              
              $
              1,936
              
              
              33.73
              
              $
              1,766
              
              
              34.33
              
              $
              1,320
              
              
              31.91
              
              $
              253
              
              
              17.89
              
              $
              351
              
              
              16.15Farmland
              
              
              61
              
              
              1.05
              
              
              39
              
              
              .76
              
              
              33
              
              
              0.97
              
              
              28
              
              
              1.01
              
              
              30
              
              
              1.481-4
                  family residential
              
              
              1,059
              
              
              20.96
              
              
              954
              
              
              20.30
              
              
              911
              
              
              23.98
              
              
              702
              
              
              27.87
              
              
              575
              
              
              26.48Multifamily
                  residential
              
              
              42
              
              
              1.02
              
              
              42
              
              
              1.15
              
              
              49
              
              
              1.71
              
              
              39
              
              
              1.72
              
              
              23
              
              
              1.31Nonfarm,
                  nonresidential
              
              
              1,399
              
              
              25.82
              
              
              1,176
              
              
              23.15
              
              
              1,048
              
              
              25.66
              
              
              358
              
              
              31.05
              
              
              299
              
              
              15.28Total
                  real estate
              
              
              4,497
              
              
              82.58
              
              
              3,977
              
              
              79.69
              
              
              3,361
              
              
              84.23
              
              
              1,380
              
              
              79.54
              
              
              1,278
              
              
              60.70Agricultural
              
              
              10
              
              
              .19
              
              
              10
              
              
              .22
              
              
              5
              
              
              0.14
              
              
              28
              
              
              0.94
              
              
              52
              
              
              2.24Commercial
                  and industrial
              
              
              593
              
              
              12.09
              
              
              664
              
              
              15.38
              
              
              389
              
              
              11.09
              
              
              1,241
              
              
              14.74
              
              
              711
              
              
              29.74Consumer
              
              
              226
              
              
              3.86
              
              
              212
              
              
              4.15
              
              
              168
              
              
              4.03
              
              
              124
              
              
              4.08
              
              
              149
              
              
              6.06Other
              
              
              60
              
              
              1.28
              
              
              23
              
              
              .56
              
              
              16
              
              
              0.51
              
              
              18
              
              
              0.70
              
              
              28
              
              
              1.26Total
              
              $
              5,386
              
              
              100.00
              
              $
              4,886
              
              
              100.00
              
              $
              3,939
              
              
              100.00
              
              $
              2,791
              
              
              100.00
              
              $
              2,218
              
              
              100.00





(1)  Represents
      the percentage of loans in each category to total loans
      outstanding.





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, 2007.





35


**Management’s
        Discussion and Analysis**


The
      following table sets forth information about the Bank’s nonperforming
      assets.





***Nonperforming
      Assets (dollars in thousands)***


**2007**
              
              **2006**
              
              **2005**
              
              **2004**
              
              **2003**Nonaccrual
                  loans
              
              $
              1,534
              
              $
              1,181
              
              $
              1,711
              
              $
              1,723
              
              $
              701Loans
                  past due 90 days or moreand
                  still accruing interest
              
              
              2,608
              
              
              340
              
              
              250
              
              
              628
              
              
              486Total
                  nonperforming loans
              
              
              4,142
              
              
              1,521
              
              
              1,961
              
              
              2,351
              
              
              1,187Other
                  real estate and repossessedpersonal
                  property
              
              
              340
              
              
              32
              
              
              140
              
              
              82
              
              
              164Total
                  nonperforming assets
              
              $
              4,482
              
              $
              1,553
              
              $
              2,101
              
              $
              2,433
              
              $
              1,351Nonperforming
                  assets as apercentage
                  of:Total
                  assets
              
              
              .88
              %
              
              .39
              %
              
              .65
              %
              
              .94
              %
              
              .70
              %Total
                  loans
              
              
              1.24
              %
              
              .49
              %
              
              .80
              %
              
              1.16
              %
              
              .93
              %





**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.





Management
      must ensure 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 of deposit, 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, 2007, 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 totaled $96.6 million. Historically, these
      short-term deposits are not as rate sensitive as other types of interest-bearing
      deposits. 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.





36


**Management’s
        Discussion and Analysis**


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 with a quarterly call feature
      is
      shown in the 1-3 month repricing period. Repurchase agreements with a put
      feature is shown in the repricing period in which the structure is put back
      to
      the bank.





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 (dollars in thousands)***


**December
                  31, 2007****Maturities/Repricing****1-3**
              
              **4-12**
              
              **13-60**
              
              **Over
                  60****Months**
              
              **Months**
              
              **Months**
              
              **Months**
              
              **Total*****Earning
                  assets:***Loans
              
              $
              213,459
              
              $
              21,851
              
              $
              88,671
              
              $
              36,996
              
              $
              360,977Investments
              
              
              794
              
              
              14
              
              
              5,881
              
              
              95,955
              
              
              102,644Deposits
                  with banks
              
              
              912
              
              
              -
              
              
              -
              
              
              -
              
              
              912Total
              
              
              215,165
              
              
              21,865
              
              
              94,552
              
              
              132,951
              
              
              464,533***Interest-bearing
                  liabilities:***Demand
                  accounts
              
              
              24,841
              
              
              -
              
              
              -
              
              
              -
              
              
              24,841Savings
                  and money market
              
              
              71,760
              
              
              -
              
              
              -
              
              
              -
              
              
              71,760Time
                  deposits
              
              
              63,399
              
              
              165,871
              
              
              16,314
              
              
              3,624
              
              
              249,208Repurchase
                  agreements and purchasedfunds
              
              
              24,651
              
              
              10,000
              
              
              10,000
              
              
              -
              
              
              44,651Short-term
                  borrowings
              
              
              6,000
              
              
              7,000
              
              
              -
              
              
              -
              
              
              13,000Long-term
                  debt
              
              
              -
              
              
              -
              
              
              11,500
              
              
              14,000
              
              
              25,500Junior
                  subordinated debentures
              
              
              8,248
              
              
              -
              
              
              -
              
              
              -
              
              
              8,248Total
              
              
              198,899
              
              
              182,871
              
              
              37,814
              
              
              17,624
              
              
              437,208***Interest
                  rate gap***
              
              $
              16,266
              
              $
              (161,006
              )
              $
              56,738
              
              $
              115,327
              
              $
              27,325***Cumulative
                  interest sensitivity gap***
              
              $
              16,266
              
              $
              (144,740
              )
              $
              (88,002
              )
              $
              27,325Ratio
                  of sensitivity gap to totalearnings
                  assets
              
              
              3.50
              %
              
              (34.66
              )%
              
              12.21
              %
              
              24.83
              %
              
              5.89
              %Cumulative
                  ratio of sensitivity gapto
                  total earnings assets
              
              
              3.50
              %
              
              (31.16
              )%
              
              (18.94
              )%
              
              5.89
              %





**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.





37


**Management’s
        Discussion and Analysis**
  **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***


**2007**
              
              **2006**
              
              **2005**Average
                  equity to average assets
              
              
              7.64
              %
              
              7.27
              %
              
              6.70
              %Return
                  on average assets
              
              
              .89
              %
              
              1.02
              %
              
              1.00
              %Return
                  on average equity
              
              
              11.67
              %
              
              14.07
              %
              
              14.98
              %


***Annual
      Meeting***





The
      annual meeting of stockholders will be held Thursday, May 22, 2008 at 7:00
      p.m.
      at the Vineland Station Train Depot, 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***Elliott
                Davis, PLLC
            
            First
                Citizens Bank
            
            Gaeta
                & Eveson, P.A.Certified
                Public Accountants
            
            &
                Trust Company
            
            8305
                Falls of Neuse RoadPost
                Office Box 760
            
            Post
                Office Box 29522
            
            Suite
                203Galax,
                Virginia 24333
            
            Raleigh,
                North Carolina 27626-0522
            
            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.





38