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, 2009





OR





 ̈  TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934





For the
transition period from _______ to _______.





COMMISSION FILE NUMBER 001-33046





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 BOULEVARDWHITEVILLE, 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:





Title
      of each class
              
              Name
      of each exchange on which registeredWarrants
      to purchase shares of common stock
              
              The
      NASDAQ Global Market





Securities
registered pursuant to Section 12(g) of the Act:


COMMON
STOCK, NO PAR VALUE





WARRANTS
TO PURCHASE SHARES OF COMMON STOCK





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  ̈ 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.  ̈ 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.


 ̈ Yes    x  No





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Date File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).


 ̈ Yes     ̈ 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   ̈





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  ̈
                  Accelerated filer  ̈Non-accelerated filer (Do not check ifa smaller reporting company)  ̈
                  Smaller reporting company x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act):


 ̈  Yes   x  No





The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant, based on the closing sales price of the
Registrant’s Common Stock reported on the NASDAQ Global Select Market on June
30, 2009 was $18,119,696. Solely for purposes of this calculation, the term
“affiliate” includes all directors and executive officers of the Registrant and
all beneficial owners of more than 5% of the Registrant’s voting
securities.





As of
March 19, 2010, the Registrant had outstanding 5,551,183 shares of Common
Stock.





Documents
      incorporated by reference
              
              Where
      incorporatedAnnual
      report to stockholders for the fiscal year ended
                December
      31, 2009
              
              Part
      IIProxy
      statement for the 2010 annual meeting of
                stockholders
              
              Part
      III







FORM 10-K
CROSS-REFERENCE INDEX


FORM
      10-K
                
                PROXY
                  STATEMENT
                
                ANNUAL
                  REPORTPART
      IItem
      1 – Business
                
                1Item
      1A – Risk Factors
                
                8Item
      1B – Unresolved Staff Comments
                
                8Item
      2 – Properties
                
                8Item
      3 – Legal Proceedings
                
                9Item
      4 –Reserved
                
                9PART
      IIItem
      5–Market for Registrant’s Common Equity, Related Stockholder Matters and
      Issuer Purchases of Equity Securities
                
                10Item
      6 – Selected Financial Data
                
                11Item
      7 – Management’s Discussion and Analysis of Financial Condition and
      Results of Operation
                
                
                
                
                
                11Item
      7A – Quantitative and Qualitative Disclosures About Market
      Risk
                
                
                
                
                
                11Item
      8 – Financial Statements and Supplementary Data
                
                
                
                
                
                11Item
      9 – Changes in and Disagreements with Accountants on Accounting and
      FinancialDisclosure
                
                11Item
      9A(T) – Controls and Procedures
                
                11Item
      9B – Other Information
                
                12PART
      IIIItem
      10 – Directors, Executive Officers and Corporate
Governance
                
                12
                
                12Item
      11 – Executive Compensation
                
                
                
                12Item
      12 – Security Ownership of Certain Beneficial Owners and Management and
      Related Stockholder Matters
                
                
                
                13Item
      13 – Certain Relationships and Related Transactions, and Director
      Independence
                
                
                
                13Item
      14 – Principal Accounting Fees and  Services
                
                
                
                13PART
      IVItem
      15 – Exhibits and Financial Statement Schedules
                
                14







PART
I





ITEM
1 – BUSINESS





Note
Regarding Forward-Looking Statements




Statements
contained in this report, which are not historical facts, are forward-looking
statements, as that term is defined in the Private Securities Litigation Reform
Act of 1995. Actual results could vary as a result of market and other factors.
Such forward-looking statements are subject to risks and uncertainties which
could cause actual results to differ materially from those currently anticipated
due to a number of factors, which include, but are not limited to, factors
discussed in documents filed by the Company with the U.S. Securities and
Exchange Commission from time to time. Such forward-looking statements may be
identified by the use of such words as “believe,”
“expect,”  “anticipate,” “should,” “might,” “planned,” “estimated,”
and “potential.” Examples of forward-looking statements include, but are not
limited to, estimates with respect to the financial condition, expected or
anticipated revenue, results of operations and business of the Company that are
subject to various factors which could cause actual results to differ materially
from these estimates. These factors include, but are not limited
to:





·
            the
      credit risks of lending activities, including changes in the level and
      trend of loan delinquencies and
write-offs;





·
            changes in general economic
      conditions, either nationally or in our market
    areas;





·
            changes in the levels of general
      interest rates, deposit interest rates, our net interest margin and
      funding sources;





·
            fluctuations in the demand for
      loans, the number of unsold homes and other properties and fluctuations in
      real estate values in our market
areas;





·
            results of examinations of us by
      the Federal Reserve Bank and the North Carolina Banking Commission or
      other regulatory authorities, including the possibility that any such
      regulatory authority may, among other things, require us to increase our
      reserve for loan losses or to write down
  assets;





·
            recent and future bail out
      actions by the government;





·
            our ability to control operating
      costs and expenses;





·
            governmental action as a result
      of our inability to comply with regulatory orders and
      agreements;





·
            Asset/liability matching risks
      and liquidity risks;





·
            our ability to manage loan
      delinquency rates;





·
            our ability to retain key members
      of our senior management
team;





·
            costs and effects of
      litigation;





·
            increased competitive pressures
      in the banking industry;





·
            changes in consumer spending,
      borrowing and savings
habits;





·
            legislative or regulatory changes
      that adversely affect our
business;





·
            adverse changes in the securities
      markets;





·
            inability of key third-party
      providers to perform their obligations to
  us;





·
            changes in accounting policies
      and practices, as may be adopted by the financial institution regulatory
      agencies or the Financial Accounting Standards
    Board;




1





·
            changes in our borrowers’
      performance on loans;





·
            Changes in critical accounting
      policies and judgments;





·
            Changes in the equity and debt
      securities markets;





·
            Fluctuations of our stock
      price;





·
            Success and timing of our
      business strategies;





·
            Political developments, wars or
      other hostilities that may disrupt or increase volatility in securities
      markets or otherwise affect economic
  conditions;





Additionally,
the timing and occurrence or non-occurrence of events may be subject to
circumstances beyond our control.





You
should not place undue reliance on these forward-looking statements, which
reflect our expectations only as of the date of this annual report.  We do
not assume any obligation to revise forward-looking statements except as may be
required by law.





General





Waccamaw
Bankshares, Inc. (the “Company”) was formed during 2001 as a bank 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 reorganization.  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, and Lancaster County, South Carolina through one
banking office and Horry County through four 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 Office of the Commissioner of Banks
and the Federal Reserve.





Regulatory
Actions





We expect
to enter into a written agreement with the Federal Reserve by the end of the
second quarter of 2010, but do not know the exact contents of the written
agreement at this time. This is a type of formal supervisory agreement with our
primary federal banking regulator. We expect that we will be required by the
written agreement to establish and submit the following to the Federal
Reserve:





•
            a
      written program to reevaluate allowance for loan loss methodologies and
      calculations and to improve our methodology for identifying, rating,
      assigning, monitoring, and reviewing credit
  risks;


•
            a
      written plan to strengthen our credit risk management practices,
      particularly in our commercial real estate, construction and development
      and home equity line of credit
portfolio;


•
            a
      written plan to strengthen our management of commercial real estate
      concentrations, including steps to reduce or mitigate the risk of
      concentrations in light of current market
  conditions;


•
            an
      independent audit of certain credit relationships;
  and


•
            a
      written plan to ensure the adequacy of reports provided to the board of
      directors and to improve oversight of our risks and risk management
      practices.





Any
written plans, programs, or assessments required by the written agreement with
the Federal Reserve will require approval by the Federal Reserve and prompt
implementation by us upon receiving such approval. The written agreement may
also restrict us from taking certain actions without the prior approval of the
Federal Reserve, including:


2


•
            declaring
      or paying dividends;


•
            taking
      dividends or other payments from Waccamaw
Bank;


•
            making
      distributions of interest, principal, or other sums on trust preferred
      securities.





Market
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 through 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 north.  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, North Carolina and fifty miles
north of Columbia. 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 our market 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.


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. At June 30, 2009 (the most current data provided by the
FDIC Deposit Market Share Report), there were 15 offices of 6 other commercial
banks operating in Columbus County, 45 offices of 12 other commercial banks
operating in Brunswick County, 78 offices of 19 other commercial banks operating
in New Hanover County, 7 offices of 5 other commercial banks operating in Bladen
County, 10 offices of 5 other commercial banks operating in Lancaster County and
134 offices of 26 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 Company and offer certain
services, such as investment banking, trust and international banking services,
that the Company cannot or will not provide.





3




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") in 1991 and the
Gramm-Leach-Bliley Act in 1999, numerous additional regulatory requirements have
been placed on the banking industry in the past several 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.





In
addition, we expect to enter into a written agreement with the Federal Reserve
in the near future. Although we do not know the exact contents of the written
agreement at this time, it will impose additional requirements and restrictions
on our operations. These restrictions may have an adverse effect on our business
and earnings.





Federal
Bank Holding Company Regulation (Financial Holding Company
Regulations)





The
Company is a bank 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.





“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.


4


In
addition, and subject to certain exceptions, the BHCA and the Change in Bank
Control Act, together with regulations there under, 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 there will be a rebuttable presumption of control 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, and 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 of 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 requirements 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.


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.





5




Insurance of Deposit
Accounts.  The Bank’s deposits are insured up to limits set by
the Deposit Insurance Fund of the FDIC.  On October 3, 2008, the
Emergency Economic Stabilization Act of 2008 temporarily raised the standard
minimum deposit insurance amount (the “SMDIA”) from $100,000 to $250,000 per
depositor until December 31, 2009.  On May 20, 2009, the Helping
Families Save Their Homes Act extended the temporary increase in the SMDIA to
$250,000 per depositor through December 31, 2013. On January 1, 2014, the SMDIA
will return to $100,000 per depositor for all account categories except IRAs and
certain other retirement accounts, which will remain at $250,000 per depositor,
unless a new law is enacted before then to extend the increased deposit
insurance limits.





The FDIC
has amended its risk-based assessment system to implement authority granted by
the Federal Deposit Insurance Reform Act of 2005 (“Reform
Act”).  Under the revised system, insured institutions are assigned to
one of four risk categories based on supervisory evaluations, regulatory capital
levels and certain other factors.  An institution’s assessment rate
depends upon the category to which it is assigned.  Risk Category I
contains well-capitalized banks with only a few minor
weaknesses.  Unlike the other categories, Risk Category I contains
further risk differentiation based on the FDIC’s analysis of financial ratios,
examination component ratings and other information.





The
Reform Act provided the FDIC with authority to adjust the Deposit Insurance Fund
ratio to insured deposits within a range of 1.15% and 1.50%, in contrast to the
prior statutorily fixed ratio of 1.25%.  Assessment rates are
determined by the FDIC and currently range from 5 to 7 basis points annually of
assessable deposits for the healthiest institutions (Risk Category I) to 43
basis points for the riskiest (Risk Category IV).  The FDIC may adjust
assessment rates from one quarter to the next, except that no single adjustment
can exceed 3 basis points.  The Bank’s quarterly Deposit Insurance
Fund assessments during the year ended December 31, 2009 ranged from 8 to 23
basis points of assessable deposits.





The
Reform Act also provided for a one-time credit for eligible insured institutions
based on their assessment base as of December 31, 1996.  Subject to
certain limitations with respect to institutions that are exhibiting weaknesses,
one-time credits are used to offset quarterly assessments until
exhausted.  The Bank did not qualify for this credit because it
commenced operations after December 31, 1996.  The Reform Act also
provided that the FDIC may pay dividends to insured institutions once the
Deposit Insurance Fund reserve ratio equals or exceeds 1.35% of estimated
insured deposits.





On
October 14, 2008, the FDIC announced the Temporary Liquidity Guarantee Program
(the “TLGP”) to strengthen confidence and encourage liquidity in the banking
system.  The TLGP consists of two components: a temporary guarantee of
newly-issued senior unsecured debt named the Debt Guarantee Program, and a
temporary unlimited guarantee of funds in noninterest-bearing transaction
accounts at FDIC-insured institutions named the Transaction Account Guarantee
Program (“TAG”).  All newly-issued senior unsecured debt will be
charged an annual assessment of up to 100 basis points (depending on term)
multiplied by the amount of debt issued and calculated through the date of that
debt or June 30, 2012, whichever is earlier.  The Bank elected to opt
out of the Debt Guarantee Program.  The Bank elected to participate in
the TAG Program and as a result, does not anticipate a material increase in its
deposit insurance premiums.  On August 26, 2009, the FDIC adopted a
final rule extending the TAG portion of the TLGP for six months through June 30,
2010.





On
May 22, 2009, the FDIC announced that it would levy a special assessment on
insured institutions as part of its effort to rebuild the Deposit Insurance
Fund. The special assessment equaled five basis points on each FDIC-insured
depository institution’s assets, minus its Tier 1 capital, as of June 30,
2009. The amount of the Bank’s special assessment was $265,697.





On
November 12, 2009, the FDIC voted to require all FDIC insured depository
institutions to prepay risk-based assessments for the fourth quarter of 2009 and
for all of 2010, 2011 and 2012.  The prepaid assessments are designed
to provide the FDIC with additional liquid assets for the Deposit Insurance
Fund, which have been used to protect depositors of failed institutions and have
been exchanged for less liquid claims against the assets of failed
institutions.  The FDIC projected that if no action is taken, its
liquidity needs to resolve failures could exceed its liquid assets beginning in
the first quarter of 2010.  The prepaid assessment for all insured
institutions was collected on
December 30, 2009.  For the fourth quarter of 2009 and all of 2010,
the prepaid assessment was based on an institution’s total base assessment rate
in effect on September 30, 2009.  That rate will be increased by 3
basis points for the 2011 and 2012 prepayments and a quarterly five percent
deposit growth rate is also built into the calculation.




6




On
December 30, 2009, the Bank paid a $4.25 million prepaid assessment and it will
be accounted for as a prepaid expense with a zero risk-weighting for risk-based
regulatory capital purposes.  On a quarterly basis after December 31,
2009, the Bank will expense its regular quarterly assessment and record an
offsetting credit to the prepaid assessment asset until the asset is
exhausted.  If the prepaid assessment is not exhausted by June 30,
2013, any remaining amount will be returned to the Bank.





The FDIC
has authority to further increase deposit insurance assessments.  A
significant increase in insurance premiums would likely have an adverse effect
on the operating expenses and results of operations of the Company and the
Bank.  Management cannot predict what deposit insurance assessment
rates will be in the future.





Insurance
of deposits may be terminated by the FDIC upon a finding that an insured
institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC.  Management
of the Bank is not aware of any practice, condition or violation that might lead
to termination of its FDIC 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 the reserve requirement 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.


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.





7




Material
Customers





Deposits
are derived from a broad base of customers in the Company’s market
area.  No material portion of deposits has 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 137
full-time equivalent employees consisting of 129 full-time employees and 16
part-time employees.


ITEM
1A – RISK FACTORS


ITEM
1B – UNRESOLVED STAFF COMMENTS


ITEM
2 - PROPERTIES





The Bank
has three branches in Columbus County, North Carolina, including one in
Whiteville, one in Tabor City, and one in Chadbourn. The Whiteville branch is
located at 110 North J.K. Powell Boulevard, Whiteville, North Carolina, in a
12,000 square foot building that includes three drive-up lanes and an ATM. The
Company purchased the land on which this facility is located for $233,318 from a
Company director. This transaction was effected at arm’s length and management
believes the purchase price was at or below fair market value. Construction was
completed in April 2001 at a cost of $1.8 million.





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 five years beginning on February 1,
2010.  The Bank has the option to renew the lease for two additional
terms of five years.




8




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, 2005.  The Bank has the option to renew
the lease for four additional terms of five years.





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, 2010. The
Bank has the option to renew the lease for four 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, 2010.  The
Bank has the option to renew the lease for four 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. The facility 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, 2009.  The Bank has a five
year lease with the option to renew for four 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 16th 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 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
Little River branch is housed in a 10,000 square foot facility and has three
drive-up lanes and an ATM. The construction was completed in August 2008 at a
cost of $2.7 million and the land was purchased for $990,000.





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





On the
normal course of business, Waccamaw Bankshares’ subsidiary, Waccamaw Bank, may
be named as a party in legal disputes.





ITEM
4 –RESERVED





9




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 5,551,183 shares were issued and
outstanding as of March 19, 2010.  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 19, 2010 is 2,800.  There were 550 shares issued and outstanding
of the Company’s Series A convertible preferred stock as of March 19,
2010.





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 Bank, for each quarter in the last two fiscal
years.  These quotations reflect inter-dealer prices, without retail
mark-up, mark-down, or commissions and may not represent actual
transactions.





2009
                    
                    
                    2008High
                    
                    
                    Low
                    
                    
                    High
                    
                    
                    LowFirst
      Quarter
                    
                    $
                    6.74
                    
                    
                    $
                    2.22
                    
                    
                    $
                    11.00
                    
                    
                    $
                    9.25Second
      Quarter
                    
                    
                    4.67
                    
                    
                    
                    2.50
                    
                    
                    
                    9.99
                    
                    
                    
                    8.70Third
      Quarter
                    
                    
                    4.40
                    
                    
                    
                    2.85
                    
                    
                    
                    9.94
                    
                    
                    
                    6.11Fourth
      Quarter
                    
                    
                    4.97
                    
                    
                    
                    2.85
                    
                    
                    
                    9.08
                    
                    
                    
                    5.00





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


On
December 20, 2006, the Company sold 65,111 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 $21.82 per share (adjusted for 11 for 10 stock split in
2007). 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 hereunder. 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
shares of Series A Preferred Stock, issued in connection with the unit
placement, are 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.  On September 25,
2009, an amendment to the warrant agreement extended the exercise period of the
warrants until September 30, 2014. All other provisions of the warrant
agreement are unchanged and remain in full force and effect.




10




ITEM
6 – SELECTED FINANCIAL DATA




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
2009 annual report to stockholders, pages 43 - 63.





ITEM
7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





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 7 through 42 of the
Company’s 2009 Annual Report to Stockholders are incorporated herein by
reference:





1.
            Consolidated
      Balance Sheets as of December 31, 2009 and
2008





2.
            Consolidated
      Statements of Operations for the years ended December 31, 2009 and
      2008





3.
            Consolidated
      Statements of Stockholders’ Equity for the years ended December 31, 2009
      and 2008





4.
            Consolidated
      Statements of Cash Flows for the years ended December 31, 2009 and
      2008





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




Our
management, under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the design and operation of our disclosure controls and procedures in
accordance with Rule 13a-15(e) of the Securities Exchange Act of 1934 (the
“Exchange Act”). Our management, including our Chief Executive Officer and Chief
Financial Officer concluded that, as of December 31, 2009, our disclosure
controls and procedures were effective in ensuring that the information we are
required to disclose in the reports we file or submit under the Act is (i)
accumulated and communicated to our management (including the Chief Executive
Officer and Chief Financial Officer) to allow timely decisions regarding
required disclosure, and (ii) recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and forms.




In
connection with the above evaluation of our disclosure controls and procedures,
no change in our internal control over financial reporting was identified that
occurred during our fourth quarter of 2009 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.




11




ANNUAL
REPORT


ON
INTERNAL CONTROL OVER FINANCIAL REPORTING




The
management of Waccamaw Bankshares, Inc. and Subsidiary (the “Company”) is
responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Rule 13a – 15(f) of the Exchange
Act. The Company’s internal control system was designed to provide reasonable
assurance to the Company’s management and board of directors regarding the
preparation and fair presentation of published financial statements in
accordance with generally accepted accounting principles.




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. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may be
inadequate due to changes in conditions, or that the degree of compliance with
policies or procedures may deteriorate.




The
Company’s management assessed the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2009. 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 this assessment, the Company’s management has
concluded that, as of December 31, 2009, the Company’s internal control over
financial reporting was effective based on that framework.




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.





ITEM
9B – OTHER INFORMATION





There was
no information required to be disclosed by the Company in a report on form 8-K
during the fourth quarter of 2009 that was not so disclosed.





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 2010 Annual Meeting of Stockholders, pages 3-4 and
14-27.





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 2010 Annual Meeting of Stockholders, pages
18-27.





12




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 2010 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
                    
                    
                    611,188
                    
                    
                    $
                    18.15
                    
                    
                    
                    680,973Equity
      compensation plans not approved by security holders
                    
                    None
                    
                    
                    None
                    
                    
                    NoneTotal
                    
                    
                    611,188
                    
                    
                    $
                    18.15
                    
                    
                    
                    680,973





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 2010 Annual Meeting of Stockholders, pages 17 and
20.





ITEM
14 – PRINCIPAL ACCOUNTANT FEES AND SERVICES





The
information required by this item is incorporated by reference to the Company’s
proxy statement for the 2010 Annual Meeting of Stockholders, page
28


13




PART
IV





ITEM
15 – EXHIBITS AND FINANCIAL STATEMENT SCHEDULES





(a)List of Documents Filed as
Part of this Report





(1)Financial
Statements.The following financial statements are filed as a part of
this report:





Consolidated
balance sheets at December 31, 2009 and 2008





Consolidated
statements of operations for the years ended December 31, 2009 and
2008





Consolidated
statements of changes in stockholders’ equity for the years ended December 31,
2009 and 2008





Consolidated
statements of cash flows for the years ended December 31, 2009 and
2008





Notes to
consolidated financial statements





Reports
of independent registered public accounting firms





(2)Financial
Statement Schedules.All schedules for which provision is made in the
applicable accounting regulations of the Securities and Exchange Commission are
omitted because of the absence of conditions under which they are required or
because the required information is included in the financial statements and
related notes thereto.





(3)Exhibits.The following exhibits are filed as part of this
report:





3.1
              Articles
      of Incorporation of Registrant (incorporated by reference from Exhibit 3.1
      of Registrant’s Registration Statement on Form S-1, Registration No.
      333-160435, as filed with the Commission on July 2,
  2009)





3.2
            Bylaws
      of Registrant (filed
herewith)





4
            Form
      of Common Stock Certificate (incorporated by reference from Exhibit 4 to
      Registrant’s Annual Report on Form 10-KSB for the year ended December 31,
      2001, as filed with the Commission on March 29,
  2002)





10.1
            Employment
      Agreement with James G. Graham (incorporated by reference from Exhibit
      10.3 to Registrant’s Quarterly Report on Form 10-Q for the quarterly
      period ended June 30, 2008, as filed with the Commission on August 14,
      2008)*





10.2
            Change
      of Control Agreement (incorporated by reference from Exhibit 10.4 to
      Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended
      June 30, 2008, as filed with the Commission on August 14,
      2008)*




14




10.3
            Change
      of Control Agreement with J. Daniel Hardy (incorporated by reference from
      Exhibit 10.3 of Registrant’s Form S-1, Registration No. 333-160435, filed
      with the Commission on July 2,
2009)*





10.4
            Executive
      Supplemental Retirement Plan Agreement (incorporated by reference from
      Exhibit 10.5 to Registrant’s Quarterly Report on Form 10-Q for the
      quarterly period ended June 30, 2008, as filed with the Commission on
      August 14, 2008)*





10.5
            Director
      Supplemental Retirement Plan (incorporated by reference from Exhibit 10.6
      to Registrant’s Quarterly Report on Form 10-Q for the quarterly period
      ended June 30, 2008, as filed with the Commission on August 14,
      2008)*





10.6
            Director
      Supplemental Retirement Plan Agreement (incorporated by reference from
      Exhibit 10.7 to Registrant’s Quarterly Report on Form 10-Q for the
      quarterly period ended June 30, 2008, as filed with the Commission on
      August 14, 2008)*





10.7
            2008
      Omnibus Stock Ownership and Long Term Incentive Plan (incorporated by
      reference from Exhibit 99.1 to Registrant’s Registration Statement on Form
      S-8, Registration No. 333-153327, as filed with the Commission on
      September 4, 2008)





10.8
            Amended
      and Restated Trust Agreement of Waccamaw Statutory Trust II (incorporated
      by reference from Exhibit 10.1 to Registrant’s Quarterly Report on Form
      10-Q for the quarterly period ended June 30, 2008, as filed with the
      Commission on August 14,
2008)





10.9
            Guarantee
      Agreement (incorporated by reference from Exhibit 10.2 to Registrant’s
      Quarterly Report on Form 10-Q for the quarterly period ended June 30,
      2008, as filed with the Commission on August 14,
    2008)





10.10
            Indenture
      (incorporated by reference from Exhibit 4.1 to Registrant’s Quarterly
      Report on Form 10-Q for the quarterly period ended June 30, 2008, as filed
      with the Commission on August 14,
2008)





13
            Annual
      Report to Stockholders (filed
herewith)





21
            Subsidiaries
      of Registrant (filed
herewith)





23.1
            Consent
      of Elliott Davis, PLLC (filed
herewith)





23.2
            Consent
      of Dixon Hughes PLLC (filed
herewith)





31.1
            Certification
      of Principal Executive Officer Pursuant to Section 302 of the
      Sarbanes-   Oxley Act (filed
  herewith)





31.2
            Certification
      of Principal Financial Officer Pursuant to Section 302 of the
      Sarbanes-   Oxley Act (filed
  herewith)





32
            Certifications
      Pursuant to Section 906 of the Sarbanes-Oxley Act (filed
      herewith)





99
            Definitive
      Proxy Statement for the 2010 Annual Meeting of Shareholders (to be
      filed   with the Commission pursuant to Rule
      14a-6)





*
Management contract or compensatory plan or arrangement




15




(b)Exhibits.The exhibits required by
Item 601 of Regulation S-K are either filed as part of this report or
incorporated by reference herein.





(c)Financial
Statements and Schedules Excluded from Annual Report.There are no other financial
statements and financial statement schedules which were excluded from the annual
report to shareholders pursuant to Rule 14a-3(b) which are required to be
included herein.


16




SIGNATURES





In
accordance with 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.April
      15, 2010
                      
                      /s/
      James G. GrahamDate
                      James
      G. GrahamPresident
      and Chief Executive
Officer





Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
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,
      Director and
                                                                
                                                                April 15, 2010James
      G. Graham
                                                                
                                                                Chief
      Executive Officer/s/
      Neil C. Bender, II
                                                                
                                                                Director
                                                                
                                                                April 15, 2010Neil
      C. Bender/s/
      M. B. “Bo” Biggs
                                                                
                                                                Director
                                                                
                                                                April 15, 2010M.
      B. “Bo” Biggs/s/
      Dr. Maudie M. Davis
                                                                
                                                                Director
                                                                
                                                                April 15, 2010Dr.
      Maudie M. Davis/s/
      Monroe Enzor, III
                                                                
                                                                Director
                                                                
                                                                April 15, 2010Monroe
      Enzor, III/s/
      James E. Hill, Jr.
                                                                
                                                                Director
                                                                
                                                                April 15, 2010James
      E. Hill, Jr./s/
      Alan W. Thompson
                                                                
                                                                Director,
      Chairman
                                                                
                                                                April 15, 2010Alan
      W. Thompson
                                                                
                                                                of
      the Board/s/
      Dale Ward
                                                                
                                                                Director
                                                                
                                                                April 15, 2010Dale
      Ward/s/
      J. Densil Worthington
                                                                
                                                                Director
                                                                
                                                                April 15, 2010J.
      Densil Worthington/s/
      Brian Campbell
                                                                
                                                                Director
                                                                
                                                                April 15, 2010Brian
      Campbell/s/
      David A. Godwin
                                                                
                                                                Chief
      Financial and Principal
                                                                
                                                                April 15, 2010David
      A. Godwin
                                                                
                                                                Accounting
      Officer




17




EXHIBIT
INDEX





EXHIBIT NUMBER
                
                DESCRIPTION OF EXHIBIT3.1
                
                Articles
      of Incorporation of Registrant*3.2
                
                Bylaws
      of Registrant4
                
                Form
      of Common Stock Certificate*10.1
                
                Employment
      Agreement with James G. Graham*10.2
                
                Change
      of Control Agreement*10.3
                
                Change
      of Control Agreement with J. Daniel Hardy*10.4
                
                Executive
      Supplemental Retirement Plan Agreement*10.5
                
                Director
      Supplemental Retirement Plan*10.6
                
                Director
      Supplemental Retirement Plan Agreement*10.7
                
                2008
      Omnibus Stock Ownership and Long Term Incentive Plan*10.8
                
                Amended
      and Restated Trust Agreement of Waccamaw Statutory Trust
    II*10.9
                
                Guarantee
      Agreement*10.10
                
                Indenture*13
                
                Annual
      Report to Stockholders21
                
                Subsidiaries
      of Registrant23.1
                
                Consent
      of Elliott Davis, PLLC23.2
                
                Consent
      of Dixon Hughes PLLC31.2
                
                Certification
      of Principal Executive Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act31.2
                
                Certification
      of Principal Financial Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act32
                
                Certifications
      Pursuant to Section 906 of the Sarbanes-Oxley Act99
                
                Definitive
      Proxy Statement for the 2010 Annual Meeting of
    Shareholders**





*Incorporated
by reference


** To be
filed with the Commission pursuant to Rule 14a-6


18




INTRODUCTION





Table
of Contents





Introduction
                
                1Statement
      of Mission
                
                2Significant
      Trends
                
                3Financial
      Highlights Summary
                
                4Shareholder
      Letter
                
                5Consolidated
      Balance Sheets
                
                7Consolidated
      Statements of Operations
                
                8Consolidated
      Statements of Changes in Stockholders' Equity
                
                9Consolidated
      Statements of Cash Flows
                
                10Notes
      to Consolidated Financial Statements
                
                11Report
      of Independent Registered Public Accounting Firms
                
                42Management’s
      Discussion and Analysis
                
                44Stockholder
      Information
                
                67





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.




2




Significant
Trends
















3









Financial
Highlights Summary1







2009
                
                
                2008
                
                
                2007
                
                
                2006
                
                
                2005Summary
      of OperationsInterest
      income
                
                $
                25,889
                
                
                $
                30,485
                
                
                $
                31,637
                
                
                $
                25,379
                
                
                $
                18,228Interest
      expense
                
                
                (12,536
                )
                
                
                (16,934
                )
                
                
                (16,296
                )
                
                
                (11,226
                )
                
                
                (7,536
                )Net
      interest income
                
                
                13,353
                
                
                
                13,551
                
                
                
                15,341
                
                
                
                14,153
                
                
                
                10,692Provision
      for loan losses
                
                
                (16,580
                )
                
                
                (2,990
                )
                
                
                (386
                )
                
                
                (1,450
                )
                
                
                (1,370
                )Other
      income
                
                
                3,908
                
                
                
                966
                
                
                
                3,443
                
                
                
                2,581
                
                
                
                2,269Other
      expense
                
                
                (18,515
                )
                
                
                (15,397
                )
                
                
                (12,440
                )
                
                
                (9,422
                )
                
                
                (6,967
                )Income
      tax (expense) benefit
                
                
                3,628
                
                
                
                1,827
                
                
                
                (2,049
                )
                
                
                (2,210
                )
                
                
                (1,589
                )Net
      income (loss)
                
                $
                (14,206
                )
                
                $
                (2,043
                )
                
                $
                3,909
                
                
                $
                3,652
                
                
                $
                3,035Per
      Share Data2Basic
      income (loss) per share
                
                $
                (2.57
                )
                
                $
                (.37
                )
                
                $
                .73
                
                
                $
                .71
                
                
                $
                .61Diluted
      income (loss) per share
                
                
                (2.57
                )
                
                
                (.37
                )
                
                
                .72
                
                
                
                .69
                
                
                
                .58Book
      value
                
                
                3.09
                
                
                
                5.04
                
                
                
                6.44
                
                
                
                5.77
                
                
                
                4.48Average
      Balance Sheet SummaryLoans,
      net
                
                $
                368,458
                
                
                $
                376,747
                
                
                $
                332,451
                
                
                $
                279,625
                
                
                $
                238,579Securities
                
                
                92,344
                
                
                
                105,819
                
                
                
                65,454
                
                
                
                46,561
                
                
                
                31,257Total
      assets
                
                
                558,618
                
                
                
                539,468
                
                
                
                438,579
                
                
                
                356,675
                
                
                
                302,381Deposits
                
                
                442,959
                
                
                
                415,711
                
                
                
                354,512
                
                
                
                298,324
                
                
                
                252,994Stockholders’
      equity
                
                
                28,886
                
                
                
                33,460
                
                
                
                33,501
                
                
                
                25,945
                
                
                
                20,254Selected
      RatiosAverage
      equity to average assets
                
                
                5.17
                %
                
                
                6.20
                %
                
                
                7.64
                %
                
                
                7.27
                %
                
                
                6.70
                %Return
      on average assets
                
                
                (2.54
                %)
                
                
                (.38
                %)
                
                
                .89
                %
                
                
                1.02
                %
                
                
                1.00
                %Return
      on average equity
                
                
                (49.18
                %)
                
                
                (6.11
                %)
                
                
                11.67
                %
                
                
                14.07
                %
                
                
                14.98
                %







1   In
thousands of dollars, except per share data.


2   Adjusted
for the effect of 11 for 10 stock split in 2007.




4









Shareholder
Letter








Dear
Shareholders, Clients and Friends:





Enduring.
Tenacious. Sustaining. Determined. Resourceful, Dedicated.





These are
some of the words you will find printed throughout the 2009
report.  Indeed, our Nation’s economy has suffered through the worse
economic downturn since the Great Depression. Despite the traumatic year our
company experienced, Waccamaw Bank remains well capitalized, the highest capital
rating assigned by bank regulatory authorities and has endured the effects of
the turmoil in our country’s economy. Likewise, our bank suffered severely
during 2009 and is reporting a net loss of $14,205,532 for the year. Through the
enduring, tenacious and determined resources of our dedicated staff, our bank is
making strong improvements in our company’s future.





Without
question, 2009 was the most challenging period in our Company’s history with the
previous eighteen months being an extremely stressful economic
time.  Despite these turbulent times, we again reiterate the Bank has
maintained capital ratios above the standards established for a bank to be
classified as a “well capitalized” bank; the highest capital rating
achievable.   Our bank is very proud to say we did so without any
Federal assisted capital from the Trouble Assets Relief Program (TARP); which
was a significant distinction from many of our market’s major
competitors.





Waccamaw’s
financial performance was overshadowed by several factors that are explained
below.  We are pleased, however, with the core performance of our
banking operations as we have increased our market share and our customer base
substantially while improving our critical funding sources during
2009.





Below is
the consolidated statement of operations of December 31, 2009 compared to the
year ended December 31, 2008.  This should put in very clear numbers
what happened to our bank in 2009.  Following this is a detailed
explanation for each following the breakdown.





·
            $14,205,532
      net loss of for 2009 versus net loss of $2,043,030 in
  2008


·
            Interest
      expense decreased 26.0% to $12.5million from $16.9
  million


·
            Interest
      income decreased 15.1% to $25.9 million from $30.5
  million


·
            Net
      interest income decreased 1.5% to $13.4 million from $13.6
      million


·
            Provision
      for loan losses increased 454% to $16.6 million from $3.0
      million


·
            Deferred
      tax asset valuation allowance
$3,652,441


·
            Goodwill
      impairment charge of $2.7 million


·
            Allowance
      for loan losses increased 41%. Increase as percentage of loans to 2.90%
      from 1.86%





Here are
some additional details regarding some of the numbers above.





The
goodwill impairment charge was the company’s goodwill associated with the
acquisition of a South Carolina financial institution in 2006.  This
charge is a non-cash accounting transaction that will not effect cash flows,
liquidity, tangible capital ratios, or the Company’s ability to conduct
business.  The charge is primarily due to the current state of the
financial markets and Waccamaw Bankshares stock price performance in
2009.  The Company’s market capitalization has been less than its
recorded book value and as a result, assumptions used in testing this intangible
asset determined the impairment was appropriate.





In a
similar manner, the charge down of the Company’s tax deferred asset, is a
non-cash charge, that does not affect cash flows or liquidity.  A tax
deferred asset is primarily comprised of future tax benefits associated with the
allowance for loan losses, actual loan losses, and other items.  After
analysis, it was determined that the non-cash valuation allowance was
appropriate.  In future profitable periods, this charge may be
reversed should testing prove it to be reasonable.





Because
of the prolonged economic downturn and asset quality trend, the Company has
undertaken extensive loan portfolio review resulting in a significant increase
in the reserve for provisional loan losses. It is our belief that increased
non-performing assets, net charge-offs, and the significant increase in
provision for loan loses is the proper response to the economic environment in
our market.  The Bank has recognized loan losses and impairments in an
appropriate manner that will serve to improve portfolio performance in future
periods. A tax refund of approximately $5 million has been included in our other
assets and will be converted to earning assets upon receipt.




See Notes to Consolidated Financial
Statements




5







Shareholder
Letter










At
December 31, 2009, net loans were $340.0 million, a decrease of 10.3% compared
to $378.9 million as of December 31, 2008.  Total deposits were $433.5
at December 31, 2009, a 3.6% increase over the year earlier figure of $418.6
million.





Waccamaw
Bank remains focused on our strategic effort to become the strongest community
bank in the coastal region of the Carolinas.  The good news for our
region is that we have begun to recover from this long and painful recession and
look forward to reporting strong operating results in the future. To be sure any
recovery that is sustainable will never take our country back to the same
‘business as usual’ practices; from Wall Street to Main Street.





During
2009, our bank implemented a number of efficiencies to lower our expenses and
costs. Through diligent efforts by our entire staff, we were able to create over
$1.5 million in cost saving measures.  Most of these savings came from
a reduction in payroll, benefits, and cut backs in other areas of our day to day
expenses.





We have
endured a most traumatic time in the history of Waccamaw Bank and indeed in the
last half century and remain at a “well capitalized” position.  Our
newer offices are gaining financial strength and are achieving a stronger level
of profitability each and every month.  We would like to take this
time to thank our dedicated shareholders for their loyalty to the
bank.  We are confident of our financial future as we move
forward.





It is
with a great deal of gratitude and appreciation we thank our loyal, hard-working
staff for the tumultuous year we have all endured.  As we reduced
overhead expenses to create additional efficiencies, our fine employees were
asked to give more than ever before.  We can’t over emphasize the
answer to the call they made.  We are humbled by their ongoing
dedication to their clients, shareholders, fellow coworkers and communities.
Without question, our Company’s future performance will be the result of their
untiring and unselfish efforts.





Sincerely,James
      G. Graham
                  Alan
      W. ThompsonPresident
      and Chief Executive Officer
                  Chairman
      of the Board




6








Consolidated
Balance Sheets


December
31, 2009 and 2008





2009
                        
                        
                        2008AssetsCash
      and due from banks
                        
                        $
                        13,973,474
                        
                        
                        $
                        8,947,752Interest-bearing
      deposits with banks
                        
                        
                        7,695,499
                        
                        
                        
                        2,684,741Federal
      funds sold
                        
                        
                        21,315,000
                        
                        
                        
                        4,281,000Total
      cash and cash equivalents
                        
                        
                        42,983,973
                        
                        
                        
                        15,913,493Investment
      securities, available for sale
                        
                        
                        87,769,319
                        
                        
                        
                        87,402,799Restricted
      equity securities
                        
                        
                        4,041,350
                        
                        
                        
                        4,131,906Loans,
      net of allowance for loan losses of  $10,148,927  in
      2009 and $7,187,981  in 2008
                        
                        
                        340,020,798
                        
                        
                        
                        378,882,889Property
      and equipment, net
                        
                        
                        17,035,644
                        
                        
                        
                        17,597,502Goodwill
                        
                        
                        -
                        
                        
                        
                        2,727,152Intangible
      assets, net
                        
                        
                        237,270
                        
                        
                        
                        416,194Accrued
      income
                        
                        
                        2,449,081
                        
                        
                        
                        2,448,477Bank
      owned life insurance
                        
                        
                        18,576,015
                        
                        
                        
                        17,834,763Foreclosed
      assets
                        
                        
                        4,994,241
                        
                        
                        
                        956,832Other
      assets
                        
                        
                        15,113,381
                        
                        
                        
                        9,138,427Total
      assets
                        
                        $
                        533,221,072
                        
                        
                        $
                        537,450,434Liabilities
      and Stockholders' EquityLiabilitiesNoninterest-bearing
      deposits
                        
                        $
                        32,940,811
                        
                        
                        $
                        36,159,809Interest-bearing
      deposits
                        
                        
                        400,597,148
                        
                        
                        
                        382,420,080Total
      deposits
                        
                        
                        433,537,959
                        
                        
                        
                        418,579,889Securities
      sold under agreements to repurchase
                        
                        
                        20,615,000
                        
                        
                        
                        23,830,000Other
      short-term borrowings
                        
                        
                        3,500,000
                        
                        
                        
                        7,000,000Long-term
      debt
                        
                        
                        43,000,000
                        
                        
                        
                        45,500,000Junior
      subordinated debentures
                        
                        
                        12,372,000
                        
                        
                        
                        12,372,000Accrued
      interest payable
                        
                        
                        942,689
                        
                        
                        
                        1,328,976Other
      liabilities
                        
                        
                        2,098,993
                        
                        
                        
                        995,414Total
      liabilities
                        
                        
                        516,066,641
                        
                        
                        
                        509,606,279Commitments
      and contingencies (Note 18)
                        
                        
                        -
                        
                        
                        
                        -Stockholders’
      equityPreferred
      stock, Series A, convertible, non-cumulative, non-voting, no par value;
      1,000,000 shares authorized; 550 and 28,184 shares issued and outstanding
      at December 31, 2009 and 2008, respectively
                        
                        
                        9,064
                        
                        
                        
                        464,476Common
      stock, no par value; 25,000,000 shares authorized; 5,551,183 and 5,523,549
      shares issued and outstanding at December 31, 2009 and 2008,
      respectively
                        
                        
                        25,099,770
                        
                        
                        
                        24,591,884Retained
      earnings (deficit)
                        
                        
                        (5,129,490
                        )
                        
                        
                        8,907,591Accumulated
      other comprehensive loss
                        
                        
                        (2,824,913
                        )
                        
                        
                        (6,119,796
                        )Total
      stockholders’ equity
                        
                        
                        17,154,431
                        
                        
                        
                        27,844,155Total
      liabilities and stockholders’ equity
                        
                        $
                        533,221,072
                        
                        
                        $
                        537,450,434




See Notes to Consolidated Financial
Statements




7







Consolidated
Statements of Operations


Years
ended December 31, 2009 and 2008





2009
                            
                            
                            2008Interest
      incomeLoans
      and fees on loans
                            
                            $
                            21,113,676
                            
                            
                            $
                            24,056,784Investment
      securities, taxable
                            
                            
                            4,110,706
                            
                            
                            
                            5,612,932Investment
      securities, nontaxable
                            
                            
                            586,998
                            
                            
                            
                            714,011Federal
      funds sold
                            
                            
                            30,502
                            
                            
                            
                            69,850Deposits
      with banks
                            
                            
                            47,429
                            
                            
                            
                            31,745Total
      interest income
                            
                            
                            25,889,311
                            
                            
                            
                            30,485,322Interest
      expenseDeposits
                            
                            
                            9,262,674
                            
                            
                            
                            13,502,304Federal
      funds purchased and securities sold under agreements to
      repurchase
                            
                            
                            747,349
                            
                            
                            
                            1,103,935Other
      borrowed funds
                            
                            
                            2,526,195
                            
                            
                            
                            2,328,430Total
      interest expense
                            
                            
                            12,536,218
                            
                            
                            
                            16,934,669Net
      interest income
                            
                            
                            13,353,093
                            
                            
                            
                            13,550,653Provision
      for loan losses
                            
                            
                            16,579,908
                            
                            
                            
                            2,990,096Net
      interest income (loss) after provisionfor
      loan losses
                            
                            
                            (3,226,815
                            )
                            
                            
                            10,560,557Noninterest
      income (expense)Service
      charges on deposit accounts
                            
                            
                            3,022,511
                            
                            
                            
                            2,115,172ATM
      and check cashing fees
                            
                            
                            875,361
                            
                            
                            
                            755,029Mortgage
      origination income
                            
                            
                            380,263
                            
                            
                            
                            352,929Income
      from financial services
                            
                            
                            139,275
                            
                            
                            
                            264,201Earnings
      on bank owned life insurance
                            
                            
                            741,252
                            
                            
                            
                            547,952Net
      realized (losses) gains on sale or maturity of investment
      securities
                            
                            
                            (886,653
                            )
                            
                            
                            98,207Impairment
      on investment securities available for sale
                            
                            
                            (418,710
                            )
                            
                            
                            (3,348,460
                            )Other
      operating income
                            
                            
                            55,311
                            
                            
                            
                            181,442Total
      noninterest income
                            
                            
                            3,908,610
                            
                            
                            
                            966,472Noninterest
      expenseSalaries
      and employee benefits
                            
                            
                            7,129,531
                            
                            
                            
                            8,196,516Occupancy
      and equipment
                            
                            
                            2,096,787
                            
                            
                            
                            2,012,137Data
      processing
                            
                            
                            1,175,402
                            
                            
                            
                            1,306,998Advertising
                            
                            
                            310,577
                            
                            
                            
                            705,462Regulatory
      agency expense
                            
                            
                            1,292,849
                            
                            
                            
                            389,327Professional
      services
                            
                            
                            852,530
                            
                            
                            
                            489,537Foreclosed
      assets, net
                            
                            
                            775,692
                            
                            
                            
                            43,845Goodwill
      impairment charge
                            
                            
                            2,727,152
                            
                            
                            
                            -Other
      expense
                            
                            
                            2,154,695
                            
                            
                            
                            2,253,467Total
      noninterest expense
                            
                            
                            18,515,215
                            
                            
                            
                            15,397,289Loss
      before income taxes
                            
                            
                            (17,833,420
                            )
                            
                            
                            (3,870,260
                            )Income
      tax expense (benefit)
                            
                            
                            (3,627,888
                            )
                            
                            
                            (1,827,230
                            )Net
      loss
                            
                            $
                            (14,205,532
                            )
                            
                            $
                            (2,043,030
                            )Basic
      loss per share
                            
                            $
                            (2.57
                            )
                            
                            $
                            (.37
                            )Diluted
      loss per share
                            
                            $
                            (2.57
                            )
                            
                            $
                            (.37
                            )Weighted
      average common shares outstanding
                            
                            
                            5,534,458
                            
                            
                            
                            5,490,982Weighted
      average dilutive common shares outstanding
                            
                            
                            5,534,458
                            
                            
                            
                            5,490,982




See
Notes to Consolidated Financial Statements




8







Consolidated
Statements of Changes in Stockholders’ Equity


Years
ended December 31, 2009 and 2008







AccumulatedOtherPreferred
                        
                        
                        Common
                        
                        
                        Retained
                        
                        
                        ComprehensiveStock
                        
                        
                        Stock
                        
                        
                        Earnings
                        
                        
                        Income (Loss)
                        
                        
                        TotalDecember
      31, 2007
                        
                        $
                        793,967
                        
                        
                        $
                        23,785,199
                        
                        
                        $
                        11,124,589
                        
                        
                        $
                        (680,614
                        )
                        
                        $
                        35,023,141Adoption
      of Topic 320 of ASC
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (173,968
                        )
                        
                        
                        -
                        
                        
                        
                        (173,968
                        )Comprehensive
      lossNet
      loss
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (2,043,030
                        )
                        
                        
                        -
                        
                        
                        
                        (2,043,030
                        )Net
      change in unrealized loss on investment securities available for sale, net
      of income taxes of  ($2,714,873)
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (7,438,637
                        )
                        
                        
                        (7,438,637
                        )Reclassification
      adjustment of impairment in investments securities available for sale, net
      of income taxes of $1,290,965
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        2,057,495
                        
                        
                        
                        2,057,495Reclassification
      adjustment of gain recognizedin net of income taxes of
      ($40,167)
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (58,040
                        )
                        
                        
                        (58,040
                        )Total
      comprehensive loss
                        
                        
                        (7,482,212
                        )Stock
      based compensation
                        
                        
                        -
                        
                        
                        
                        127,409
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        127,409Exercise
      of stock options
                        
                        
                        -
                        
                        
                        
                        165,774
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        165,774Excess
      tax benefits from stock-basedcompensation
                        
                        
                        -
                        
                        
                        
                        184,011
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        184,011Conversion
      of preferred stock to common stock
                        
                        
                        (329,491
                        )
                        
                        
                        329,491
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -December
      31, 2008
                        
                        
                        464,476
                        
                        
                        
                        24,591,884
                        
                        
                        
                        8,907,591
                        
                        
                        
                        (6,119,796
                        )
                        
                        
                        27,844,155Comprehensive
      lossNet
      loss
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (14,205,532
                        )
                        
                        
                        -
                        
                        
                        
                        (14,205,532
                        )Net
      change in unrealized gain on investment securities available for sale, net
      of income taxes of  $1,669,468
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        2,661,189
                        
                        
                        
                        2,661,189Reclassification
      adjustment of impairment in investments securities available for sale, net
      of income taxes of $161,413
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        257,297
                        
                        
                        
                        257,297Reclassification
      adjustment of loss recognizedin net of income taxes of
      $341,805
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        544,848
                        
                        
                        
                        544,848Total
      comprehensive loss
                        
                        
                        (10,742,198
                        )Reversal
      of non-credit related impairment
                        
                        
                        168,451
                        
                        
                        
                        (168,451
                        )
                        
                        
                        -Stock
      based compensation
                        
                        
                        -
                        
                        
                        
                        122,378
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        122,378Stock
      issuance costs
                        
                        
                        -
                        
                        
                        
                        (69,904
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (69,904
                        )Conversion
      of preferred stock tocommon
      stock
                        
                        
                        (455,412
                        )
                        
                        
                        455,412
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -December
      31, 2009
                        
                        $
                        9,064
                        
                        
                        $
                        25,099,770
                        
                        
                        $
                        (5,129,490
                        )
                        
                        $
                        (2,824,913
                        )
                        
                        $
                        17,154,431




See
Notes to Consolidated Financial Statements





9




Consolidated
Statements of Changes in Cash Flows


For
the years ended December 31, 2009 and 2008





2009
                    
                    
                    2008Cash
      flows from operating activitiesNet
      loss
                    
                    $
                    (14,205,532
                    )
                    
                    $
                    (2,043,030
                    )Adjustments
      to reconcile net loss to net cash provided by operations:Depreciation
      and amortization
                    
                    
                    942,966
                    
                    
                    
                    1,011,671Impairment
      of goodwill
                    
                    
                    2,727,152
                    
                    
                    
                    -Stock-based
      compensation
                    
                    
                    122,378
                    
                    
                    
                    127,409Provision
      for loan losses
                    
                    
                    16,579,908
                    
                    
                    
                    2,990,096Accretion
      of discount on securities, net of amortization
      of  premiums
                    
                    
                    209,020
                    
                    
                    
                    (19,032
                    )Write-down
      of OREO
                    
                    
                    469,411
                    
                    
                    
                    -(Gain)
      loss on sale of investment securities
                    
                    
                    886,653
                    
                    
                    
                    (98,207
                    )Impairment
      of investment securities
                    
                    
                    418,710
                    
                    
                    
                    3,348,460Income
      from bank owned life insurance
                    
                    
                    (741,252
                    )
                    
                    
                    (547,952
                    )Deferred
      taxes
                    
                    
                    (1,403,202
                    )
                    
                    
                    (1,881,102
                    )Changes
      in assets and liabilities:Accrued
      income
                    
                    
                    (604
                    )
                    
                    
                    490,787Other
      assets
                    
                    
                    (6,397,438
                    )
                    
                    
                    559,531Accrued
      interest payable
                    
                    
                    (386,287
                    )
                    
                    
                    (796,697
                    )Other
      liabilities
                    
                    
                    1,103,579
                    
                    
                    
                    (819,024
                    )Net
      cash provided by operating activities
                    
                    
                    325,462
                    
                    
                    
                    2,322,910Cash
      flows from investing activitiesPurchases
      of restricted equity securities
                    
                    
                    (62,100
                    )
                    
                    
                    -Purchases
      of investment securities
                    
                    
                    (93,133,979
                    )
                    
                    
                    (38,148,849
                    )Maturities
      of investment securities
                    
                    
                    13,787,672
                    
                    
                    
                    2,927,227Net
      (increase) decrease in loans
                    
                    
                    17,182,817
                    
                    
                    
                    (27,373,415
                    )Proceeds
      from sales of investment securities
                    
                    
                    82,870,608
                    
                    
                    
                    34,858,839Investment
      in bank owned life insurance
                    
                    
                    -
                    
                    
                    
                    (5,509,450
                    )Purchases
      of property and equipment
                    
                    
                    (165,712
                    )
                    
                    
                    (3,814,254
                    )Proceeds
      from sale of other real estate
                    
                    
                    592,546
                    
                    
                    
                    -Net
      cash provided by (used in) investing activities
                    
                    
                    21,071,852
                    
                    
                    
                    (37,059,902
                    )Cash
      flows from financing activitiesNet
      increase (decrease) in noninterest-bearing deposits
                    
                    
                    (3,218,998
                    )
                    
                    
                    3,788,636Net
      increase in interest-bearing deposits
                    
                    
                    18,177,068
                    
                    
                    
                    36,611,918Net
      decrease in securities sold underagreements
      to repurchase
                    
                    
                    (3,215,000
                    )
                    
                    
                    (5,392,000
                    )Net
      increase (decrease) in federal funds purchased
                    
                    
                    -
                    
                    
                    
                    (15,429,300
                    )Net
      increase in junior subordinated debentures
                    
                    
                    -
                    
                    
                    
                    4,000,000Net
      decrease in short-term borrowings
                    
                    
                    (3,500,000
                    )
                    
                    
                    (7,000,000
                    )Net
      proceeds from (repayment of)  long-term debt
                    
                    
                    (2,500,000
                    )
                    
                    
                    21,000,000Proceeds
      from issuance of common stock
                    
                    
                    -
                    
                    
                    
                    165,774Benefit
      of non-qualified stock option exercise
                    
                    
                    -
                    
                    
                    
                    184,011Stock
      issuance costs and redemption of fractional shares
                    
                    
                    (69,904
                    )
                    
                    
                    -Net
      cash provided by financing activities
                    
                    
                    5,673,166
                    
                    
                    
                    37,929,039Increase
      (decrease) in cash and cash equivalents
                    
                    
                    27,070,480
                    
                    
                    
                    3,192,047Cash
      and cash equivalents, beginning
                    
                    
                    15,913,493
                    
                    
                    
                    12,721,446Cash
      and cash equivalents, ending
                    
                    $
                    42,983,973
                    
                    
                    $
                    15,913,493Supplemental
      disclosure of cash flow informationInterest
      paid
                    
                    $
                    12,922,505
                    
                    
                    $
                    17,731,365Taxes
      paid
                    
                    $
                    52,647
                    
                    
                    $
                    133,750Supplemental
      disclosure of noncash activitiesReal
      estate acquired in settlement of loans
                    
                    $
                    5,099,366
                    
                    
                    $
                    638,597




See
Notes to Consolidated Financial Statements




10









Notes
to Consolidated Financial Statements


For
the years ended December 31, 2009 and 2008




Note
1.  Organization and Summary of Significant Accounting
Policies





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 seventeen 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 North Carolina Commissioner of
Banks and the Federal Reserve.





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





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




Going Concern Considerations
  The consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets and the
discharge of liabilities in the normal course of business for the foreseeable
future.  These consolidated financial statements do not include any
adjustments relating to the recoverability or classification of assets or the
amounts and classification of liabilities that may be necessary should we be
unable to continue as a going concern.
  The
substantial uncertainties throughout the economy andU.S.banking
industry coupled with current market conditions have adversely affected the
Company’s 2009 results and capital levels. The significant loss in 2009,
primarily related to credit losses, goodwill impairment and the valuation
allowance on deferred tax assets, reduced the Company’s capital levels. In order
to remain well capitalized under federal banking agencies’ guidelines,
management believes that the Company will need to raise additional capital to
absorb the potential future credit losses associated with the disposition of its
nonperforming assets.  Accordingly, management is in the process of
evaluating various alternatives to increase tangible common equity and
regulatory capital through the issuance of additional equity in public or
private offerings.  Management is actively evaluating a number of
capital sources, asset reductions, and other balance sheet management strategies
to ensure that the projected level of regulatory capital can support its balance
sheet long-term.  Management is currently reducing and otherwise
restructuring its balance sheet to improve capital
ratios.
  Current market conditions for banking institutions, the
overall uncertainty in financial markets, and depressed stock price are
significant barriers to the success of any plan to issue additional equity in
public or private offerings.  An equity financing transaction would result
in substantial dilution to the Company'scurrent
shareholders and could adversely affect the market price of the Company's common
stock.  There can be no assurance as to whether these efforts will be
successful, either on a short-term or long-term basis.  Should these
efforts beunsuccessful, due to existing regulatory
restrictions on cash payments between the Bank and the holding company, the
Company may be unable to discharge its liabilities in the normal course of
business. There can be no assurance that the Company will be successful in any
efforts to raise additional capital during 2010.
  Both the parent company and the banking subsidiary
actively manage liquidity and cash flow needs. The Company has suspended its
common and preferred dividends to shareholders until such time as the Company
returns to profitability.  At December 31, 2009, the Company had
$42 million of cash and cash equivalents.  The Company has no
long-term debt maturing in 2010.
  Liquidity at the bank level is dependent upon the
deposit franchise which funds 81% of the Company’s assets (or 62% excluding
brokered CDs). The FDIC’s temporary changes to increase the amount of deposit
insurance to $250,000 per deposit relationship and to provide unlimited deposit
insurance for certain transaction accounts have contributed to the stable
deposit base. All banks that have elected to participate in the Transaction
Account Guarantee Program (“TAGP”) have the same FDIC insurance
coverage.  Potential loss of deposits would be a primary funding need
in a liquidity crisis.  Deposit balances which are not covered by FDIC
insurance total approximately $9.6 million currently, and would increase to
approximately $13.5 million without the benefit of the FDIC’s TAGP, currently
scheduled to expire at June 30, 2010.  Thus, the primary
deposit-related liquidity risk relates to balances which are not
insured.  As of March 31, 2010 the Company has liquid assets of
approximately $95 million to address liquidity needs in a crisis scenario. If a
liquidity issue presents itself, deposit promotions would be expected to yield
significant in-flows of cash, but could be limited based on recently approved
limitations on maximum interest rates that may be offered by should the bank not
be well capitalized.
  In addition, certain borrowings, such as brokered CDs
and FHLB advances, are dependent on various credit eligibility criteria which
may be impacted by changes in the Company’s financial position and/or results of
operations. Given the weakened economy, and current market conditions, there is
no assurance that the Company will, if it chooses to do so, be able to obtain
new borrowings or issue additional equity on terms that are
satisfactory.
  Based on current capital levels and expected liquidity
needs and sources, management expects the Company to be able to meet its
obligations at least through December 31, 2010. If unanticipated market
factors emerge, or if the Company is unable to raise additional capital,
successfully execute its plans, or comply with regulatory requirements,
then its banking regulators could take further action, which could include
actions that may have a material adverse effect on the Company’s business,
results of operations and financial position.






11




Critical
Accounting Policies





We
believe our policies with respect to the methodology for our determination of
the allowance for loan losses, investment impairment charges, goodwill
impairment 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 (“GAAP”) 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 determination of other than
temporary impairment on investment securities, 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
 For
the years ended December 31, 2009 and 2008







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 collectability 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.





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", and
“federal funds sold.” Generally, federal funds are purchased and sold for
one-day periods.





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


For
the years ended December 31, 2009 and 2008





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 make
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 make 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 collectability 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


For
the years ended December 31, 2009 and 2008





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





Property
and Equipment





Land is
carried at cost.  Buildings, furniture and equipment, automobiles, 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
                  
                  3-10Buildings
                  
                  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.





Fair
value of the reporting unit in 2009 was determined using a discounted cash flow
model with estimated cash flows based on internal forecasts of net income. Our
goodwill impairment testing for 2009, which was updated at December 31,
2009, indicated that our goodwill was impaired. As a result of the recent
decline in our stock price and operating results, the excess of the fair value
over carrying value narrowed in our assessment. Based on the impairment
testing process, the Company recorded a goodwill impairment charge of $2.7
million in 2009.





Intangible
Assets





Intangible
assets consist primarily of purchased core deposit intangible assets and are
accounted for in accordance with generally accepted accounting
principles.  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 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.





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





The
Company recognizes compensation cost relating to share-based payment
transactions. Generally accepted accounting principles 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.  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.


15










Notes
to Consolidated Financial Statements


For
the years ended December 31, 2009 and 2008





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





Advertising
Expense





The
Company expenses advertising costs as they are incurred.  Advertising
expense for the years ended December 31, 2009 and 2008 was approximately
$311,000 and $705,000, 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. Due
to uncertainty regarding the realization of the entire deferred tax asset,
management has recorded a deferred tax asset valuation allowance as of December
31, 2009. Details are included in Note 17. 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.





When tax
returns are filed, it is highly certain that some positions taken would be
sustained upon examination by the taxing authorities, while others are subject
to uncertainty about the merits of the position taken or the amount of the
position that would be ultimately sustained.  The benefit of a tax
position is recognized in the financial statements in the period during which,
based on all available evidence, management believes it is more likely than not
that the position will be sustained upon examination, including the resolution
of appeals or litigation processes, if any.  Tax positions taken are
not offset or aggregated with other positions.  Tax positions that
meet the more-likely-than-not recognition threshold are measured as the largest
amount of tax benefit that is more than 50% likely of being realized upon
settlement with the applicable taxing authority.  The portion of the
benefits associated with tax position taken that exceeds the amount measured as
described above is reflected as a liability for unrecognized tax benefits in the
accompanying balance sheet along with any associated interest and penalties that
would be payable to the taxing authorities upon
examination.  Management is not aware of any material uncertain tax
positions and no liability has been recognized at December 31,
2009.  Interest and penalties associated with unrecognized tax
benefits would be classified as additional interest expense or other expense,
respectively, in the statement of income.





Comprehensive
Income





Annual
comprehensive income reflects the change in the Company’s equity during the year
arising from transactions and events other than investments by and distributions
to stockholders. It consists of net income plus certain other changes in assets
and liabilities that are currently reported as separate components of
stockholders’ equity rather than as income or expense. The company’s sole
component of accumulated other comprehensive income is unrealized losses on
investment securities available for sale.





Basic
Earnings per Share





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


16





Notes
to Consolidated Financial Statements


For
the years ended December 31, 2009 and 2008





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





Diluted
Earnings per Share




The
computation of diluted earnings per share is similar to the computation of basic
earnings per share except that the denominator is increased to include the
number of additional common shares that would have been outstanding if dilutive
potential common shares had been issued. The numerator is adjusted for any
changes in income or loss that would result from the assumed conversion of those
potential common stock equivalents. Potential common stockequivalents include
the Company’s Series A convertible preferred stock and related outstanding
warrants and shares associated with stock-based compensation. Due to the net
loss in 2009, dilutive common stock equivalents have been excluded from the
computation of dilutive earnings per share as the result would be
anti-dilutive.





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. In December 2007, the Bank entered into
to structured repo obligation with Barclays Capital, Inc. in the amount of $20
million. Within the structured repo are embedded derivatives which will not have
a material effect on the results of operations.





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





Generally
accepted accounting principles (“GAAP”) define fair value as the exchange price
that would be received for an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous market for the asset or liability
in an orderly transaction between market participants on the measurement
date.  The Company determines the fair value of its financial
instruments based on the fair value hierarchy established per GAAP which
requires an entity to maximize the use of observable inputs and minimize the use
of unobservable inputs when measuring fair value.  Investment
securities available for sale, loans held for sale and servicing assets are
recorded at fair value on a recurring basis.  Certain impaired loans
and foreclosed assets are carried at fair value on a nonrecurring
basis.





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.





Subsequent
Events





In
accordance with accounting guidance, the Company evaluated events and
transactions for potential recognition or disclosure in our financial statements
through the date the financial statements were issued.





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.


17








Notes
to Consolidated Financial Statements


For
the years ended December 31, 2009 and 2008





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





Recent
Accounting Pronouncements, continued




to as the
FASB Accounting Standards Codification (“ASC”). The new structure is effective
for interim or annual periods ending after September 15, 2009. All existing
accounting standards have been superseded and all other accounting literature
not included is considered non-authoritative.




The FASB
issued new accounting guidance on accounting for transfers of financial assets
in June 2009.  The guidance limits the circumstances in which a
financial asset should be derecognized when the transferor has not transferred
the entire financial asset by taking into consideration the transferor’s
continuing involvement.  The standard requires that a transferor
recognize and initially measure at fair value all assets obtained (including a
transferor’s beneficial interest) and liabilities incurred as a result of a
transfer of financial assets accounted for as a sale.  The concept of
a qualifying special-purpose entity is no longer applicable.  The
standard is effective for the first annual reporting period that begins after
November 15, 2009, for interim periods within the first annual reporting period,
and for interim and annual reporting periods thereafter.  Earlier
application is prohibited.  The Company does not expect the guidance
to have any impact on the Company’s financial statements.  The ASC was
amended in December, 2009, to include this guidance.





Guidance
was issued in June 2009 requiring a company to analyze whether its interest in a
variable interest entity (“VIE”) gives it a controlling financial interest that
should be included in consolidated financial statements.  A company
must assess whether it has an implicit financial responsibility to ensure that
the VIE operates as designed when determining whether it has the power to direct
the activities of the VIE that significantly impact its economic performance,
making it the primary beneficiary.  Ongoing reassessments of whether a
company is the primary beneficiary are also required by the
standard.  This guidance amends the criteria to qualify as a primary
beneficiary as well as how to determine the existence of a VIE.  The
standard also eliminates certain exceptions that were previously
available.  This guidance is effective as of the beginning of each
reporting entity’s first annual reporting period that begins after November 15,
2009, for interim periods within that first annual reporting period, and for
interim and annual reporting periods thereafter.  Earlier application
is prohibited.  Comparative disclosures will be required for periods
after the effective date.  The Company does not expect the guidance to
have any impact on the Company’s financial position.  An update was
issued in December, 2009, to include this guidance in the ASC.





An update
was issued in October, 2009 to provide guidance requiring companies to allocate
revenue in multi-element arrangements.  Under this guidance, products
or services (deliverables) must be accounted for separately rather than as a
combined unit utilizing a selling price hierarchy to determine the selling price
of a deliverable.  The selling price is based on vendor-specific
evidence, third-party evidence or estimated selling price.  The
amendments in the update are effective prospectively for revenue arrangements
entered into or materially modified in fiscal years beginning on or after June
15, 2010 with early adoption permitted.  The Company does not expect
the update to have an impact on its financial statements.





In
October, 2009, updated guidance was issued to provide for accounting and
reporting for own-share lending arrangements issued in contemplation of a
convertible debt issuance.  At the date of issuance, a share-lending
arrangement entered into on an entity’s own shares should be measured at fair
value in accordance with prior guidance and recognized as an issuance cost, with
an offset to additional paid-in capital.  Loaned shares are excluded
from basic and diluted earnings per share unless default of the share-lending
arrangement occurs.  The amendment also requires several disclosures
including a description and the terms of the arrangement and the reason for
entering into the arrangement.  The effective dates of the amendment
are dependent upon the date the share-lending arrangement was entered into and
include retrospective application for arrangements outstanding as of the
beginning of fiscal years beginning on or after December 15,
2009.   The Company has no plans to issue convertible debt and,
therefore, does not expect the update to have an impact on its financial
statements.


18








Notes
to Consolidated Financial Statements


For
the years ended December 31, 2009 and 2008





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





Recent
Accounting Pronouncements, continued





In
January, 2010, guidance was issued to alleviate diversity in the accounting for
distributions to shareholders that allow the shareholder to elect to receive
their entire distribution in cash or shares but with a limit on the aggregate
amount of cash to be paid.  The amendment states that the stock
portion of a distribution to shareholders that allows them to elect to receive
cash or shares with a potential limitation on the total amount of cash that all
shareholders can elect to receive in the
aggregate is considered a share issuance.  The amendment is effective
for interim and annual periods ending on or after December 15, 2009 and had no
impact on the Company’s financial statements.





Also in
January, 2010, an amendment was issued to clarify the scope of subsidiaries for
consolidation purposes.  The amendment provides that the decrease in
ownership guidance should apply to (1) a subsidiary or group of assets that is a
business or nonprofit activity, (2) a subsidiary that is a business or nonprofit
activity that is transferred to an equity method investee or joint venture, and
(3) an exchange of a group of assets that constitutes a business or nonprofit
activity for a non-controlling interest in an entity.  The guidance
does not apply to a decrease in ownership in transactions related to sales of in
substance real estate or conveyances of oil and gas mineral
rights.  The update is effective for the interim or annual reporting
periods ending on or after December 15, 2009 and had no impact on the Company’s
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. Adjustment to Earnings





Due to a
system error discovered during the October 2009, dating back to the second
quarter of 2008 and extending to the second quarter of 2009, interest income on
certain loan participations was understated by $552,151 and net income
understated by $340,274. Interest income of $212,350 and net income of $130,480
relating to 2008 was corrected as an out-of period adjustment in the third
quarter of 2009. The correction of this error affected both the asset account,
“Accrued income” and income account “Loans and fees on loans”, as this was an
accrual entry only there were no cash transactions affected by this
error.





The
following table details the income and tax effect of the error on the affected
previously issued financial statements:


Year
      Ended2008Interest
      income
                  
                  $
                  212,350Income
      tax expense
                  
                  
                  (81,870
                  )Net
      income impact of error
                  
                  
                  130,480Net
      income (loss) as previously reported
                  
                  
                  (2,043,030
                  )Net
      income (loss), Pro Forma
                  
                  $
                  (1,912,550
                  )





As
management has determined the impact of this error is not material to the
previously issued financial statements, these statements will not be revised.
The correction of the error has been reflected in the 2009 statement of
operations.





Note
3.  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.


19








Notes
to Consolidated Financial Statements


For
the years ended December 31, 2009 and 2008





Note
3.  Business Combinations, continued





The
acquisition was accounted for as a purchase transaction and accordingly the
results of operations attributable to the acquired company are 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 Company recorded a goodwill impairment
charge of $2.7 million in 2009 as referenced in Note 1 on Goodwill.





Note
4.  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
$2,740,000 and $3,127,000 for the period including December 31, 2009 and 2008,
respectively.





Note
5.  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
                
                
                FairCost
                
                
                Gains
                
                
                Losses
                
                
                Value2009Mortgage
      backed securities
                
                
                61,167,200
                
                
                
                159,880
                
                
                
                (768,810
                )
                
                
                60,558,270Corporate
      securities
                
                
                5,617,961
                
                
                
                -
                
                
                
                (1,116,151
                )
                
                
                4,501,810Single
      issue trust preferred securities
                
                
                12,089,781
                
                
                
                148,661
                
                
                
                (1,686,293
                )
                
                
                10,552,149Pooled
      trust preferred securities
                
                
                133,935
                
                
                
                -
                
                
                
                (51,680
                )
                
                
                82,255Municipal
      securities
                
                
                13,083,406
                
                
                
                29,210
                
                
                
                (1,037,781
                )
                
                
                12,074,835$
                92,092,283
                
                
                $
                337,751
                
                
                $
                (4,660,715
                )
                
                $
                87,769,3192008Government
      sponsored enterprises(FHLB, FHLMC, FNMA and FFCB)
                
                $
                10,500,000
                
                
                $
                106,465
                
                
                $
                -
                
                
                $
                10,606,465Mortgage
      backed securities
                
                
                40,090,699
                
                
                
                824,260
                
                
                
                (4,582
                )
                
                
                40,910,377Corporate
      securities
                
                
                7,318,842
                
                
                
                19,675
                
                
                
                (1,989,834
                )
                
                
                5,348,683Equity
      securities
                
                
                52,800
                
                
                
                -
                
                
                
                -
                
                
                
                52,800Single
      issue trust preferred securities
                
                
                21,565,751
                
                
                
                165,199
                
                
                
                (6,157,683
                )
                
                
                15,573,267Pooled
      trust preferred securities
                
                
                570,058
                
                
                
                -
                
                
                
                (430,384
                )
                
                
                139,674Municipal
      securities
                
                
                16,577,067
                
                
                
                12,741
                
                
                
                (1,818,275
                )
                
                
                14,771,533$
                96,675,217
                
                
                $
                1,128,340
                
                
                $
                (10,400,758
                )
                
                $
                87,402,799





Restricted
equity securities are carried at cost and consist of investments in stock of the
Federal Home Loan Bank of Atlanta (FHLB) and The Federal Reserve Bank of
Richmond (Federal Reserve).  Both 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 FHLB has indefinitely
suspended redemptions of their stock. The Federal Reserve requires banks to
purchase stock as a condition of membership in the Federal Reserve
system.





Investment
securities with market values of $43,507,833 and $48,947,717 at December 31,
2009 and 2008, respectively were pledged as collateral on public deposits and
for other banking purposes as required or permitted by law.  Gross
realized gains and losses resulting from the sale of securities for the years
ended December 31, 2009 and 2008 are as follows:


20




Notes
to Consolidated Financial Statements
 For
the years ended December 31, 2009 and 2008
 
 Note
5.  Investment Securities, continued
 
 2009
                    
                    
                    2008Realized
      gains
                    
                    $
                    1,556,768
                    
                    
                    $
                    137,477Realized
      losses
                    
                    
                    (2,443,421
                    )
                    
                    
                    (39,270
                    )$
                    (886,653
                    )
                    
                    $
                    98,207
 
 The
scheduled contractual maturities of securities (all available for sale) at
December 31, 2009 are as follows:
 
 Amortized
                  
                  
                  FairCost
                  
                  
                  ValueDue
      in one year or less
                  
                  $
                  1,322,937
                  
                  
                  $
                  1,322,937Due
      in one through five years
                  
                  
                  2,470,000
                  
                  
                  
                  2,255,560Due
      in five through ten years
                  
                  
                  1,002,184
                  
                  
                  
                  952,851Due
      after ten years
                  
                  
                  87,297,163
                  
                  
                  
                  83,237,971$
                  92,092,284
                  
                  
                  $
                  87,769,319
 
 The
following tables detail 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, 2009 and
December 31, 2008.
 
 Less Than 12 Months
                    
                    
                    12 Months or More
                    
                    
                    TotalFair
                    
                    
                    Unrealized
                    
                    
                    Fair
                    
                    
                    Unrealized
                    
                    
                    Fair
                    
                    
                    UnrealizedValue
                    
                    
                    Losses
                    
                    
                    Value
                    
                    
                    Losses
                    
                    
                    Value
                    
                    
                    LossesDecember
      31, 2009Mortgage
      backed securities
                    
                    $
                    42,983,307
                    
                    
                    $
                    (768,810
                    )
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    42,983,307
                    
                    
                    $
                    (768,810
                    )Corporate
      securities
                    
                    
                    1,398,872
                    
                    
                    
                    (896,151
                    )
                    
                    
                    1,780,000
                    
                    
                    
                    (220,000
                    )
                    
                    
                    3,178,872
                    
                    
                    
                    (1,116,151
                    )Single
      issue trust preferred securities
                    
                    
                    1,994,732
                    
                    
                    
                    (925,992
                    )
                    
                    
                    3,967,017
                    
                    
                    
                    (760,301
                    )
                    
                    
                    5,961,749
                    
                    
                    
                    (1,686,293
                    )Pooled
      trust preferred securities
                    
                    
                    33,118
                    
                    
                    
                    (51,680
                    )
                    
                    
                    49,138
                    
                    
                    
                    -
                    
                    
                    
                    82,256
                    
                    
                    
                    (51,680
                    )Municipal
      securities
                    
                    
                    1,356,260
                    
                    
                    
                    (43,738
                    )
                    
                    
                    6,714,609
                    
                    
                    
                    (994,043
                    )
                    
                    
                    8,070,869
                    
                    
                    
                    (1,037,781
                    )Total
      temporarily impaired securities
                    
                    $
                    47,766,289
                    
                    
                    $
                    (2,686,371
                    )
                    
                    $
                    12,510,764
                    
                    
                    $
                    (1,974,344
                    )
                    
                    $
                    60,277,053
                    
                    
                    $
                    (4,660,715
                    )December
      31, 2008Government
      sponsored enterprises(FHLB, FHLMC and FFCB)
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -Mortgage
      backed securities
                    
                    
                    230,539
                    
                    
                    
                    (3,626
                    )
                    
                    
                    26,554
                    
                    
                    
                    (956
                    )
                    
                    
                    257,093
                    
                    
                    
                    (4,582
                    )Corporate
      securities
                    
                    
                    3,268,382
                    
                    
                    
                    (527,020
                    )
                    
                    
                    1,037,069
                    
                    
                    
                    (1,462,814
                    )
                    
                    
                    4,305,451
                    
                    
                    
                    (1,989,834
                    )Single
      issue trust preferred securities
                    
                    
                    12,424,063
                    
                    
                    
                    (6,056,874
                    )
                    
                    
                    904,060
                    
                    
                    
                    (100,808
                    )
                    
                    
                    13,328,123
                    
                    
                    
                    (6,157,682
                    )Pooled
      trust preferred securities
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    139,674
                    
                    
                    
                    (430,384
                    )
                    
                    
                    139,674
                    
                    
                    
                    (430,384
                    )Municipal
      securities
                    
                    
                    8,046,371
                    
                    
                    
                    (625,298
                    )
                    
                    
                    5,162,622
                    
                    
                    
                    (1,192,977
                    )
                    
                    
                    13,208,993
                    
                    
                    
                    (1,818,275
                    )Total
      temporarily impaired securities
                    
                    $
                    23,969,355
                    
                    
                    $
                    (7,212,818
                    )
                    
                    $
                    7,269,979
                    
                    
                    $
                    (3,187,939
                    )
                    
                    $
                    31,239,334
                    
                    
                    $
                    (10,400,757
                    )
 
 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. The changes
in fair value in our available for sale portfolio reflect normal market
conditions and vary; either positively or negatively, based primarily on changes
in general levels of marketinterest rates relative to the yields of the
portfolio. Additionally, changes in the fair value of securities available for
sale do not affect our income nor does it affect the Bank’s regulatory capital
requirements. The Bank has invested in trust preferred securities and management
is closely monitoring these securities. Other than temporary impairment charges
for December 31, 2009 consisted of a pooled trust preferred security of
$418,710.
  21










Notes
to Consolidated Financial Statements


For
the years ended December 31, 2009 and 2008





Note
5.  Investment Securities, continued





Other
than temporary impairment charges for December 31, 2008 included a single issue
trust preferred security of $339,013, a pooled trust preferred security of
$1,044,675 and FNMA Preferred Stock of $1,964,772.





Unrealized
losses associated with the investment securities total $4.7 million. Of that
amount, $2.0 million has existed for a period of twelve consecutive months or
longer. Unrealized losses that are related to the prevailing interest rate
environment will decline over time and recover as these securities approach
maturity. The unrealized losses in the municipal securities portfolio are due to
widening credit spreads in the municipal securities market and are the result of
concerns about the bond insurers associated with these securities. At
December 31, 2009, the Company believes that all contractual cash flows
will be received on this portfolio.




Prices in
the two pooled trust preferred securities continue to decline due to illiquidity
and reduced demand for these securities. A pooled trust preferred securities
portfolio was written down by $1,044,000 during 2008. After cash flow testing of
these securities using default and loss assumptions derived from a third party
credit source with expertise in bank credit quality, the remaining security
failed the model’s projected cash flow test. During 2009, the Company recognized
that the remaining pooled trust preferred security was other-than-temporarily
impaired and, accordingly, this security has been written down to the fair
value. The pooled trust preferred securities portfolio was written down by
$418,710 during 2009. In February of 2010, the Company sold these securities for
a gain of $274,000, based on the December 31, 2009 balance that has been
adjusted for prior other than temporarily impaired losses.





The
single-issue securities are trust-preferred issuances from other banks and had a
total market value of approximately $10.6 million as of December 31,
2009, compared with their adjusted cost basis of approximately
$12.1 million. Management does not believe any individual unrealized loss
as of December 31, 2009, represents other-than-temporary impairment. The
Company has the ability and believes it is more likely than not that it will
hold these securities until such time as the value recovers or the securities
mature. Furthermore, the Company believes that portions of the change in value
are attributable to changes in market interest rates and the current state of
illiquidity within the market for securitized assets.





Note
6.  Loans Receivable





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





2009
                        
                        
                        2008In
      thousandsCommercial
                        
                        $
                        32,551
                        
                        
                        $
                        42,958Real estate:Construction
      and land development
                        
                        
                        121,838
                        
                        
                        
                        125,878Residential,
      1-4 families
                        
                        
                        80,071
                        
                        
                        
                        83,734Residential,
      5 or more families
                        
                        
                        9,879
                        
                        
                        
                        11,802Farmland
                        
                        
                        2,473
                        
                        
                        
                        3,343Nonfarm,
      nonresidential
                        
                        
                        88,197
                        
                        
                        
                        98,438Agricultural
                        
                        
                        563
                        
                        
                        
                        654Consumer
                        
                        
                        13,380
                        
                        
                        
                        17,217Other
                        
                        
                        1,512
                        
                        
                        
                        2,432350,464
                        
                        
                        
                        386,456Deferred
      loan fees, net of costs
                        
                        
                        (294
                        )
                        
                        
                        (385
                        )Allowance
      for loan losses
                        
                        
                        (10,149
                        )
                        
                        
                        (7,188
                        )$
                        340,021
                        
                        
                        $
                        378,883





Approximately
$20.0 million in 1-4 family residential loans, $22.0 million in commercial real
estate loans and $10.0 million 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, 2009.





22










Notes
to Consolidated Financial Statements


For
the years ended December 31, 2009 and 2008





Note
7.  Allowance for Loan Losses





Information
related to the allowance for loan losses is as follows:


2009
                
                
                2008Balance,
      beginning
                
                $
                7,187,981
                
                
                $
                5,385,782Provision
      charged to expense
                
                
                16,579,908
                
                
                
                2,990,096Recoveries
      of amounts charged off
                
                
                91,965
                
                
                
                11,150Amounts
      charged off
                
                
                (13,710,927
                )
                
                
                (1,199,047
                )Balance,
      ending
                
                $
                10,148,927
                
                
                $
                7,187,981Impaired
      loans without a valuation allowance
                
                $
                41,575,130
                
                
                $
                2,384,963Impaired
      loans with a valuation allowance
                
                
                -
                
                
                
                22,844,795Total
      impaired loans
                
                $
                41,575,130
                
                
                $
                25,229,758Valuation
      allowance related to impaired loans
                
                $
                -
                
                
                $
                3,586,786Total
      nonaccrual loans
                
                $
                21,439,670
                
                
                $
                15,633,308Total
      loans past due ninety days or more and still accruing
    interest
                
                $
                1,409,152
                
                
                $
                1,451,040





The
average annual recorded investment in impaired loans and interest income
recognized on impaired loans for the last two years (all approximate) is
summarized below:





2009
                
                
                2008Average
      investment in impaired loans
                
                $
                13,701,261
                
                
                $
                7,356,217Interest
      income recognized on impaired loans
                
                $
                9,557,690
                
                
                $
                1,109,854Interest
      income recognized on a cash basis on impaired loans
                
                $
                1,172,061
                
                
                $
                531,367




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





Note
8.  Property and Equipment





Components
of Property and Equipment





Property
and equipment and total accumulated depreciation consisted of the following at
December 31:





2009
                      
                      
                      2008Land
                      
                      $
                      5,593,639
                      
                      
                      $
                      3,374,095Buildings
                      
                      
                      9,992,900
                      
                      
                      
                      9,874,157Construction
      in progress
                      
                      
                      -
                      
                      
                      
                      2,367,319Leasehold
      improvements
                      
                      
                      1,070,135
                      
                      
                      
                      1,007,864Automobiles
                      
                      
                      55,818
                      
                      
                      
                      55,818Furniture
      and equipment
                      
                      
                      4,034,932
                      
                      
                      
                      3,902,45920,747,424
                      
                      
                      
                      20,581,7122009
                      
                      
                      2008Less
      accumulated depreciation
                      
                      
                      3,711,780
                      
                      
                      
                      2,984,210$
                      17,035,644
                      
                      
                      $
                      17,597,502





Depreciation
expense reported in net income was approximately $764,000 and $754,000 for the
years ended December 31, 2009 and 2008, respectively.





23









Notes
to Consolidated Financial Statements


For
the years ended December 31, 2009 and 2008





Note
8.  Property and Equipment, continued





Leases





The Bank
leases several banking facilities and its operations center under agreements
accounted for as operating leases.  Rent expense was approximately
$401,000 and $412,000 in 2009 and 2008, respectively.  Future minimum
lease payments under non-cancelable commitments are as follows.





2010
                  
                  $
                  258,6882011
                  
                  
                  151,3862012
                  
                  
                  132,5502013
                  
                  
                  104,1002014
                  
                  
                  51,600Thereafter
                  
                  
                  95,550$
                  793,874





Note
9.  Intangible Assets





The book
value of intangible assets at December 31, 2009 and 2008 are as
follows:





As of December 31, 2009
                  
                  
                  As of December 31, 2008Gross Carrying
                  
                  
                  Accumulated
                  
                  
                  Gross Carrying
                  
                  
                  AccumulatedAmount
                  
                  
                  Amortization
                  
                  
                  Amount
                  
                  
                  AmortizationAmortized
      intangible assetsDeposit
      premium
                  
                  $
                  2,439,919
                  
                  
                  $
                  2,209,315
                  
                  
                  $
                  2,439,919
                  
                  
                  $
                  2,050,390Other
                  
                  
                  200,000
                  
                  
                  
                  193,334
                  
                  
                  
                  200,000
                  
                  
                  
                  173,335Total
                  
                  $
                  2,639,919
                  
                  
                  $
                  2,402,649
                  
                  
                  $
                  2,639,919
                  
                  
                  $
                  2,223,725Unamortized
      intangible assetsGoodwill
      from The Bank ofHeath
      Springs merger
                  
                  $
                  -
                  
                  
                  $
                  n/a
                  
                  
                  $
                  2,727,152
                  
                  
                  $
                  n/a





Amortization
expense is calculated on a straight-line basis over a period of ten years and
was approximately $179,000 and $257,000 in 2009 and 2008,
respectively.  Management expects amortization expense to be
approximately $77,000 in 2010 and $30,000 over the remaining five
years.





The
Company recorded a goodwill impairment charge of $2.7 million in 2009 as a
result of the Company’s annual goodwill impairment test. Goodwill is reviewed
for potential impairment at least annually at the reporting unit level. The
Company performs its impairment testing in the second quarter of each year and
more frequently if circumstances exist that indicate a probable reduction in the
fair value below carrying value. An impairment loss is recorded to the extent
that the carrying amount of goodwill exceeds its implied fair value. In
performing the first step (“Step 1”) of the goodwill impairment testing and
measurement process to identify possible impairment, the estimated fair value of
the reporting unit (determined to be Company-level) was developed using a market
valuation approach that utilizes the current stock price as the primary
indicator of fair market value.





The
results of this Step 1 process indicated that the estimated fair value for the
reporting unit was less than book value, thus requiring the Company to perform
the second step (“Step 2”) of the goodwill impairment test. Based on the Step 2
analysis, it was determined that there was no implied fair value of goodwill as
of December 31, 2009, which resulted in the goodwill impairment charge of $2.7
million. The primary factor in the determination of goodwill impairment in 2009
was the Company’s relatively low stock price and resulting market valuation. The
Company’s stock price has been trading below its book value and tangible book
value throughout 2009.





24










Notes
to Consolidated Financial Statements


For
the years ended December 31, 2009 and 2008





Note
10.  Deposits





Time
deposits in denominations of $100,000 or more were $176.8 million and $155.6
million at December 31, 2009 and 2008, respectively. Interest expense on such
deposits aggregated approximately $4.2 million and $7.0 million in 2009 and
2008, respectively. Time deposits in denominations of $100,000 or more, maturing
subsequent to December 31, 2009 are as follows (amounts in
thousands):





Large
Time Deposit Maturities, (thousands)





2010
                
                $
                146,1682011
                
                
                28,9942012
                
                
                1,1642013
                
                
                1062014
                
                
                353Total
      time deposits of $100,000 or more
                
                $
                176,785





Note
11.  Borrowed Funds





Other
short-term borrowings





Securities
sold under agreements to repurchase and federal funds purchased generally mature
within one day to 12 months from the transaction date. Also included in other
short-term borrowings is one variable rate FHLB advance of $2,500,000 at
December 31, 2009.  There was one variable rate FHLB advance of
$6,000,000 at December 31, 2008.  Also included in other
short-term borrowings was a $1,000,000 line of credit at a 5.00% lending rate
that will mature on July 1, 2010.





The
Company’s loan agreement, for the $1,000,000 line of credit debt obligation
noted above, includes financial covenants requiring the Bank to maintain a
minimum weighted average return on assets of greater than 0.50% on an annualized
basis, maintain total equity capital of $43,499,000 at all times and the
percentage of non-performing loans to gross loans shall not exceed
4.00%.  The Company did not meet these covenants in 2009 and has not
obtained a waiver through December 31, 2009.  As such, the debt
obligation has been classified in other short-term borrowings due to the
covenant violations.





Additional
information is summarized below:





2009
                
                
                2008Outstanding
      balance at December 31
                
                $
                3,500,000
                
                
                $
                7,000,000Year-end
      weighted average rate
                
                
                5.61
                %
                
                
                1.10
                %Daily
      average outstanding during the period
                
                $
                5,945,833
                
                
                $
                13,828,540Average
      rate for the year
                
                
                3.36
                %
                
                
                3.62
                %Maximum
      outstanding at any month-end during the period
                
                $
                9,500,000
                
                
                $
                32,015,000





Securities
sold under agreements to repurchase





Securities
sold under agreements to repurchase (“repos”) consist of overnight and term
agreements. Additional information is summarized below:





25




Notes
to Consolidated Financial Statements
 For
the years ended December 31, 2009 and 2008


Note
11.  Borrowed Funds, continued





Securities
sold under agreements to repurchase, continued


2009
                
                
                2008Outstanding
      balance at December 31
                
                $
                20,615,000
                
                
                $
                23,380,000Year-end
      weighted average rate
                
                
                3.00
                %
                
                
                3.63
                %Daily
      average outstanding during the period
                
                $
                22,933,882
                
                
                $
                27,232,822Average
      rate for the year
                
                
                3.25
                %
                
                
                3.86
                %Maximum
      outstanding at any month-end during the period
                
                $
                23,563,000
                
                
                $
                28,095,000





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.





Overnight
securities sold under agreements to repurchase are collateralized financing
transactions and are primarily executed with local Bank customers. Overnight
repos totaled $3.6 million and $3.8 million at December 31, 2009 and 2008,
respectively.





Our term
repos totaled $17.0 million at December 31, 2009 and $20.0 million at
December 31, 2008 and include embedded derivatives. These structured repos
consist of $10.0 million with an interest rate of 3.30% that matures on
November 21, 2018 and can be called at the counter party’s option quarterly
beginning on November 21, 2009 and can be called at the counterparty’s or
the Bank’s option annually beginning on November 21, 2012, $3.5 million with an
interest rate of 3.92% that matures on December 19, 2017 that can be called
at the counterparty’s option on December 19, 2010, and $3.5 million with an
interest rate of 3.82% that matures on December 19, 2017.





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 $5,000,000, which can be canceled at any time.  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. The Federal Home Loan Bank of Atlanta has the ability to
cancel this line at any time. At December 31, 2009 and December 31, 2008 there
were no amounts outstanding under these credit facilities.





Long-term
debt





At
December 31, 2009 and 2008, $40,000,000 and $42,500,000, respectively were
outstanding under Federal Home Loan Bank advances. Approximately $20,000,000 in
1-4 family residential loans, $22,000,000 in commercial real estate loans
$10,000,000 in home equity line of credit loans were pledged as collateral for
the FHLB advances at December 31, 2009. Also included in long-term debt is
$3,000,000 of subordinated notes bearing interest at 3-month LIBOR plus 350
basis points that will mature on July 1, 2015.





Maturity Date
                  
                  Advance
                  
                  Rate07/01/15
                  
                  $
                  3,000,000
                  
                  90
      Day LIBOR + 3.50%09/02/11
                  
                  
                  5,000,000
                  
                  Fixed
      at 3.76%07/17/12
                  
                  
                  9,000,000
                  
                  Fixed
      at 4.48%09/04/12
                  
                  
                  6,000,000
                  
                  Fixed
      at 4.00%09/03/13
                  
                  
                  6,000,000
                  
                  Fixed
      at 4.15%12/02/13
                  
                  
                  5,000,000
                  
                  Fixed
      at 4.39%09/29/15
                  
                  
                  4,000,000
                  
                  Fixed
      at 4.06%04/22/19
                  
                  
                  5,000,000
                  
                  Fixed
      at 4.75%$
                  43,000,000




26





Notes
to Consolidated Financial Statements


For
the years ended December 31, 2009 and 2008




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





The
Company has issued $12.4 million of Junior Subordinated debentures to
unconsolidated subsidiary trusts, Waccamaw Statutory Trust I and Waccamaw
Statutory Trust II, to fully and unconditionally guarantee the preferred
securities issued by the Trusts. These long term obligations, which currently
qualify as Tier 1 capital for the Company, constitute a full and unconditional
guarantee by the Company of the Trusts’ obligations under the Capital Trust
Securities. In accordance with generally accepted accounting principles, the
trusts are not consolidated in the Company’s financial statements.





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.





Waccamaw
Statutory Trust II, a statutory business trust (the Trust), was created by the
Company on July 18, 2008, at which time the Trust issued $4,000,000 in aggregate
liquidation amount of preferred capital trust securities which mature October 1,
2038.  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 July 18,
2013.  The principal assets of the Trust are $4.1 million of the
Company’s junior subordinated debentures which mature on October 1, 2038, and
bear interest at a floating rate indexed to the 3-month LIBOR, and which are
callable by the Company after July 18, 2013.  All $124 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 1 capital for
regulatory capital adequacy purposes to the extent that they do not exceed 33.3%
of the Company’s total Tier 1 capital excluding these
securities.  Amounts in excess of this ratio will not be considered
Tier 1 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. On
December 17, 2009 the Company began to defer interest payments on the junior
subordinated debentures issued to Waccamaw Statutory Trust I.  The
Company has also elected to defer payments on the junior subordinated debentures
issued to Waccamaw Statutory Trust II. In the absence of an additional funding
source, the ability of the Company to service these obligations is dependent of
the ability of the Bank to pay dividends to the holding company. Currently, the
Bank does not have the ability to pay dividends.





Note
13.  Fair Value of Financial Instruments





GAAP
provides a framework for measuring and disclosing fair value which requires
disclosures about the fair value of assets and liabilities recognized in the
balance sheet, whether the measurements are made on a recurring basis (for
example, available for sale investment securities) or on a nonrecurring basis
(for example, impaired loans).





Fair
value is defined as the exchange price that would  be received for an
asset or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date.  GAAP also establishes a
fair value hierarchy, which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair
value.




27


Notes
to Consolidated Financial Statements
 For
the years ended December 31, 2009 and 2008


Note
13.  Fair Value of Financial Instruments, continued




The Company utilizes fair
value measurements to record fair value adjustments to certain assets and to
determine fair value disclosures.  Securities available for sale are
recorded at fair value on a recurring basis.  Additionally, from time to
time, the Company may be required to record at fair value other assets on a
nonrecurring basis, such as loans held for sale, loans held for investment and
certain other assets.  These nonrecurring fair value adjustments
typically involve application of lower of cost or market accounting or
write-downs of individual assets.





Fair
Vale Hierarchy





The
Company groups assets and liabilities at fair value in three levels, based on
the markets in which the assets and liabilities are traded and the reliability
of the assumptions used to determine the fair value. These levels
are:





Level
      1 –
            Valuation
      is based upon quoted prices for identical instruments traded in active
      markets.





Level
      2 –
            Valuation
      is based upon quoted prices for similar instruments in active markets,
      quoted prices for identical or similar instruments in markets that are not
      active, and model-based valuation techniques for which all significant
      assumptions are observable in the
market.





Level
      3 –
            Valuation
      is generated from model-based techniques that use at least one significant
      assumption not observable in the market. These unobservable assumptions
      reflect estimates of assumptions that market participants would use in
      pricing the asset or liability. Valuation techniques include the use of
      option pricing models, discounted cash flow models and similar
      techniques.





The
following is a description of valuation methodologies used for assets and
liabilities recorded at fair value.





Investment Securities
Available-for-Sale





Investment
securities available-for-sale are recorded at fair value on a recurring basis.
Fair value measurement is based upon quoted prices, if available. If quoted
prices are not available, fair values are measured using independent pricing
models or other model-based valuation techniques such as present value of future
cash flows, adjusted for the security’s credit rating, prepayment assumptions
and other factors such as credit loss assumptions. Level 1 securities include
those traded on an active exchange, such as the New York Stock Exchange,
Treasury securities that are traded by dealers or brokers in active
over-the-counter markets and money market funds. Level 2 securities include
mortgage-backed securities issued by government sponsored entities, municipal
bonds and corporate debt securities. Securities classified as Level 3 include
asset-backed securities in less liquid markets.





Loans





The
Company does not record loans at fair value on a recurring basis. However, from
time to time, a loan is considered impaired and an allowance for loan losses is
established. Loans for which it is probable that payment of interest and
principal will not be made in accordance with the contractual terms of the loan
agreement are considered


impaired.
Once a loan is identified as individually impaired, management measures
impairment. The fair value of impaired loans is estimated using one of several
methods, including collateral value, market value of similar debt, enterprise
value, liquidation value, and discounted cash flows. Those impaired loans not
requiring an allowance represent loans for which the fair value of the expected
repayments or collateral exceed the recorded investments in such loans. As of
December 31, 2009, the Bank identified $41.6 million in impaired
loans.  Of these impaired loans, there were no loans identified to
have impairment.  The determination of impairment was based on the
fair market value of collateral for each loan. In situations where management
discounts appraised values in determining fair value of appraisals, these levels
will be considered to be a Level 3 input.





Foreclosed
Assets





Foreclosed
assets are adjusted to fair value upon transfer of the loans to other real
estate owned.  Real estate acquired in settlement of loans is recorded
initially at estimated fair value of the property less estimated selling costs
at the date of foreclosure.  The initial recorded value may be
subsequently reduced by additional allowances, whichare
charges to earnings if the estimated fair value of the property less estimated
selling costs declines below the initial recorded value.  Fair value
is based upon independent market prices, appraised values of the collateral or
management’s estimation of the value of the collateral.  When the fair
value of the collateral is based on an observable market price or a current
appraised value, the Company recorded the foreclosed asset as
nonrecurring


28


Notes
to Consolidated Financial Statements
 For
the years ended December 31, 2009 and 2008


Note
13.  Fair Value of Financial Instruments, continued





Level
2.  When an appraised value is not available or management determines
the fair value of the collateral is further impaired below the appraised value
and there is no observable market price, the Company records the foreclosed
asset as nonrecurring Level 3.





Assets
and Liabilities Recorded as Fair Value on a Recurring Basis





The
tables below present the recorded amount of assets and liabilities measured at
fair value on a recurring basis (in thousands).





December 31, 2009
                
                Total
                
                
                Level 1
                
                
                Level 2
                
                
                Level 3Investment
      securities available for sale
                
                $
                87,769
                
                
                $
                3,890
                
                
                $
                81,009
                
                
                $
                2,870Total
      assets at fair value
                
                $
                87,769
                
                
                $
                3,890
                
                
                $
                81,009
                
                
                $
                2,870December 31, 2008Investment
      securities available for sale
                
                $
                87,403
                
                
                $
                -
                
                
                $
                83,464
                
                
                $
                3,939Total
      assets at fair value
                
                $
                87,403
                
                
                $
                -
                
                
                $
                83,464
                
                
                $
                3,939





There
were no liabilities measured at fair value on a recurring basis at December 31,
2009 and 2008.





The
following table presents additional information about financial assets and
liabilities measured at fair value at December 31, 2009 and 2008, on a recurring
basis and for which Level 3 inputs are utilized to determine fair
value:





Availablefor
      SaleSecurities(In
      thousands)Balance,
      January 1, 2008
                  
                  $
                  -Total
      gains or losses (realized/unrealized)Included
      in earnings (or changes in net assets)
                  
                  
                  -Included
      in other comprehensive income
                  
                  
                  -Purchases,
      issuances, and settlements
                  
                  
                  -Transfers
      in and/or out of Level 3
                  
                  
                  3,939Balance,
      December 31, 2008
                  
                  
                  3,939Total
      gains or losses (realized/unrealized)Included
      in earnings (or changes in net assets)
                  
                  
                  -Included
      in other comprehensive income
                  
                  
                  (1,069
                  )Purchases,
      issuances, and settlements
                  
                  
                  -Transfers
      in and/or out of Level 3
                  
                  
                  -Balance,
      December 31, 2009
                  
                  $
                  2,870





Assets
and Liabilities Recorded as Fair Value on a Nonrecurring Basis





The
Company may be required from time to time, to measure certain assets at fair
value on a nonrecurring basis in accordance with U. S generally accepted
accounting principles. These include assets that are measured at the lower of
cost or market that were recognized at fair value below cost at the end of the
period. Assets measured at fair value on a nonrecurring basis are included in
the tables below (in thousands).




29


Notes
to Consolidated Financial Statements
 For
the years ended December 31, 2009 and 2008


Note
13.  Fair Value of Financial Instruments, continued





Assets
and Liabilities Recorded as Fair Value on a Nonrecurring Basis





December 31, 2009
                
                Total
                
                
                Level 1
                
                
                Level 2
                
                
                Level 3Impaired
      loans
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -Foreclosed
      assets
                
                
                4,994
                
                
                
                -
                
                
                
                -
                
                
                
                4,994Total
      assets at fair value
                
                $
                4,994
                
                
                $
                -
                
                
                $
                -
                
                
                $
                4,994December 31, 2008Impaired
      loans
                
                $
                19,258
                
                
                $
                -
                
                
                $
                -
                
                
                $
                19,258Total
      assets at fair value
                
                $
                19,258
                
                
                $
                -
                
                
                $
                -
                
                
                $
                19,258





There
were no liabilities measured at fair value on a nonrecurring basis at December
31, 2009 and 2008.





Generally
accepted accounting principles requires disclosure of fair value information
about financial instruments, whether or not recognized in the Statement of
Condition, for which it is practicable to estimate that value. 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 instrument. The use of different
market assumptions and/or estimation methodologies may have a material effect on
the estimated fair value amounts. Also, the fair value estimates presented
herein are based on pertinent information available to management as of
December 31, 2009 and 2008. Such amounts have not been comprehensively
revalued for purposes of these financial statements since those dates, and,
therefore, current estimates of fair value may differ significantly from the
amounts presented herein.





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





CASH, DUE FROM BANKS AND FEDERAL
FUNDS SOLD — For those short-term instruments, the carrying amount
is a reasonable estimate of fair value.





SECURITIES AVAILABLE FOR
SALE — Fair values for securities available for sale are primarily
based on quoted market prices. If a quoted market price is not available, fair
value is estimated using market prices for similar securities.





RESTRICTED EQUITY SECURITIES — The carrying values of restricted equity securities approximate
fair values.





LOANS — For equity lines
and other loans with short-term or variable rate characteristics, the carrying
value reduced by an estimate for credit losses inherent in the portfolio is a
reasonable estimate of fair value. The fair value of all other loans is
estimated by discounting their future cash flows using interest rates currently
being offered for loans with similar terms, reduced by an estimate of credit
losses inherent in the portfolio. The discount rates used are commensurate with
the interest rate and prepayment risks involved for the various types of
loans.




DEPOSITS — The fair
value disclosed for demand deposits (i.e., interest- and non-interest-bearing
demand, savings and money market savings) is equal to the amounts payable on
demand at the reporting date (i.e., their carrying amounts). Fair values for
certificates of deposit are estimated using a discounted cash flow calculation
that applies interest rates currently being offered on certificates of deposit
to a schedule of aggregated monthly maturities.




30





Notes
to Consolidated Financial Statements


For
the years ended December 31, 2009 and 2008




Note
13.  Fair Value of Financial Instruments, continued





SHORT-TERM BORROWINGS —
For these short-term liabilities, the carrying amount is a reasonable estimate
of fair value.





FHLB ADVANCES AND LONG-TERM
DEBT — The fair value of the Company’s fixed rate borrowings are
estimated using discounted cash flows, based on the Company’s current
incremental borrowing rates for similar types of borrowing arrangements. The
carrying amount of the Company’s variable rate borrowings approximates their
fair values.





COMMITMENTS TO EXTEND CREDIT AND
STANDBY LETTERS OF CREDIT — The value of these unrecognized
financial instruments is estimated based on the fee income associated with the
commitments which, in the absence of credit exposure, is considered to
approximate their settlement value. As no significant credit exposure exists,
and because such fee income is not material to the Company’s financial
statements at December 31, 2009 and 2008, the fair value of these
commitments is not presented.





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





December 31, 2009
                
                
                December 31, 2008Carrying
                
                
                Fair
                
                
                Carrying
                
                
                FairAmount
                
                
                Value
                
                
                Amount
                
                
                ValueFinancial
      AssetsCash
      and due from banks
                
                $
                13,973
                
                
                $
                13,973
                
                
                $
                8,948
                
                
                $
                8,948Interest-bearing
      deposits with banks
                
                
                7,695
                
                
                
                7,695
                
                
                
                2,685
                
                
                
                2,685Federal
      funds sold
                
                
                21,315
                
                
                
                21,315
                
                
                
                4,281
                
                
                
                4,281Investment
      securities
                
                
                87,769
                
                
                
                87,769
                
                
                
                87,403
                
                
                
                87,403Restricted
      equity securities
                
                
                4,041
                
                
                
                4,041
                
                
                
                4,132
                
                
                
                4,132Loans,
      net of allowance for loan losses
                
                
                340,021
                
                
                
                333,368
                
                
                
                378,883
                
                
                
                381,398Financial
      LiabilitiesDeposits
                
                
                433,538
                
                
                
                431,370
                
                
                
                418,580
                
                
                
                418,815Securities
      sold under agreements to repurchase and federal funds
      purchased
                
                
                20,615
                
                
                
                20,615
                
                
                
                23,830
                
                
                
                23,830Other
      short-term borrowings
                
                
                3,500
                
                
                
                3,484
                
                
                
                10,000
                
                
                
                10,000Long-term
      debt
                
                
                43,000
                
                
                
                41,450
                
                
                
                42,500
                
                
                
                40,375Junior
      subordinated debentures
                
                
                12,372
                
                
                
                8,234
                
                
                
                12,372
                
                
                
                12,000





Note
14.  Loss per Share





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





2009
                  
                  
                  2008Net
      loss
                  
                  $
                  (14,205,532
                  )
                  
                  $
                  (2,043,030
                  )Weighted
      average common shares outstanding
                  
                  
                  5,534,458
                  
                  
                  
                  5,490,982Effect
      of dilutive securities, options
                  
                  
                  -
                  
                  
                  
                  -Effect
      of dilutive securities, preferred stock
                  
                  
                  -
                  
                  
                  
                  -Weighted
      average common shares outstanding, diluted
                  
                  
                  5,534,458
                  
                  
                  
                  5,490,982Basic
      loss per share
                  
                  $
                  (2.57
                  )
                  
                  $
                  (.37
                  )Diluted
      loss per share
                  
                  $
                  (2.57
                  )
                  
                  $
                  (.37
                  )




31


Notes
to Consolidated Financial Statements
 For
the years ended December 31, 2009 and 2008


Note
14.  Loss per Share, continued





At
December 31, 2009, 296,899 warrants were outstanding with a $21.82 per share
exercise price.  These warrants could be used to purchase one share of
the Company’s common stock at any time until September 30, 2009. On
September 25, 2009, an amendment to the warrant agreement extended the
exercise period of the warrants until September 30, 2014. All other
provisions of the warrant agreement are unchanged and remain in full force and
effect. At December 31, 2009, 550 shares of the Company’s Series A convertible
preferred stock were outstanding. The convertible preferred stock can be
converted to one share of the Company’s common stock at an exercise price of
$16.48. Exercise of these warrants, the Company’s convertible preferred stock
and 315,000 options are not assumed in computing 2009 diluted earnings per share
due to the net loss of for the year ended December 31, 2009. The Company’s
Series A convertible preferred stock and shares associated with stock-based
compensation have been excluded from the computation of dilutive EPS as the
result would be anti-dilutive.





Note
15.    Employment Agreements





The
Company has entered into employment agreements with certain key officers to
ensure a stable and competent management base.  In the event of a
change in control of the Company, as defined in the agreements, the acquirer
will be bound to the terms of the agreements.





Note
16.    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 contributed up
to 3% of an employee’s compensation who have completed at least twelve months of
service which vests over a five-year period. However, this contribution was
eliminated in February, 2009.  The Bank’s aggregate contribution was
$21,000 and $110,000 for the years ended December 31, 2009 and 2008,
respectively.





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 balance sheets of $18,576,015 and $17,834,763 at December 31, 2009
and 2008, respectively. Income earned on these policies is reflected as a
separate line item in the Consolidated Statements of Operations. The Company
recorded expenses of $241,004 and a liability of $483,448 related to these
benefits in 2009 and expenses of $240,675 and a liability of $242,444 in
2008.





Stock
Option Plans





The
Company’s Board of Directors has adopted the Waccamaw Bankshares, Inc. 2008
Omnibus Stock Ownership and Long-Term Incentive Plan.  In
accordance with the Company’s plan, the Company may grant Incentive Stock
Options, Non-Qualified Stock Options, Restricted Stock, Stock Appreciation
Rights and/or Units and up to 705,973 shares of common stock may be issued
(adjusted for stock dividends).  Options granted under the plan expire
no more than 10 years from date of grant. Option exercise price under the plan
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 the plan, vesting is
determined by the specific option agreements.  It is the Company’s
policy to issue newshares to satisfy option exercises. Both the 1998 Incentive Stock Option
Plan (Incentive Plan) and the 1998 Nonstatutory Stock Option
Plan (Nonstatutory Plan) expired in 2008; as the options not granted
under these plans were terminated and the remaining options under these plans
have a maximum term of ten years from the original grant date.




32


Notes
to Consolidated Financial Statements
 For
the years ended December 31, 2009 and 2008


Note
16.    Benefit Plans, continued





Stock
Option Plans, continued





As
described in Note 1, 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
$122,000 and $127,000 for the years ended December 31, 2009 and 2008,
respectively.





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:





2009
                  
                  
                  2008Weighted
      average fair value of options granted during the year
                  
                  $
                  3.07
                  
                  
                  $
                  3.93Assumptions:Average
      risk free interest rate
                  
                  
                  2.18
                  %
                  
                  
                  3.80
                  %Average
      expected volatility
                  
                  
                  75.80
                  %
                  
                  
                  40.02
                  %Expected
      dividend rate
                  
                  
                  -
                  %
                  
                  
                  -
                  %Expected
      life in years
                  
                  
                  10
                  
                  
                  
                  10





There was
no cash received from option exercises under the plans for the year ended
December 31, 2009 and $165,774 for the year ended December 31,
2008.  There was no total intrinsic value of options exercised during
year ended December 31, 2009 and the intrinsic value of options exercised in
2008 was $449,900.





After the
approval of the Omnibus Plan, no further options have been or will be issued
under the Previous Plans. The term of the Omnibus Plan is indefinite, except
that no incentive stock option award can be granted after the tenth anniversary
of the plan. The Omnibus Plan provides that shares of common stock may be
granted to certain key employees and outside directors through non-qualified
stock options, incentive stock options, stock available for rights, restricted
stock, performance awards or any other award made under the terms of the plan.
The Board of Directors determines the exercise price and all other terms of all
grants.





Activity
under the Omnibus Plan during the years ended December 31, 2009 and 2008 is
summarized below:





2008
      Omnibus Stock Ownershipand Long Term Incentive
PlanAvailablefor Grant
                  
                  
                  GrantedBalance
      December 31, 2007
                  
                  
                  -
                  
                  
                  
                  -Authorization
      of options to purchase shares of Company stock under Omnibus
      Plan
                  
                  
                  705,973
                  
                  
                  
                  -Forfeited
                  
                  
                  -
                  
                  
                  
                  -Granted
                  
                  
                  (26,500
                  )
                  
                  
                  26,500Exercised
                  
                  
                  -
                  
                  
                  
                  -Balance
      December 31, 2008
                  
                  
                  679,473
                  
                  
                  
                  26,500Forfeited
                  
                  
                  5,500
                  
                  
                  
                  (5,500
                  )Granted
                  
                  
                  (4,000
                  )
                  
                  
                  4,000Exercised
                  
                  
                  -
                  
                  
                  
                  -Balance
      December 31, 2009
                  
                  
                  680,973
                  
                  
                  
                  25,000




33




Notes
to Consolidated Financial Statements
 For
the years ended December 31, 2009 and 2008


Note
16.    Benefit Plans, continued





Stock
Option Plans, continued





A summary
of option activity under the plans as of and changes during the year ended
December 31, 2009 is presented below:




Weighted
                  
                  
                  AverageAverage
                  
                  
                  Remaining
                  
                  
                  AggregateOptions
                  
                  
                  Exercise
                  
                  
                  Contractual
                  
                  
                  IntrinsicOutstanding
                  
                  
                  Price
                  
                  
                  Term
                  
                  
                  ValueOutstanding
      at December 31, 2008
                  
                  
                  329,489
                  
                  
                  $
                  14.64Granted
                  
                  
                  4,000
                  
                  
                  
                  4.64Forfeited
                  
                  
                  (19,200
                  )
                  
                  
                  11.80Exercised
                  
                  
                  -
                  
                  
                  
                  -Expired
                  
                  
                  -
                  
                  
                  
                  -Outstanding
      at December 31, 2009
                  
                  
                  314,289
                  
                  
                  $
                  14.69
                  
                  
                  5.8
      years
                  
                  
                  $
                  -Exercisable
      at December 31, 2009
                  
                  
                  270,085
                  
                  
                  $
                  15.39
                  
                  
                  5.4
      years
                  
                  
                  $
                  -





The total
fair value of options that were contractually vested during 2009 and 2008 was
$103,973 and $97,147, respectively.





As of
December 31, 2009 the Company had unamortized compensation expense related to
unvested stock options of $199,768 which is expected to be amortized over 5
years.  Total unrecognized
compensation cost related to outstanding non-vested stock options will be
recognized over the following periods:





2010
                  
                  $
                  81,0912011
                  
                  
                  63,2372012
                  
                  
                  42,0632013
                  
                  
                  12,8612014
                  
                  
                  516Total
                  
                  $
                  199,768


Note
17.  Income Taxes





Current
and Deferred Income Tax Components





The
components of income tax expense are as follows:





2009
                
                
                2008Current
                
                $
                (5,031,090
                )
                
                $
                53,872Deferred
                
                
                1,403,202
                
                
                
                (1,881,102
                )Income
      tax benefit
                
                $
                (3,627,888
                )
                
                $
                (1,827,230
                )





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




34


Notes
to Consolidated Financial Statements
 For
the years ended December 31, 2009 and 2008


Note
17.  Income Taxes, continued





Current
and Deferred Income Tax Components, continued





2009
                
                
                2008Tax
      at statutory federal rate
                
                $
                (6,063,363
                )
                
                $
                (1,315,888
                )Tax
      exempt interest
                
                
                (203,357
                )
                
                
                (213,861
                )Tax
      exempt income from bank owned life insurance
                
                
                (252,026
                )
                
                
                (186,304
                )State
      income tax, net of federal benefit
                
                
                (812,134
                )
                
                
                (184,509
                )Valuation
      allowance
                
                
                3,652,441
                
                
                
                -Other
                
                
                50,551
                
                
                
                73,332Income
      tax benefit
                
                $
                (3,627,888
                )
                
                $
                (1,827,230
                )





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:





2009
                
                
                2008Deferred
      tax assetsAllowance
      for loan losses
                
                $
                3,746,495
                
                
                $
                2,625,492OTTI
      on investments
                
                
                -
                
                
                
                1,290,965Employment
      benefit liability
                
                
                186,388
                
                
                
                93,472Deposit
      premium amortization
                
                
                329,615
                
                
                
                326,737Deferred
      loan fees
                
                
                113,299
                
                
                
                148,482Tax
      amortization of goodwill
                
                
                770,772
                
                
                
                -Allowance
      for other real estate owned
                
                
                269,511
                
                
                
                -Net
      operating loss carryover
                
                
                763,958
                
                
                
                -Alternative
      minimum tax credit carryover
                
                
                550,852
                
                
                
                -Other
                
                
                -
                
                
                
                848Unrealized
      loss on securities available for sale
                
                
                1,666,503
                
                
                
                3,152,622Total
      gross deferred tax assets
                
                
                8,397,393
                
                
                
                7,638,618Less:
      Valuation allowance
                
                
                (3,652,441
                )
                
                
                -Total
      deferred tax assets, net of valuation allowance
                
                
                4,744,952
                
                
                
                7,638,618Deferred
      tax liabilitiesDepreciation
                
                
                (559,849
                )
                
                
                (559,247
                )Accretion
      of bond discount
                
                
                (80,586
                )
                
                
                (85,533
                )Deferred
      tax liabilities
                
                
                (640,435
                )
                
                
                (644,780
                )Net
      deferred tax asset
                
                $
                4,104,517
                
                
                $
                6,993,838





At
December 31, 2009, the Company had a net deferred tax asset before any valuation
allowance of $7,756,958, consisting of items noted in the table above. The
Company does maintain a valuation allowance as $3,652,441 has been established
against the above benefits.  Based on historical and budgeted earnings
and tax planning strategies, management has determined the amount of deferred
tax asset it is more likely than not that will be utilized over the next year.
Due to uncertainty related to long-term projections, any remaining deferred tax
asset is off-set with a valuation allowance.





The
Company had analyzed the tax positions taken or expected to be taken in and its
tax returns and concluded it has no liability related to uncertain tax
positions. The Company’s federal and state income tax returns are open and
subject to examination from the 2006 tax return year and forward.




35


Notes
to Consolidated Financial Statements
 For
the years ended December 31, 2009 and 2008


Note
18.  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:





2009
                
                
                2008Commitments
      to extend credit
                
                $
                41,072,000
                
                
                $
                41,067,000Stand-by
      letters of credit
                
                
                796,000
                
                
                
                3,194,000$
                41,868,000
                
                
                $
                44,261,000





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





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





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.




36


Notes
to Consolidated Financial Statements
 For
the years ended December 31, 2009 and 2008


Note
19.  Regulatory Restrictions





Written
Agreement





We expect
to enter into a written agreement with the Federal Reserve in the near future,
but do not know the exact contents of the written agreement at this time. This
is a type of formal supervisory agreement with our primary federal banking
regulator. The written agreement could, among other things, inhibit our ability
to grow and pay dividends. In addition, we expect that this written agreement
will require us to implement plans to improve our risk management and compliance
systems, oversight functions, operating and financial management and capital
plans. While subject to the written agreement, we expect our management and
board of directors will be required to focus considerable time and attention on
taking corrective actions to comply with its terms. We may also be required to
hire third-party consultants and advisers to assist us in complying with the
written agreement. This could increase our non-interest expense and reduce our
earnings. If we do not comply with the written agreement, we could be subject to
the assessment of civil money penalties, further regulatory sanctions, or other
regulatory enforcement actions.





Dividends





The
Company’s dividend payments will be made from dividends received from the
Bank.  The Bank, as a North Carolina banking corporation, may pay
dividends only out of undivided profits (retained earnings) as determined
pursuant to North Carolina General Statutes Section 53-87. As of December 31,
2009, there are no retained earnings from which to pay dividends. Regulatory
authorities may also 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 1 capital to risk-weighted assets, and of Tier 1
capital to average assets, as all those terms are defined in the
regulations.  Management believes, as of December 31, 2009 and 2008,
that the Company and the Bank met all capital adequacy requirements to which
they are subject.





As of
December 31, 2009 and 2008, 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
1 risk-based, and Tier 1leverage 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).




37


Notes
to Consolidated Financial Statements
 For
the years ended December 31, 2009 and 2008


Note
19.  Regulatory Restrictions, continued





Capital
Requirements, continued





MinimumTo
      Be WellMinimum
                
                
                Capitalized
      UnderCapital
                
                
                Prompt
      CorrectiveActual
                
                
                Required
                
                
                Action ProvisionsAmount
                
                
                Ratio
                
                
                Amount
                
                
                Ratio
                
                
                Amount
                
                
                RatioDecember
      31, 2009Total
      capital to risk-weighted assetsConsolidated
                
                $
                35,848
                
                
                
                8.95
                %
                
                $
                32,029
                
                
                
                8.00
                %
                
                $
                n/a
                
                
                
                n/aBank
                
                $
                40,401
                
                
                
                10.11
                %
                
                $
                31,972
                
                
                
                8.00
                %
                
                $
                39,965
                
                
                
                10.00
                %Tier
      1 capital to risk-weighted assetsConsolidated
                
                $
                31,742
                
                
                
                7.93
                %
                
                $
                16,014
                
                
                
                4.00
                %
                
                $
                n/a
                
                
                
                n/aBank
                
                $
                32,332
                
                
                
                8.09
                %
                
                $
                15,986
                
                
                
                4.00
                %
                
                $
                23,979
                
                
                
                6.00
                %Tier
      1 capital to average assetsConsolidated
                
                $
                31,742
                
                
                
                5.88
                %
                
                $
                21,596
                
                
                
                4.00
                %
                
                $
                n/a
                
                
                
                n/aBank
                
                $
                32,332
                
                
                
                6.00
                %
                
                $
                21,565
                
                
                
                4.00
                %
                
                $
                26,956
                
                
                
                5.00
                %





MinimumTo
      Be WellMinimum
                
                
                Capitalized
      UnderCapital
                
                
                Prompt
      CorrectiveActual
                
                
                Required
                
                
                Action ProvisionsAmount
                
                
                Ratio
                
                
                Amount
                
                
                Ratio
                
                
                Amount
                
                
                RatioDecember
      31, 2008Total
      capital to risk-weighted assetsConsolidated
                
                $
                52,871
                
                
                
                11.68
                %
                
                $
                36,224
                
                
                
                8.00
                %
                
                $
                n/a
                
                
                
                n/aBank
                
                $
                51,709
                
                
                
                11.44
                %
                
                $
                36,136
                
                
                
                8.00
                %
                
                $
                45,170
                
                
                
                10.00
                %Tier
      1 capital to risk-weighted assetsConsolidated
                
                $
                44,206
                
                
                
                9.76
                %
                
                $
                18,112
                
                
                
                4.00
                %
                
                $
                n/a
                
                
                
                n/aBank
                
                $
                43,044
                
                
                
                9.53
                %
                
                $
                18,068
                
                
                
                4.00
                %
                
                $
                27,102
                
                
                
                6.00
                %Tier
      1 capital to average assetsConsolidated
                
                $
                44,206
                
                
                
                8.00
                %
                
                $
                22,098
                
                
                
                4.00
                %
                
                $
                n/a
                
                
                
                n/aBank
                
                $
                43,044
                
                
                
                7.81
                %
                
                $
                22,049
                
                
                
                4.00
                %
                
                $
                27,561
                
                
                
                5.00
                %




38


Notes
to Consolidated Financial Statements
 For
the years ended December 31, 2009 and 2008


Note
19.  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 $2,100,000 at December 31,
2009.  No 23A transactions existed at December 31, 2009 or
2008.





Note
20.  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:





2009
                
                
                2008Balance,
      beginning
                
                $
                4,682,184
                
                
                $
                2,634,705Change
      in relationships
                
                
                1,099
                
                
                
                -New
      loans and advances
                
                
                923,208
                
                
                
                2,872,453Repayments
                
                
                (1,898,684
                )
                
                
                (824,974
                )Balance,
      ending
                
                $
                3,707,807
                
                
                $
                4,682,184





Note
21.  Parent Company Financial Information





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





Balance
Sheets


December
31, 2009 and 2008





2009
                
                
                2008AssetsCash
      and due from banks
                
                $
                130,175
                
                
                $
                147,430Investment
      in subsidiary bank at equity
                
                
                29,743,740
                
                
                
                40,065,993Other
      assets
                
                
                708,392
                
                
                
                1,101,130Total
      assets
                
                $
                30,582,307
                
                
                $
                41,314,553LiabilitiesShort-term
      debt
                
                $
                1,000,000
                
                
                $
                1,000,000Junior
      Subordinated debt
                
                
                12,372,000
                
                
                
                12,372,000Other
      liabilities
                
                
                55,876
                
                
                
                98,398Total
      liabilities
                
                
                13,427,876
                
                
                
                13,470,398




39


Notes
to Consolidated Financial Statements
 For
the years ended December 31, 2009 and 2008


Note
21.  Parent Company Financial Information, continued





Balance
Sheets (continued)


December
31, 2009 and 2008





2009
                
                
                2008Stockholders'
      equityPreferred
      stock
                
                
                9,064
                
                
                
                464,476Common
      stock
                
                
                25,099,770
                
                
                
                24,591,884Retained
      earnings (deficit)
                
                
                (5,129,490
                )
                
                
                8,907,591Accumulated
      other comprehensive loss
                
                
                (2,824,913
                )
                
                
                (6,119,796
                )Total
      stockholders' equity
                
                
                17,154,431
                
                
                
                27,844,155Total
      liabilities and stockholders' equity
                
                $
                30,582,307
                
                
                $
                41,314,553





Statements
of Operations


Years
ended December 31, 2009 and 2008





2009
                
                
                2008IncomeLoans
      and fees on loans
                
                $
                -
                
                
                $
                7,139Investment
      securities, taxable
                
                
                41,465
                
                
                
                57,442Investment
      securities, non-taxable
                
                
                -
                
                
                
                4,195Net
      realized gains on sale or maturity of investment
securities
                
                
                -
                
                
                
                56,600Total
      income
                
                
                41,465
                
                
                
                125,376ExpensesSalaries
      and employee benefits
                
                
                122,378
                
                
                
                127,409Franchise
      tax
                
                
                17,188
                
                
                
                52,535Interest
      expense
                
                
                580,203
                
                
                
                701,520Other
      expenses
                
                
                810
                
                
                
                1,672Total
      expenses
                
                
                720,579
                
                
                
                883,136Loss
      before tax expense and equity in undistributed income of
      subsidiary
                
                
                (679,114
                )
                
                
                (757,760
                )Federal
      income tax benefit
                
                
                189,290
                
                
                
                215,745State
      income tax expense
                
                
                (25
                )
                
                
                (31,043
                )Total
      income tax benefit
                
                
                189,265
                
                
                
                184,702Loss
      before equity in undistributed income of subsidiary
                
                
                (489,849
                )
                
                
                (573,058
                )Equity
      in undistributed income (loss) of subsidiary
                
                
                (13,715,683
                )
                
                
                (1,469,972
                )Net
      loss
                
                $
                (14,205,532
                )
                
                $
                (2,043,030
                )




40


Notes
to Consolidated Financial Statements
 For
the years ended December 31, 2009 and 2008


Note
21.  Parent Company Financial Information, continued





Statements
of Cash Flows


Years
ended December 31, 2009 and 2008





2009
                
                
                2008Cash
      flows from operating activitiesNet
      loss
                
                $
                (14,205,532
                )
                
                $
                (2,043,030
                )Adjustments:Amortization
                
                
                7,166
                
                
                
                25,583Stock-based
      compensation
                
                
                122,378
                
                
                
                127,409Tax
      benefit of non-qualified stock option exercise
                
                
                -
                
                
                
                184,011Gain
      on sale of investment securities
                
                
                -
                
                
                
                (56,600
                )Decrease
      in equity in undistributed loss of subsidiary
                
                
                13,715,683
                
                
                
                1,469,972(Increase)
      decrease in other assets
                
                
                385,572
                
                
                
                (229,645
                )Increase
      (decrease) in other liabilities
                
                
                (42,522
                )
                
                
                71,442Net
      cash used by operating activities
                
                
                (17,255
                )
                
                
                (450,858
                )Cash
      flows from investing activitiesSales
      of investment securities
                
                
                -
                
                
                
                213,212Investment
      in subsidiary
                
                
                -
                
                
                
                (5,000,000
                )Net
      cash used by investing activities
                
                
                -
                
                
                
                (4,786,788
                )Cash
      flows from financing activitiesProceeds
      of junior subordinated debt
                
                
                -
                
                
                
                4,124,000Proceeds
      of short-term debt
                
                
                -
                
                
                
                1,000,000Issuance
      of stock and redemption of fractional shares
                
                
                -
                
                
                
                165,774Net
      cash provided  by financing activities
                
                
                -
                
                
                
                5,289,774Increase
      (decrease) in cash and due from banks
                
                
                (17,255
                )
                
                
                52,128Cash
      and cash equivalents, beginning
                
                
                147,430
                
                
                
                95,302Cash
      and cash equivalents, ending
                
                $
                130,175
                
                
                $
                147,430




41







Report
of Independent Registered Public Accounting Firm
 
 
 Board of
Directors and Stockholders
 Waccamaw
Bankshares, Inc.
 Whiteville,
North Carolina
 
 
 We have
audited the consolidated balance sheet of Waccamaw Bankshares, Inc. and
subsidiary as of December 31, 2009, and the related consolidated statements of
operations, changes in stockholders’ equity and cash flows for the year then
ended.  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 audit.
 
 We
conducted our audit 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 audit provides a reasonable basis for our opinion.
 
 In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Waccamaw Bankshares, Inc. and
subsidiary at December 31, 2009, and the results of its operations and its cash
flows for the year then ended, in conformity with U.S. generally accepted
accounting principles.
 
 We were
not engaged to examine management’s assertion about the effectiveness of
Waccamaw Bankshares, Inc. and subsidiary’s internal control over financial
reporting as of December 31, 2009 included in the Form 10-K and, accordingly, we
do not express an opinion thereon.
 
 
 
  Galax,
Virginia
 April 15,
2010
 
 42
   
  
 Report
of Independent Registered Public Accounting Firm
 
 
 To the
Board of Directors and Shareholders
 Waccamaw
Bankshares, Inc. and Subsidiary
 Whiteville,
North Carolina
 
 We have
audited the accompanying consolidated balance sheet of Waccamaw Bankshares, Inc.
and Subsidiary (hereinafter referred to as the “Company”) as of December 31,
2008, and the related consolidated statements of operations, changes in
stockholders’ equity and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
 
 We
conducted our audit 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. We were not engaged to perform an
audit of the Company’s internal control over financial reporting.  Our
audit included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting.  Accordingly, we
express no such opinion.  An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.  We believe that our audit provides 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 as of December 31, 2008, and the results of their operations and
their cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of America.
 
 As
discussed in Note 1 to the consolidated financial statements, effective January
1, 2008 the Company adopted Emerging Issues Task Force Issue 06-4, Accounting for Deferred Compensation
and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements.
 
  
 Raleigh,
North Carolina
 March 31,
2009


43





Management’s
Discussion and Analysis







MANAGEMENT’S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATION





The
following presents management’s discussion and analysis of the financial
condition and results of operation of the Company as of December 31, 2009 and
2008 and the years then ended.  This discussion should be read in
conjunction with the Company’s Financial Statements and the Notes
thereto.





We expect
to enter into a written agreement with the Federal Reserve in the near future,
but do not know the exact contents of the written agreement at this time. This
is a type of formal supervisory agreement with our primary federal banking
regulator. The written agreement could, among other things, inhibit our ability
to grow and pay dividends. In addition, we expect that this written agreement
will require us to implement plans to improve our risk management and compliance
systems, oversight functions, operating and financial management and capital
plans. While subject to the written agreement, we expect our management and
board of directors will be required to focus considerable time and attention on
taking corrective actions to comply with its terms. We may also be required to
hire third-party consultants and advisers to assist us in complying with the
written agreement. This could increase our non-interest expense and reduce our
earnings. If we do not comply with the written agreement, we could be subject to
the assessment of civil money penalties, further regulatory sanctions, or other
regulatory enforcement actions.





Overview





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





The
Company’s total assets were $533.2 million at December 31, 2009 as compared to
$537.5 million at December 31, 2008. Total deposits at December 31, 2009
increased 3.6% to $433.5 million.  Total deposits were $418.6 million
at December 31, 2008. The Bank’s net loans decreased to $340.0 million at the
end of 2009, a decrease of $38.9 million over the 2008 amount of $378.9 million.
The $38.9 million decrease in loans was due to weaker than expected loan demand
in some of the market areas covered by Waccamaw Bank.  Investment
securities were $87.8 million and $87.4 million at December 31, 2009 and 2008,
respectively.





The
Bank’s nonperforming loans increased significantly on a consecutive quarter
basis in 2009 through lack of performance and the degradation of the portfolio
has continued into 2010. Unless the economy improves significantly, these asset
quality issues and related costs are likely to continue to depress the Bank’s
operating performance in 2010. Due to the asset quality issues in 2009 and into
2010, this could erode regulatory capital further, although the Bank is “well
capitalized” in 2009.





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, 2009 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,investment impairment
charges, goodwill impairment 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.


44





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.





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 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 recorded a
goodwill impairment charge of $2.7 million in 2009.


45





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 following 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.





Net
Interest Income and Average Balances (thousands)





Periods
      Ended December
      31,2009
                                  
                                  
                                  2008
                                  
                                  
                                  2007Average
                                    Balance<
      ;/f ont>
                                  
                                  Interest
                                    Income/
                                    Expenses
                                  
                                  Yield/
                                    Cost
                                  
                                  
                                  Average
                                    Balance<
      ;/f ont>
                                  
                                  Interest
                                    Income/
                                    Expenses
                                  
                                  Yield/
                                    Cost
                                  
                                  
                                  Average
                                    Balances
                                  
                                  Interest
                                    Income/
                                    Expenses
                                  
                                  Yield/
                                    CostInterest-earning
      assets:Investment
      securities
                                  
                                  $
                                  92,344
                                  
                                  $
                                  4,698
                                  
                                  5.09
                                  %
                                  
                                  $
                                  105,819
                                  
                                  $
                                  6,327
                                  
                                  5.98
                                  %
                                  
                                  $
                                  65,454
                                  
                                  $
                                  3,805
                                  
                                  
                                  5.81
                                  %Federal
      funds sold
                                  
                                  
                                  12,784
                                  
                                  
                                  30
                                  
                                  .24
                                  %
                                  
                                  
                                  6,318
                                  
                                  
                                  70
                                  
                                  1.11
                                  %
                                  
                                  
                                  5,481
                                  
                                  
                                  290
                                  
                                  
                                  5.29
                                  %Deposits
      with banks
                                  
                                  
                                  8,323
                                  
                                  
                                  47
                                  
                                  .57
                                  %
                                  
                                  
                                  1,999
                                  
                                  
                                  32
                                  
                                  1.60
                                  %
                                  
                                  
                                  943
                                  
                                  
                                  49
                                  
                                  
                                  5.19
                                  %Loans, net1,2
                                  
                                  
                                  368,458
                                  
                                  
                                  21,114
                                  
                                  5.73
                                  %
                                  
                                  
                                  376,747
                                  
                                  
                                  24,056
                                  
                                  6.39
                                  %
                                  
                                  
                                  332,451
                                  
                                  
                                  27,493
                                  
                                  
                                  8.27
                                  %Total
      interest-earning assets
                                  
                                  
                                  481,909
                                  
                                  
                                  25,889
                                  
                                  
                                  
                                  
                                  
                                  490,883
                                  
                                  
                                  30,485
                                  
                                  
                                  
                                  
                                  
                                  404,329
                                  
                                  
                                  31,637Yield
      on average interest- earning assets
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  5.37
                                  %
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  6.21
                                  %
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  7.82
                                  %Noninterest-earning
      assets:Cash
                                  
                                  
                                  25,450
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  8,181
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  8,204Premises
      and equipment
                                  
                                  
                                  17,346
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  17,093
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  8,475Interest
      receivable and other
                                  
                                  
                                  33,913
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  23,311
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  17,571Total
      noninterest-earning assets
                                  
                                  
                                  76,709
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  48,585
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  34,250Total
      assets
                                  
                                  $
                                  558,618
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  $
                                  539,468
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  $
                                  438,579Interest-bearing
      liabilities:Demand
      deposits
                                  
                                  $
                                  35,775
                                  
                                  
                                  175
                                  
                                  .49
                                  %
                                  
                                  $
                                  29,399
                                  
                                  
                                  179
                                  
                                  .61
                                  %
                                  
                                  $
                                  26,714
                                  
                                  
                                  167
                                  
                                  
                                  .62
                                  %Savings
      deposits
                                  
                                  
                                  101,623
                                  
                                  
                                  1,361
                                  
                                  1.34
                                  %
                                  
                                  
                                  76,580
                                  
                                  
                                  1,843
                                  
                                  2.41
                                  %
                                  
                                  
                                  72,620
                                  
                                  
                                  2,436
                                  
                                  
                                  3.35
                                  %Time
      deposits
                                  
                                  
                                  270,669
                                  
                                  
                                  7,726
                                  
                                  2.85
                                  %
                                  
                                  
                                  275,956
                                  
                                  
                                  11,481
                                  
                                  4.16
                                  %
                                  
                                  
                                  218,997
                                  
                                  
                                  11,067
                                  
                                  
                                  5.05
                                  %Other
      short-term borrowings
                                  
                                  
                                  8,970
                                  
                                  
                                  208
                                  
                                  2.32
                                  %
                                  
                                  
                                  22,644
                                  
                                  
                                  764
                                  
                                  3.37
                                  %
                                  
                                  
                                  10,513
                                  
                                  
                                  469
                                  
                                  
                                  4.46
                                  %Long-term
      debt
                                  
                                  
                                  75,521
                                  
                                  
                                  3,066
                                  
                                  4.06
                                  %
                                  
                                  
                                  65,250
                                  
                                  
                                  2,667
                                  
                                  4.09
                                  %
                                  
                                  
                                  37,422
                                  
                                  
                                  2,157
                                  
                                  
                                  5.77
                                  %Total
      interest-bearing liabilities
                                  
                                  
                                  492,558
                                  
                                  
                                  12,536
                                  
                                  
                                  
                                  
                                  
                                  469,829
                                  
                                  
                                  16,934
                                  
                                  
                                  
                                  
                                  
                                  366,266
                                  
                                  
                                  16,296Cost
      of average interest- bearing liabilities
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  2.55
                                  %
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  3.60
                                  %
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  4.45
                                  %Noninterest-bearing
      liabilities:Demand
      deposits
                                  
                                  
                                  34,892
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  33,775
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  36,181Interest
      payable and other
                                  
                                  
                                  2,282
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  2,404
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  2,631Total
      noninterest- bearing liabilities
                                  
                                  
                                  37,174
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  36,179
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  38,812Total
      liabilities
                                  
                                  
                                  529,732
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  506,008
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  405,078Stockholders'
      equity
                                  
                                  
                                  28,886
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  33,460
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  33,501Total
      liabilities and stockholders' equity
                                  
                                  $
                                  558,618
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  $
                                  539,468
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  $
                                  438,579Net
      interest income
                                  
                                  
                                  
                                  
                                  $
                                  13,353
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  $
                                  13,551
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  $
                                  15,341Net
      yield on interest-earning assets
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  2.77
                                  %
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  2.76
                                  %
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  3.79
                                  %




1      Average
loan balances include nonaccrual loans.


2      Deferred
loan fees are included in interest income.


46





Management’s
Discussion and Analysis








Interest
income during 2009 was $25.9 million, a decrease of 15.1% from the 2008 total of
$30.5 million.  Interest income for 2007 was $31.6
million.  The decrease in net interest income can primarily be
attributed to the decrease of 450 basis points in the Prime lending rate, as a
result of which the majority of the Company’s loans re-priced immediately, and
the higher relative cost of funding loans, due to the fact that the Company’s
deposits were not able to re-price as quickly as the loans.  Average
earning assets were $481.9 million during 2009, a decrease of 1.8% from
2008.  Average earning assets increased 21.4% to $490.9 million during
2008 over the 2007 balance of $404.3 million.  Yields on
interest-earning assets during 2009, 2008, and 2007 were 5.4%, 6.2%, and 7.8%,
respectively.





Interest
rates charged on loans vary with the degree of risk, maturity and amount of the
loan.  Competitive pressures, money market rates, availability of
funds, and government regulation also influence interest rates.  On
average, loans yielded 5.7%, 6.4% and 8.3% during 2009, 2008, and 2007,
respectively.  Yields on loans decreased in 2009 primarily as a result
of the declining rate environment.





Interest
expense was $12.5 million during 2009, a decrease of 26.0% over
2008.  Interest expense in 2008 was $16.9 million, an increase of 3.9%
over 2007. The decrease in 2009 is a result of our deposits re-pricing in 2009
as average cost of funds decreased approximately 100 basis points from 2008. The
increase in 2008 over 2007 is due to the increase in the level of average
interest bearing liabilities. The average rate paid on interest-bearing
liabilities during 2009, 2008, and 2007 was 2.6%, 3.6%, and 4.5%,
respectively.





Net
interest income was $13.4 million during 2009, a decrease of 1.5% from
2008.  During 2008 net interest income decreased to $13.6
million.  Net interest income was $15.3 million in 2007. The decreases
in net interest income in 2009 and 2008 can primarily be attributed to the
decrease of 450 basis points in the Prime lending rate, as a result of which the
majority of the Company’s loans re-priced immediately, and the higher relative
cost of funding loans, due to the fact that the Company’s deposits were not able
to re-price as quickly as the loans.  Net interest margin during 2009,
2008, and 2007 was 2.8%, 2.8%, and 3.8%, respectively.





The
effects of changes in volumes and rates on net interest income for 2009, 2008
and 2007 are shown in the table below.





Rate/Volume
Variance Analysis (thousands)





2009
      Compared to 2008
                            
                            2008
      Compared to 2007Interest
                            
                            
                            
                            
                            
                            InterestIncome/
                            
                            Variance
                            
                            Income/
                            
                            VarianceExpense
                            
                            Attributable
      to
                            
                            Expense
                            
                            Attributable
      toVariance
                            
                            Rate
                            
                            Volume
                            
                            Variance
                            
                            Rate
                            
                            VolumeInterest-earning
      assets:Loans
                            
                            $
                            (2,942
                            )
                            $
                            (2,424
                            )
                            $
                            (518
                            )
                            $
                            (3,436
                            )
                            $
                            (8,274
                            )
                            $
                            4,838Investment
      securities
                            
                            
                            (1,629
                            )
                            
                            (879
                            )
                            
                            (750
                            )
                            
                            2,522
                            
                            
                            111
                            
                            
                            2,411Deposits
      with banks
                            
                            
                            15
                            
                            
                            (4
                            )
                            
                            19
                            
                            
                            (17
                            )
                            
                            28
                            
                            
                            (45
                            )Federal
      funds sold
                            
                            
                            (40
                            )
                            
                            129
                            
                            
                            (169
                            )
                            
                            (220
                            )
                            
                            (273
                            )
                            
                            53Total
                            
                            
                            (4,596
                            )
                            
                            (3,178
                            )
                            
                            (1,418
                            )
                            
                            (1,151
                            )
                            
                            (8,408
                            )
                            
                            7,257Interest-bearing
      liabilities:Demand
      deposits
                            
                            
                            (4
                            )
                            
                            -
                            
                            
                            (4
                            )
                            
                            12
                            
                            
                            -
                            
                            
                            12Savings
      deposits
                            
                            
                            (482
                            )
                            
                            16
                            
                            
                            (498
                            )
                            
                            (858
                            )
                            
                            (133
                            )
                            
                            (725
                            )Time
      deposits
                            
                            
                            (3,755
                            )
                            
                            (1,521
                            )
                            
                            (2,234
                            )
                            
                            413
                            
                            
                            (19
                            )
                            
                            432Short-term
      borrowings
                            
                            
                            (556
                            )
                            
                            (10
                            )
                            
                            (546
                            )
                            
                            162
                            
                            
                            (5
                            )
                            
                            167Long-term
      debt
                            
                            
                            399
                            
                            
                            (1
                            )
                            
                            400
                            
                            
                            644
                            
                            
                            (24
                            )
                            
                            668Total
                            
                            
                            (4,398
                            )
                            
                            (1,516
                            )
                            
                            (2,882
                            )
                            
                            373
                            
                            
                            (181
                            )
                            
                            554Net
      interest income
                            
                            $
                            (198
                            )
                            $
                            (1,662
                            )
                            $
                            1,464
                            
                            $
                            (1,524
                            )
                            $
                            (8,227
                            )
                            $
                            6,703





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.


47





Management’s Discussion and Analysis










Provision
for Loan Losses





The
provision for loan losses is charged to income in an amount necessary to
maintain an allowance for loan losses at an appropriate level in light of the
risk inherent 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 $16,579,908, $2,990,096, and $385,864 during
2009, 2008, and 2007 respectively. The Bank's allowance for loan losses as a
percentage of gross loans was 2.90%, 1.86% and 1.49% at the end of 2009, 2008,
and 2007, respectively.  Additional information regarding loan loss
provisions is discussed in “Nonperforming and Problem Assets.”





Noninterest
Income





Noninterest
income consists of revenues generated from a variety of financial services and
activities.  The majority of noninterest income is a result of service
charges on deposit accounts including charges for insufficient funds and fees
charged for non-deposit 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 $3.9 million, $966,000, and $3.4 million for the years ended
December 31, 2009, 2008, and 2007, respectively. Noninterest income increased in
2009 primarily due to increases in service charges in deposit accounts of
$908,000, increases of $193,000 in earnings on bank owned life insurance and
increases of $27,000 in mortgage origination income. The Company investment
write-down consisted of a pooled trust preferred security of $418,710. Service
charges on deposit accounts were 69.8% of total noninterest income excluding the
write-downs of investment securities for 2009.  Service charges will
most likely increase as the number of deposit accounts increase. The Bank's fee
structure is reviewed annually to determine if adjustments to fees are
warranted.





The Bank
purchased life insurance for certain number of its key employees in December
2004, March 2007, December 2007, June 2008 and December 2008 providing $741,000,
$548,000 and $390,000 of noninterest income for the years ended December 31,
2009, 2008 and 2007, respectively.


48





Management’s
Discussion and Analysis





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





Sources
of Noninterest Income (thousands)





2009
                
                
                2008
                
                
                2007Service
      charges on deposit accounts
                
                $
                3,023
                
                
                $
                2,115
                
                
                $
                1,325ATM
      and check cashing fees
                
                
                875
                
                
                
                755
                
                
                
                538Gain
      (loss) on sale of investment securities
                
                
                (887
                )
                
                
                98
                
                
                
                246Mortgage
      origination
                
                
                380
                
                
                
                353
                
                
                
                467Insurance
      commission
                
                
                13
                
                
                
                15
                
                
                
                14Income
      from financial services
                
                
                139
                
                
                
                264
                
                
                
                305Earnings
      on bank owned life insurance
                
                
                741
                
                
                
                548
                
                
                
                390Impairment
      of investment securities
                
                
                (419
                )
                
                
                (3,348
                )
                
                
                -Other
                
                
                44
                
                
                
                166
                
                
                
                158Total
      noninterest income
                
                $
                3,909
                
                
                $
                966
                
                
                $
                3,443





Noninterest
Expense





Noninterest
expense for 2009, 2008, and 2007 was $18.5 million, $15.4 million and $12.4
million, respectively.  The majority of the increase in noninterest
expense for 2009 can be attributed primarily to a goodwill impairment charge of
$2.7 million in 2009 with no similar charges in 2008 or 2007.





The
goodwill impairment charge of $2.7 million resulted from the Company’s annual
goodwill impairment test. Goodwill is reviewed for potential impairment at least
annually at the reporting unit level. The Company performs its impairment
testing in the second quarter of each year and more frequently if circumstances
exist that indicate a probable reduction in the fair value below carrying value.
An impairment loss is recorded to the extent that the carrying amount of
goodwill exceeds its implied fair value. In performing the first step (“Step 1”)
of the goodwill impairment testing and measurement process to identify possible
impairment, the estimated fair value of the reporting unit (determined to be
Company-level) was developed using a market valuation approach that utilizes the
current stock price as the primary indicator of fair market value.





The
results of this Step 1 process indicated that the estimated fair value for the
reporting unit was less than book value, thus requiring the Company to perform
the second step (“Step 2”) of the goodwill impairment test. Based on the Step 2
analysis, it was determined that the implied fair value of goodwill was $0 as of
December 31, 2009, which resulted in the goodwill impairment charge. The primary
factor in the determination of goodwill impairment in 2009 was the Company’s
relatively low stock price and resulting market valuation. The Company’s stock
price has been trading below its book value and tangible book value throughout
2009. Management attributes its relatively low stock price to both financial
services industry-wide and Company-specific factors. The goodwill impairment
charge is non-cash expense, and since goodwill is a noninterest earning asset,
this charge will not impact the Company’s future operating
performance.





Fair
value as a percentage of carrying value was approximately 84%. The methods used
for selecting the final value for the Company was weighted equally between the
comparable transactions approach and the discounted cash flow approach. The
comparable transactions approach used transaction announced since October 1,
2008 and where the seller assets were less than $20 billion and non performing
assets to total assets were greater than 3%. There were 18 transactions in which
the Company’s tangible equity to assets ratio was well below the group median of
6.2%. The discounted cash flow approach was to estimate the net present value of
distributable capital that each bank could produce based on earnings projections
from 2009 to 2014 as assumptions were used from management’s projections with
and without a capital raise. Based on the assumptions, the final valuation was
calculated at $15,219,000.


49





Management’s
Discussion and Analysis








There is
a degree of uncertainty associated with the key assumptions, as the economic
recovery could effect the assumptions in an earnings multiple for the comparable
transactions approach and the ability to raise capital could effect the
assumptions in the discounted cash flow approach.





Total
personnel expenses, the largest component of noninterest expense, were $7.1
million, $8.2 million and $6.9 million during 2009, 2008 and 2007,
respectively.  Personnel expenses decreased 13.0% during 2009 and
increased 19.5% during 2008. Substantially all of this decrease in 2009 resulted
from the cost cutting initiatives in salaries and employee
benefits.  Management expects these costs to increase as the Company
grows.





Combined
occupancy and furniture and equipment expense was $2.1 million, $2.0 million and
$1.5 million, or 11.3%, 13.1% and 12.2% of noninterest expense during 2009, 2008
and 2007, respectively.  Professional services expense, including fees
paid to attorneys, independent auditors and consultants was $853,000, $490,000,
and $315,000 in 2009, 2008 and 2007, respectively. The increase in 2009 can be
mostly attributed to legal fees related to collections of various
loans.





Advertising
and public relations expense decreased to $311,000 in 2009 from $705,000 in 2008
as these expenses were reduced as the result of cost cutting initiatives to
marketing expenses in 2009.  Data processing and credit card
processing fees were $1.2 million, $1.3 million and $1.0 million during 2009,
2008 and 2007, respectively. These fees relate directly to the number of
accounts serviced and transactions processed.





In 2009,
a loss on other real estate owned was written down to fair value. There were no
expenses in 2008 or 2007 related to this expense.





During
2009, failures of insured depository institutions, as well as deterioration in
banking and general economic conditions, significantly depleted the FDIC deposit
insurance fund. The FDIC took several actions in 2009 to recapitalize the
deposit insurance fund. On May 22, 2009, the FDIC announced a final rule
imposing a special assessment on insured institutions as of June 30, 2009, and
payable on September 30, 2009. The special assessment was equal to five basis
points on each institution’s assets, minus Tier 1 capital. The amount of our
special assessment was $265,697. The FDIC also implemented changes to the
risk-based assessment system and increased the regular premium rates for 2009.
As a result of these actions, total regulatory expense from FDIC assessments
increased to $1.3 million in 2009 from $389,000 in 2008 and $265,000 in
2007.





The
overhead ratio of noninterest expense to adjusted total revenues (net interest
income plus noninterest income excluding securities transactions) was 107%, 111%
and 66% in 2009, 2008, and 2007, 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.


50





Management’s
Discussion and Analysis





Sources
of Noninterest Expense (thousands)





2009
                    
                    
                    2008
                    
                    
                    2007Salaries
      and wages
                    
                    $
                    6,328
                    
                    
                    $
                    6,838
                    
                    
                    $
                    5,862Employee
      benefits
                    
                    
                    802
                    
                    
                    
                    1,359
                    
                    
                    
                    994Total
      personnel expense
                    
                    
                    7,130
                    
                    
                    
                    8,197
                    
                    
                    
                    6,856Occupancy
      expense
                    
                    
                    1,513
                    
                    
                    
                    1,435
                    
                    
                    
                    1,074Furniture
      and equipment
                    
                    
                    584
                    
                    
                    
                    577
                    
                    
                    
                    439Printing
      and supplies
                    
                    
                    96
                    
                    
                    
                    157
                    
                    
                    
                    164Professional
      services
                    
                    
                    853
                    
                    
                    
                    490
                    
                    
                    
                    315Postage
      and office supplies
                    
                    
                    155
                    
                    
                    
                    153
                    
                    
                    
                    116Telephone
                    
                    
                    178
                    
                    
                    
                    180
                    
                    
                    
                    139Dues
      and subscriptions
                    
                    
                    77
                    
                    
                    
                    61
                    
                    
                    
                    63Education
      and seminars
                    
                    
                    32
                    
                    
                    
                    92
                    
                    
                    
                    71Franchise
      and local taxes
                    
                    
                    94
                    
                    
                    
                    117
                    
                    
                    
                    92Foreclosed
      assets, net
                    
                    
                    776
                    
                    
                    
                    -
                    
                    
                    
                    -Advertising
      and public relations
                    
                    
                    311
                    
                    
                    
                    705
                    
                    
                    
                    593Regulatory
      agency expense
                    
                    
                    1,293
                    
                    
                    
                    389
                    
                    
                    
                    265Director
      fees
                    
                    
                    -
                    
                    
                    
                    133
                    
                    
                    
                    170Data
      processing services
                    
                    
                    1,175
                    
                    
                    
                    1,307
                    
                    
                    
                    1,001Amortization
      of deposit premium
                    
                    
                    191
                    
                    
                    
                    286
                    
                    
                    
                    282Goodwill
      impairment charge
                    
                    
                    2,727
                    
                    
                    
                    -
                    
                    
                    
                    -Other
      operating expense
                    
                    
                    1,330
                    
                    
                    
                    1,118
                    
                    
                    
                    800Total
      noninterest expenses
                    
                    $
                    18,515
                    
                    
                    $
                    15,397
                    
                    
                    $
                    12,440





Income
Taxes





Income
tax expense and benefit 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 (benefit) and expense was $(3,628,000), $(1,827,000) and $2,049,000 for
2009, 2008 and 2007, respectively.  Net deferred income tax assets of
approximately $3,195,000 and $6,994,000 at December 31, 2009 and 2008,
respectively, were included in other assets.  At December 31, 2009,
$3,545,000 was placed in a valuation allowance established on net deferred tax
assets as discussed in Note 17 of “Notes to Consolidated Financial Statements”.
$1,667,000 of the total deferred tax asset is applicable to unrealized losses on
investment securities available for sale. Accounting Standards Codification
Topic 740, Income Taxes, requires that companies assess whether a valuation
allowance should be established against their deferred tax assets based on the
consideration of all available evidence using a more likely than not that the
tax position will be realized or sustained upon examination. The Company’s
management considers both positive and negative evidence and analyzes changes in
near-term market conditions as well as other factors which may impact future
operating results. At December 31, 2009, the Company’s management believes that
is more likely than not that it will be able to realize its net deferred tax
assets.





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, impairment of equity securities and investment
security discount accretion.


51





Management’s
Discussion and Analysis








The
cumulative loss incurred by the Company in 2008 and 2009 was the primary
negative factor considered by management. Additionally general economic
conditions in the Company’s primary markets and the potential for ongoing
weakening asset quality were also evaluated as potential negative
factors.





Despite
recent losses and the challenging economic environment, the Company has a
history of strong earnings, is well capitalized, has specific available tax
planning strategies currently under consideration that would generate certain
amounts of taxable income, including but not limited to:





·
            Prior
      to the losses in 2008 and 2009 from asset quality costs, the Company had a
      history of consistent earnings with cumulative pretax net income of
      $15,017,000 for the five year period ending December 31,
    2007.


·
            The
      Board of Directors has authorized management to liquidate all bank owned
      life insurance policies in 2010 which is expected to create a taxable
      pretax gain of approximately
$1,800,000.


·
            In
      February 2010 we sold securities creating a taxable gain of $376,000 and
      reinvesting the proceeds of the sales into securities that generate
      taxable income.


·
            Over
      the last quarter, asset quality indicators have stabilized and improved
      while core earnings have increased to levels last attained in 2007, so it
      appears more likely than not that over the next two to five years taxable
      income will return to levels approaching those prior to
    2008.





Earning
Assets





Average
earning assets were $481.9 million during 2009, a decrease of 1.8% from
2008.  Average earning assets were $490.9 million in 2008, an increase
of 21.4% over the $404.3 million balance for 2007.  Total average
earning assets represented 86.3%, 91.0%, and 92.2% of total average assets
during the years ended December 31, 2009, 2008 and 2007,
respectively.  A summary of average assets is shown in the following
table.





Average
Asset Mix (dollars in thousands)





2009
                              
                              
                              2008
                              
                              
                              2007Average
                                Balance
                              
                              Percent
                              
                              
                              Average
                                Balance
                              
                              Percent
                              
                              
                              Average
                                Balance
                              
                              PercentEarning
      assets:Loans,
      net
                              
                              $
                              368,458
                              
                              65.96
                              %
                              
                              $
                              376,747
                              
                              69.84
                              %
                              
                              $
                              332,451
                              
                              75.80
                              %Investment
      securities
                              
                              
                              92,344
                              
                              16.53
                              %
                              
                              
                              105,819
                              
                              19.61
                              %
                              
                              
                              65,454
                              
                              14.92
                              %Federal
      funds sold
                              
                              
                              12,784
                              
                              2.29
                              %
                              
                              
                              6,318
                              
                              1.17
                              %
                              
                              
                              5,481
                              
                              1.25
                              %Deposits
      with banks
                              
                              
                              8,323
                              
                              1.49
                              %
                              
                              
                              1,999
                              
                              .37
                              %
                              
                              
                              943
                              
                              .21
                              %Total
      earning assets
                              
                              
                              481,909
                              
                              86.27
                              %
                              
                              
                              490,883
                              
                              90.99
                              %
                              
                              
                              404,329
                              
                              92.18
                              %Nonearning
      assets:Cash
      and due from banks
                              
                              
                              25,450
                              
                              4.55
                              %
                              
                              
                              8,181
                              
                              1.52
                              %
                              
                              
                              8,204
                              
                              1.88
                              %Premises
      and equipment
                              
                              
                              17,346
                              
                              3.11
                              %
                              
                              
                              17,093
                              
                              3.17
                              %
                              
                              
                              8,475
                              
                              1.93
                              %Other
      assets
                              
                              
                              33,913
                              
                              6.07
                              %
                              
                              
                              23,311
                              
                              4.32
                              %
                              
                              
                              17,571
                              
                              4.01
                              %Total
      nonearning assets
                              
                              
                              76,709
                              
                              13.73
                              %
                              
                              
                              48,595
                              
                              9.01
                              %
                              
                              
                              34,250
                              
                              7.82
                              %Total
      assets
                              
                              $
                              558,618
                              
                              100.00
                              %
                              
                              $
                              539,468
                              
                              100.00
                              %
                              
                              $
                              438,579
                              
                              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.


52





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 86.3%, 83.6%, and
82.6% of total loans at December 31, 2009, 2008, and 2007,
respectively.  Total loans    secured by
one-to-four family residential properties represented 22.8%, 21.7% and 21.0% of
total loans at the end of 2009, 2008 and 2007, respectively.  Loans
for commercial and business purposes were $32.5 million, $43.0 million and $43.6
million, or 9.3%, 11.1% and 12.1% of total loans outstanding at December 31,
2009, 2008 and 2007, respectively.





The
amounts of gross loans outstanding by type at December 31, 2009 through December
31, 2005 are shown in the following table.





Loan
Portfolio Summary (thousands)





2009
                          
                          2008
                          
                          2007
                          
                          2006
                          
                          2005Construction
      and development
                          
                          $
                          121,838
                          
                          $
                          125,878
                          
                          $
                          121,760
                          
                          $
                          109,036
                          
                          $
                          83,575Farmland
                          
                          
                          2,473
                          
                          
                          3,343
                          
                          
                          3,806
                          
                          
                          2,412
                          
                          
                          2,5451-4
      family residential
                          
                          
                          80,071
                          
                          
                          83,734
                          
                          
                          75,671
                          
                          
                          64,475
                          
                          
                          62,796Multifamily
      residential
                          
                          
                          9,879
                          
                          
                          11,802
                          
                          
                          3,670
                          
                          
                          3,650
                          
                          
                          4,495Nonfarm,
      nonresidential
                          
                          
                          88,197
                          
                          
                          98,438
                          
                          
                          93,222
                          
                          
                          73,529
                          
                          
                          67,199Total
      real estate
                          
                          
                          302,458
                          
                          
                          323,195
                          
                          
                          298,129
                          
                          
                          253,102
                          
                          
                          220,610Agricultural
                          
                          
                          563
                          
                          
                          654
                          
                          
                          671
                          
                          
                          675
                          
                          
                          388Commercial
      and industrial
                          
                          
                          32,551
                          
                          
                          42,958
                          
                          
                          43,617
                          
                          
                          48,858
                          
                          
                          29,036Consumer
                          
                          
                          13,380
                          
                          
                          17,217
                          
                          
                          13,950
                          
                          
                          13,172
                          
                          
                          10,544Other
                          
                          
                          1,512
                          
                          
                          2,432
                          
                          
                          4,610
                          
                          
                          1,783
                          
                          
                          1,327Total
                          
                          $
                          350,464
                          
                          $
                          386,456
                          
                          $
                          360,977
                          
                          $
                          317,590
                          
                          $
                          261,905





The
maturity/re-pricing distributions of loans as of December 31, 2009 are set forth
in the following table.





Maturity
Schedule of Loans (dollars in thousands)





Commercial
                                    and
                                    Industrial
                                  
                                  Construction
                                    and
                                    Development
                                  
                                  Others
                                  
                                  Total
                                    Amount
                                  
                                  PercentThree
      months or less
                                  
                                  $
                                  12,285
                                  
                                  $
                                  45,517
                                  
                                  $
                                  68,130
                                  
                                  $
                                  125,932
                                  
                                  35.93
                                  %Over
      three months to twelve months
                                  
                                  
                                  4,936
                                  
                                  
                                  19,973
                                  
                                  
                                  17,205
                                  
                                  
                                  42,114
                                  
                                  12.02
                                  %Over
      one year to five years
                                  
                                  
                                  13,396
                                  
                                  
                                  49,051
                                  
                                  
                                  68,146
                                  
                                  
                                  130,593
                                  
                                  37.26
                                  %Over
      five years
                                  
                                  
                                  1,934
                                  
                                  
                                  7,297
                                  
                                  
                                  42,594
                                  
                                  
                                  51,825
                                  
                                  14.79
                                  %Total
      loans
                                  
                                  $
                                  32,551
                                  
                                  $
                                  121,838
                                  
                                  $
                                  196,075
                                  
                                  $
                                  350,464
                                  
                                  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.


53





Management’s
Discussion and Analysis








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.





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, 2009Amortized
      Cost DueIn
      One Yr.
                    Or
      Less
                  
                  
                  After
      One
                    Through
                    Five
      Years
                  
                  
                  After
      Five
                    Through
                    Ten
      Years
                  
                  
                  After
      Ten
                    Years
                  
                  
                  Total
                  
                  Fair
                    ValueInvestment
      securitiesMunicipal
      securities
                  
                  
                  -
                  
                  
                  
                  470
                  
                  
                  
                  -
                  
                  
                  
                  12,613
                  
                  
                  
                  13,083
                  
                  
                  12,075Corporate
      securities
                  
                  
                  1,323
                  
                  
                  
                  2,000
                  
                  
                  
                  -
                  
                  
                  
                  2,295
                  
                  
                  
                  5,618
                  
                  
                  4,502Single
      issue trust preferred securities
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,002
                  
                  
                  
                  11,088
                  
                  
                  
                  12,090
                  
                  
                  10,552Pool
      trust preferred securities
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  134
                  
                  
                  
                  134
                  
                  
                  82Mortgage-backed
      securities
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  61,167
                  
                  
                  
                  61,167
                  
                  
                  60,558Total
                  
                  $
                  1,323
                  
                  
                  $
                  2,470
                  
                  
                  $
                  1,002
                  
                  
                  $
                  87,297
                  
                  
                  $
                  92,092
                  
                  $
                  87,769Weighted
      average yieldsMunicipal
      securities
                  
                  
                  -
                  %
                  
                  
                  4.00
                  %
                  
                  
                  -
                  %
                  
                  
                  4.32
                  %
                  
                  
                  
                  
                  
                  4.31
                  %Corporate
      securities
                  
                  
                  -
                  %
                  
                  
                  1.77
                  %
                  
                  
                  -
                  %
                  
                  
                  7.65
                  %
                  
                  
                  
                  
                  
                  4.91
                  %Single
      issue trust preferred securities
                  
                  
                  -
                  %
                  
                  
                  -
                  %
                  
                  
                  6.75
                  %
                  
                  
                  6.33
                  %
                  
                  
                  
                  
                  
                  6.37
                  %Pooled
      trust preferred securities
                  
                  
                  -
                  %
                  
                  
                  -
                  %
                  
                  
                  -
                  %
                  
                  
                  18.92
                  %
                  
                  
                  
                  
                  
                  18.92
                  %Mortgage-backed
      securities
                  
                  
                  -
                  %
                  
                  
                  -
                  %
                  
                  
                  -
                  %
                  
                  
                  4.17
                  %
                  
                  
                  
                  
                  
                  4.17
                  %Consolidated
                  
                  
                  -
                  %
                  
                  
                  2.19
                  %
                  
                  
                  6.75
                  %
                  
                  
                  4.58
                  %
                  
                  
                  
                  
                  
                  4.47
                  %




54





Management’s
Discussion and Analysis





2008Book
                  Value
                
                
                Fair
                  ValueInvestment
      securitiesGovernment
      sponsored enterprises (FHLB, FFCB and FHLMC
                
                $
                10,500
                
                
                $
                10,606Equity
      securities
                
                
                53
                
                
                
                53Municipal
      securities
                
                
                16,577
                
                
                
                14,772Corporate
      securities
                
                
                7,319
                
                
                
                5,173Single
      issue trust preferred securities
                
                
                21,565
                
                
                
                15,749Pooled
      trust preferred securities
                
                
                570
                
                
                
                140Mortgage-backed
      securities
                
                
                40,091
                
                
                
                40,910Total
                
                $
                96,675
                
                
                $
                87,403





The
interest rate environment and the need for liquidity resulted in an annualized
average yield on the investment portfolio of 5.1%, 6.0%, and 5.8% during 2009,
2008 and 2007, respectively.  At December 31, 2009, 2008 and 2007, the
market value of the investment portfolio was $87.8 million, $87.4 million, and
$99.3 million, respectively. Amortized cost was $92.1 million, $96.7 million,
and $100.3 million. The
investment portfolio was restructured in 2009, as municipal securities,
corporate securities and single issue trust preferred securities were sold to
reduce risk on the balance sheet and replaced with mortgage-backed securities
with less risk to the balance sheet.





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 $12.8 million, $6.3
million, and $5.5 million in 2009, 2008, and 2007, respectively.  At
December 31, 2009 and December 31, 2008 Federal funds sold were $21.3 million
and $4.3 million, respectively.





Deposits





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





The
Bank's balance sheet growth is largely determined by the availability of
deposits in its market, the cost of attracting the deposits, and the prospects
of profitably utilizing the available deposits by increasing the loan or
investment portfolios.  Market conditions have resulted in depositors
shopping for better deposit rates more than in the past.  An increased
customer awareness of interest rates adds to the importance of rate
management.  The Bank's management must continuously monitor market
pricing, competitors’ 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 $443.0 million during 2009.  This is an increase
of 6.6% over 2008.  Average total deposits were $415.7 million for the
year ended December 31, 2008, an increase of 17.3% over 2007.  The
majority of those deposits were core deposits. The percentage of the Bank's
average deposits that were interest bearing in 2009 was 92.1% and 91.9% during
2008 and 89.8% during 2007.  Average demand deposits which earn no
interest were $34.9 million, $33.8 million and $36.2 million for the periods
ended December 31, 2009, 2008 and 2007, respectively.


55





Management’s
Discussion and Analysis








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, 2009,
2008, and 2007 are summarized in the following table.





Average
Deposit Mix (dollars in thousands)





2009
                              
                              
                              2008
                              
                              
                              2007Amount
                              
                              Rate
                              
                              
                              Amount
                              
                              Rate
                              
                              
                              Amount
                              
                              RateInterest
      bearing deposits:Demand
      accounts
                              
                              $
                              35,775
                              
                              .49
                              %
                              
                              $
                              29,399
                              
                              .61
                              %
                              
                              $
                              26,714
                              
                              .62
                              %Money
      market
                              
                              
                              91,071
                              
                              1.42
                              
                              
                              
                              67,749
                              
                              2.57
                              
                              
                              
                              66,482
                              
                              3.58Savings
                              
                              
                              10,552
                              
                              .65
                              
                              
                              
                              8,831
                              
                              1.12
                              
                              
                              
                              6,138
                              
                              .89Time
      deposit
                              
                              
                              270,669
                              
                              4.16
                              
                              
                              
                              275,956
                              
                              4.16
                              
                              
                              
                              218,997
                              
                              5.05Total
      interest bearing deposits
                              
                              
                              408,067
                              
                              2.27
                              
                              
                              
                              381,935
                              
                              3.54
                              
                              
                              
                              318,331
                              
                              4.29Noninterest
      bearing demand deposits
                              
                              
                              34,892
                              
                              
                              
                              
                              
                              33,775
                              
                              
                              
                              
                              
                              36,181Total
      deposits
                              
                              $
                              442,959
                              
                              
                              
                              
                              $
                              415,710
                              
                              
                              
                              
                              $
                              354,512





The
following table provides maturity information relating to time deposits of
$100,000 or more at December 31, 2009.





Large
Time Deposit Maturities, (thousands)





Remaining
      maturity of three months or less
                
                $
                46,116Remaining
      maturity over three through twelve months
                
                
                100,052Remaining
      maturity over twelve months
                
                
                30,617Total
      time deposits of $100,000 or more
                
                $
                176,785





Securities
Sold Under Agreements to Repurchase





Other
borrowed funds consisting of securities sold under agreements to repurchase and
Federal funds purchased were $20.6 million, $23.8 million and $29.2 million at
December 31, 2009, 2008 and 2007, respectively. Average short-term debt was $8.9
million, $22.6 million and $10.5 million during 2009, 2008 and 2007,
respectively.  The related interest expense was $208,032, $763,493 and
$468,792 during 2009, 2008 and 2007, respectively.





Other
Short-term Borrowings





There was
one fixed rate FHLB advance of $2,500,000 at December 31, 2009 and was one
variable rate FHLB advance of $6,000,000 at December 31, 2008. Also included in other
short-term borrowings was a$1,000,000 facility which is funded by Nexity
Bank that will mature on July 1, 2010 at a 5.00% lending rate.





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, 2009 and 2008 advances of $40.0 million and $42.5 million,
respectively were outstanding. The average amount outstanding during 2009 and
2008 was $40.2 million and $34.9 million, respectively.  Approximately
$20,000,000 in 1-4 family residential loans, $22,000,000 in commercial real
estate loans and 10,000,000 in home equity line of credit loans were pledged as
collateral for the FHLB advances at December 31, 2009.On June 27, 2008,
Waccamaw Bank, sold in a private placement to qualified institutional investors,
an aggregate of $3,000,000 of subordinated notes that will mature on July 1,
2015 at 3 month LIBOR plus 350 basis points.


56





Management’s
Discussion and Analysis











Maturity Date
              
              Advance
              
              Rate07/01/15
              
              
              3,000,000
              
              90
      Day LIBOR + 3.50%09/02/11
              
              
              5,000,000
              
              Fixed
      at 3.76%07/17/12
              
              
              9,000,000
              
              Fixed
      at 4.48%09/04/12
              
              
              6,000,000
              
              Fixed
      at 4.00%09/03/13
              
              
              6,000,000
              
              Fixed
      at 4.15%12/02/13
              
              
              5,000,000
              
              Fixed
      at 4.39%09/29/15
              
              
              4,000,000
              
              Fixed
      at 4.06%04/22/19
              
              
              5,000,000
              
              Fixed
      at 4.75%$
              43,000,000




Capital
Adequacy





Stockholders’
equity was $17.2 million at December 31, 2009.  This was a 38.4%
decrease from the $27.8 million at the end of 2008.  Average
stockholders' equity as a percentage of average total assets was 5.2%, 6.2% and
7.9% for 2009, 2008, and 2007, 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
(subsequently extended to September 30, 2014). 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. On September 25, 2009, an amendment
to the warrant agreement extended the exercise period of the warrants until
September 30, 2014. All other provisions of the warrant agreement are
unchanged and remain in full force and effect. 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 and completed its second issuance of trust
preferred securities in July 2008 in the amount of $4 million.  The
Trust Preferred securities are accounted for as long-term debt in the
accompanying financial statements, however, for regulatory capital purposes,
these issuances are considered Tier 1 capital. The Company has exercised its
right to defer payments on the junior subordinated debentures underlying its
outstanding trust preferred securities.





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, 2009, the Company’s Tier 1 risk-weighted
capital ratio and total capital ratio were 7.9% and 8.9%,
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, 2009, the Bank’s capital ratios were as
follows:  Tier 1 leverage ratio, 6.1%, Tier 1 risk-based capital
ratio, 8.1% and total risk-based ratio, 10.1%.  These capital ratios
were sufficient at December 31, 2009 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 at December 31, 2009
in the following table.


57





Management’s
Discussion and Analysis








Capital
Requirements (dollars in thousands)





Waccamaw
Bankshares, Inc.





Risk-basedCapitalLeverageCapital
                                
                                
                                Tier1Capital
                                
                                
                                TotalCapitalAmount
                                
                                Percentage(1)
                                
                                
                                Amount
                                
                                Percentage(2)
                                
                                
                                Amount
                                
                                Percentage(2)Actual
                                
                                $
                                31,742
                                
                                5.88
                                %
                                
                                $
                                31,742
                                
                                7.93
                                %
                                
                                $
                                35,848
                                
                                8.95
                                %Well
      Capitalized
                                
                                
                                26,995
                                
                                5.00
                                %
                                
                                
                                24,022
                                
                                6.00
                                %
                                
                                
                                40,036
                                
                                10.00
                                %





Waccamaw
Bank





Risk-basedCapitalLeverageCapital
                                
                                
                                Tier1Capital
                                
                                
                                TotalCapitalAmount
                                
                                Percentage(1)
                                
                                
                                Amount
                                
                                Percentage(2)
                                
                                
                                Amount
                                
                                Percentage(2)Actual
                                
                                $
                                32,332
                                
                                6.00
                                %
                                
                                $
                                32,332
                                
                                8.09
                                %
                                
                                $
                                40,401
                                
                                10.11
                                %Well
      Capitalized
                                
                                
                                26,956
                                
                                5.00
                                %
                                
                                
                                23,979
                                
                                6.00
                                %
                                
                                
                                39,965
                                
                                10.00
                                %







(1)
            Percentage
      of total adjusted average assets. The Federal Reserve Board (“FRB”)
      minimum leverage ratio requirement is 4 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.


58





Management’s
Discussion and Analysis








Allowance
for Loan Losses (dollars in thousands)





2009
                              
                              
                              2008
                              
                              
                              2007
                              
                              
                              2006
                              
                              
                              2005Balance
      at beginning of period
                              
                              $
                              7,188
                              
                              
                              $
                              5,386
                              
                              
                              $
                              4,886
                              
                              
                              $
                              3,939
                              
                              
                              $
                              2,791Charge-offs:Construction
      loans
                              
                              
                              (6,881
                              )
                              
                              
                              (492
                              )
                              
                              
                              (86
                              )
                              
                              
                              -
                              
                              
                              
                              -Commercial
      and industrial loans
                              
                              
                              (1,847
                              )
                              
                              
                              (231
                              )
                              
                              
                              (1
                              )
                              
                              
                              (500
                              )
                              
                              
                              (86
                              )Consumer
      and other
                              
                              
                              (4,983
                              )
                              
                              
                              (476
                              )
                              
                              
                              (201
                              )
                              
                              
                              (85
                              )
                              
                              
                              (184
                              )Total
      charge-offs
                              
                              
                              (13,711
                              )
                              
                              
                              (1,199
                              )
                              
                              
                              (288
                              )
                              
                              
                              (585
                              )
                              
                              
                              (270
                              )Recoveries:Construction
      loans
                              
                              
                              (55
                              )
                              
                              
                              -
                              
                              
                              
                              379
                              
                              
                              
                              -
                              
                              
                              
                              -Commercial
      and industrial loans
                              
                              
                              4
                              
                              
                              
                              4
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              34Consumer
      and other
                              
                              
                              143
                              
                              
                              
                              7
                              
                              
                              
                              23
                              
                              
                              
                              36
                              
                              
                              
                              14Total
      recoveries
                              
                              
                              92
                              
                              
                              
                              11
                              
                              
                              
                              402
                              
                              
                              
                              36
                              
                              
                              
                              48Net
      charge-offs
                              
                              
                              (13,619
                              )
                              
                              
                              (1,188
                              )
                              
                              
                              114
                              
                              
                              
                              (549
                              )
                              
                              
                              (222
                              )Allowance
      purchased from The Bankof Heath Springs
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              46
                              
                              
                              
                              -Provision
      for loan losses
                              
                              
                              16,580
                              
                              
                              
                              2,990
                              
                              
                              
                              386
                              
                              
                              
                              1,450
                              
                              
                              
                              1,370Balance
      at the end of the year
                              
                              $
                              10,149
                              
                              
                              $
                              7,188
                              
                              
                              $
                              5,386
                              
                              
                              $
                              4,886
                              
                              
                              $
                              3,939Total
      loans outstanding at year-end
                              
                              $
                              350,464
                              
                              
                              $
                              386,456
                              
                              
                              $
                              360,977
                              
                              
                              $
                              317,590
                              
                              
                              $
                              261,905Average
      net loans outstanding for the year
                              
                              $
                              368,458
                              
                              
                              $
                              376,747
                              
                              
                              $
                              332,451
                              
                              
                              $
                              279,625
                              
                              
                              $
                              238,579Allowance
      for loan losses toloans
      outstanding
                              
                              
                              2.90
                              %
                              
                              
                              1.86
                              %
                              
                              
                              1.49
                              %
                              
                              
                              1.54
                              %
                              
                              
                              1.50
                              %Ratio
      of net loan charge-offs toaverage
      loans outstanding
                              
                              
                              3.70
                              %
                              
                              
                              .32
                              %
                              
                              
                              (0.03
                              )%
                              
                              
                              0.20
                              %
                              
                              
                              0.09
                              %





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)





2009<
      ;/f ont>
                                            
                                            2008<
      ;/f ont>
                                            
                                            2007<
      ;/f ont>
                                            
                                            2006<
      ;/f ont>
                                            
                                            2005<
      ;/f ont>Amount&
      lt; /font>
                                            
                                            %(1)<
      ;/f
    ont>
                                            
                                            Amount&
      lt; /font>
                                            
                                            %(1)<
      ;/f
    ont>
                                            
                                            Amount&
      lt; /font>
                                            
                                            %(1)<
      ;/f
    ont>
                                            
                                            Amount&
      lt; /font>
                                            
                                            %(1)<
      ;/f
    ont>
                                            
                                            Amount&
      lt; /font>
                                            
                                            %(1)Construction
      and development
                                            
                                            $
                                            3,556
                                            
                                            35.04
                                            
                                            $
                                            2,341
                                            
                                            32.57
                                            
                                            $
                                            1,936
                                            
                                            33.73
                                            
                                            $
                                            1,766
                                            
                                            34.33
                                            
                                            $
                                            1,320
                                            
                                            31.91Farmland
                                            
                                            
                                            70
                                            
                                            .69
                                            
                                            
                                            62
                                            
                                            .86
                                            
                                            
                                            61
                                            
                                            1.05
                                            
                                            
                                            39
                                            
                                            .76
                                            
                                            
                                            33
                                            
                                            .971-4
      family residential
                                            
                                            
                                            2,282
                                            
                                            22.48
                                            
                                            
                                            1,557
                                            
                                            21.67
                                            
                                            
                                            1,059
                                            
                                            20.96
                                            
                                            
                                            954
                                            
                                            20.30
                                            
                                            
                                            911
                                            
                                            23.98Multifamily
      residential
                                            
                                            
                                            327
                                            
                                            3.22
                                            
                                            
                                            220
                                            
                                            3.05
                                            
                                            
                                            42
                                            
                                            1.02
                                            
                                            
                                            42
                                            
                                            1.15
                                            
                                            
                                            49
                                            
                                            1.71Nonfarm,
      nonresidential
                                            
                                            
                                            2,533
                                            
                                            24.96
                                            
                                            
                                            1,831
                                            
                                            25.47
                                            
                                            
                                            1,399
                                            
                                            25.82
                                            
                                            
                                            1,176
                                            
                                            23.15
                                            
                                            
                                            1,048
                                            
                                            25.66Total
      real estate
                                            
                                            
                                            8,768
                                            
                                            86.39
                                            
                                            
                                            6,011
                                            
                                            83.62
                                            
                                            
                                            4,497
                                            
                                            82.58
                                            
                                            
                                            3,977
                                            
                                            79.69
                                            
                                            
                                            3,361
                                            
                                            84.23Agricultural
                                            
                                            
                                            16
                                            
                                            .16
                                            
                                            
                                            12
                                            
                                            .17
                                            
                                            
                                            10
                                            
                                            .19
                                            
                                            
                                            10
                                            
                                            .22
                                            
                                            
                                            5
                                            
                                            .14Commercial
      and industrial
                                            
                                            
                                            943
                                            
                                            9.29
                                            
                                            
                                            800
                                            
                                            11.13
                                            
                                            
                                            593
                                            
                                            12.09
                                            
                                            
                                            664
                                            
                                            15.38
                                            
                                            
                                            389
                                            
                                            11.09Consumer
                                            
                                            
                                            380
                                            
                                            3.74
                                            
                                            
                                            320
                                            
                                            4.45
                                            
                                            
                                            226
                                            
                                            3.86
                                            
                                            
                                            212
                                            
                                            4.15
                                            
                                            
                                            168
                                            
                                            4.03Other
                                            
                                            
                                            42
                                            
                                            .42
                                            
                                            
                                            45
                                            
                                            .63
                                            
                                            
                                            60
                                            
                                            1.28
                                            
                                            
                                            23
                                            
                                            .56
                                            
                                            
                                            16
                                            
                                            .51Total
                                            
                                            $
                                            10,149
                                            
                                            100.00
                                            
                                            $
                                            7,188
                                            
                                            100.00
                                            
                                            $
                                            5,386
                                            
                                            100.00
                                            
                                            $
                                            4,886
                                            
                                            100.00
                                            
                                            $
                                            3,939
                                            
                                            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,
2009.


59





Management’s
Discussion and Analysis





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





Nonperforming
Assets (dollars in thousands)





2009
                
                
                2008
                
                
                2007
                
                
                2006
                
                
                2005Nonaccrual
      loans
                
                $
                21,440
                
                
                $
                15,633
                
                
                $
                1,534
                
                
                $
                1,181
                
                
                $
                1,711Loans
      past due 90 days or more and still accruing interest
                
                
                1,409
                
                
                
                1,451
                
                
                
                2,608
                
                
                
                340
                
                
                
                250Total
      nonperforming loans
                
                
                22,849
                
                
                
                17,084
                
                
                
                4,142
                
                
                
                1,521
                
                
                
                1,961Other
      real estate and repossessed personal property
                
                
                5,015
                
                
                
                963
                
                
                
                340
                
                
                
                32
                
                
                
                140Total
      nonperforming assets
                
                $
                27,864
                
                
                $
                18,047
                
                
                $
                4,482
                
                
                $
                1,553
                
                
                $
                2,101Nonperforming
      assets as a percentage of:Total
      assets
                
                
                5.23
                %
                
                
                3.36
                %
                
                
                .88
                %
                
                
                .39
                %
                
                
                .65
                %Total
      loans
                
                
                7.96
                %
                
                
                4.67
                %
                
                
                1.24
                %
                
                
                .49
                %
                
                
                .80
                %





Asset
Quality





At
December 31, 2009, the Company had approximately $26.3 million in loans that
were 30-89 days past due. This represented 7.50% of gross loans outstanding on
that date. This is an increase from December 31, 2008 when there were
approximately $8.0 million in loans that were 30-89 days past due, or 2.07% of
gross loans outstanding. At December 31, 2007 there were approximately $4.2
million in loans that were 30-89 days past due, or 1.17% of gross loans
outstanding. The increase in past dues is spread throughout each category of the
loan portfolio and is due primarily to the continued weakening of economic
conditions both locally and nationally. Non-accrual loans increased $5.8 million
to $21.4 million at December 31, 2009 compared to $15.6 million at December 31,
2008, primarily as a result of 3 loan relationships of $1 million or more
totaling $6.8 million that were reclassified from past due status to
non-accrual.  Non-accrual loans totaled $1.5 million at December 31,
2007.





The
percentage of non-performing loans (non-accrual loans and loans that were 90
days or more past due but still in accruing status) to total loans increased 194
basis points from 4.02% at December 31, 2008 to 6.78% at December 31, 2009.
The percentage of non-performing loans at December 31, 2007 was 1.15%. The
Company had no loans that were considered troubled debt restructured
loans.





At
December 31, 2009, there were $41.6 million of loans that were reviewed for
individual impairment under FAS 114. None of these impaired loans required a
specific reserve at December 31, 2009. At December 31, 2008, $25.2 million
in loans were classified as impaired of which $22.8 million required a specific
reserve of $3.6 million. At December 31, 2007, $2.5 million in loans were
classified as impaired of which no loans required a specific reserve. The
allowance for loan losses was $10.1 million at December 31, 2009 or 2.90% of
gross loans outstanding. This is an increase of 104 basis points from the 1.86%
of gross loans at December 31, 2008. The allowance for loans losses was
$5.4 million at December 31, 2007. The allowance for loan losses at December 31,
2009 represented 24.41% of impaired loans compared to 28.49% at
December 31, 2008. The allowance for loans losses at December 31, 2007
represented 215.07%. This increase in the allowance for 2009 resulted from
provisions for loan losses of $16.6 million, partially offset by net charge-offs
of $13.7 million. Most of the loans charged-off in 2009 were classified as
impaired at December 31, 2009. It is management’s assessment that the
allowance for loan losses as of December 31, 2009 is appropriate in light of the
risk inherent within the Company’s loan portfolio. No assurances, however, can
be made that further adjustments to the allowance for loan losses may not be
deemed necessary.


60





Management’s
Discussion and Analysis










The total
non-performing assets, (non-accrual loans, loans greater than 90 days past due
and still accruing and other real estate owned), at December 31, 2009,
December 31, 2008 and December 31, 2007 were $27.9 million, $18.0 million
and $4.5 million, respectively. The allowance for loan losses at December 31,
2009 represented 36.4% of non-performing assets compared to 43.33% at
December 31, 2008.





Since
2007, the allowance for loan losses model had been modified and refined. The
previous method included a FAS 5 component that incorporated a risk grade
assessment that was primarily based on peer group averages.  In
response to changes in the economic environment, in early 2008, the Bank
implemented a new allowance for loan losses model, developed by a vendor with
expertise in credit risk monitoring.  The new model incorporates a FAS
5 component that builds upon actual historical losses by call report code,
adjusted for environmental changes in the lending environment. At December 31,
2007, the FAS 5 component accounted for essentially all of the Bank’s allowance
for loan losses, as the local economy at that time was still relatively healthy
and real estate values were not in decline.





Additional
information is as follows:





2009
                
                
                2008
                
                
                2007Impaired
      loans
                
                $
                41,575,130
                
                
                $
                25,227,758
                
                
                $
                2,504,192Unimpaired
      loans
                
                
                308,594,595
                
                
                
                360,843,112
                
                
                
                358,019,757Gross
      loans
                
                $
                350,169,725
                
                
                $
                386,070,870
                
                
                $
                360,523,949Specific
      reserve on impaired loans
                
                $
                -
                
                
                $
                3,586,786
                
                
                $
                -Reserve
      related to FAS 5
                
                
                10,148,927
                
                
                
                3,601,195
                
                
                
                5,385,782Total
      allowance for loan losses
                
                $
                10,148,927
                
                
                $
                7,187,981
                
                
                $
                5,385,782Allowance
      to gross loans
                
                
                2.90
                %
                
                
                1.86
                %
                
                
                1.49
                %Specific
      reserve to impaired loans
                
                
                -
                
                
                
                14.22
                %
                
                
                -FAS
      5 reserves to unimpaired loans
                
                
                3.29
                %
                
                
                1.00
                %
                
                
                1.49
                %





The
Bank’s allowance for loan and lease losses methodology involves the
following:  The Registrant evaluates loans and relationships greater
than $500,000 and in non-performing status (non-accrual, greater than 90 days
still accruing, etc.) or otherwise deemed to be impaired for individual
impairment under FAS 114.  Further, individual impairment is
calculated for any loan, regardless of size, rising to the level of Troubled
Debt Restructure.  Once the FAS 114 analysis is completed, the
valuation is reviewed for required specific reserve adjustment at least
quarterly.  On large or complex credits (generally those in excess of
$1,000,000), the Bank obtains a liquidation or quick-sale appraisal at the
initial impairment determination and adjusts the specific reserve upon receipt
and review of the appraisal.  Generally, the Bank obtains an updated
appraisal on such properties annually.  On smaller credits, the
decision to pay for an in-debt appraisal is made on a case-by-case
basis.  In cases where such an updated appraisal is not obtained, the
Bank may elect to apply a discount to the most recent appraisal obtained for the
property in question.  This discount is based on changes in value
observed from appraisals on similar properties and knowledge about recent sales
of similar properties.  Again, these evaluations are reviewed
quarterly.





Loans
evaluated under FAS 114 are removed from the FAS 5 general loan classifications,
to avoid double reserving.  Our ALLL model breaks FAS 5 down into two
parts:  reserves based upon historical losses (adjusted to account for
current economic outlook or other factors), risk grade or past due status, years
to impairment, and an “unallocated” section based on observations of general
economic conditions, local unemployment figures, GDP trends, or other
quantitative or qualitative factors.


61





Management’s
Discussion and Analysis








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 re-price or mature.  Management attempts to
maintain the portfolios of earning assets and interest-bearing liabilities with
maturities or re-pricing 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, 2009, 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 re-pricing within three months totaled $147.0 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.





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 re-pricing characteristics of assets are different from the
re-pricing characteristics of funding sources.  Thus, net interest
income can be impacted by changes in interest rates even if the re-pricing
opportunities of assets and liabilities are perfectly matched.





Mortgage
backed securities are shown based on their contractual maturity but tend to be
repaid earlier. Repurchase agreements with a put feature are shown in the
re-pricing period in which the structure is put back to the Bank.





The Company’s historical liquidity
management process included anticipating operating cash requirements, evaluating
time deposit maturities, monitoring loan to deposit ratios and correlating these
activities to an overall periodic internal liquidity measure.In evaluating
our asset mix, we have sought to maintain a securities portfolio sufficient to
provide short-term liquidity in periods of unusual
fluctuations.





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.


62




Management’s
Discussion and Analysis





Interest
Rate Sensitivity (dollars in thousands)





December 31, 2009
                  Maturities/Re-pricing1-3
                  Months
                
                
                4-12
                  Months
                
                
                13-60
                  Months
                
                
                Over 60
                  Months
                
                
                TotalEarning
      assets:Loans
                
                $
                125,932
                
                
                $
                42,114
                
                
                $
                130,593
                
                
                $
                51,825
                
                
                $
                350,464Investments
                
                
                1,323
                
                
                
                -
                
                
                
                3,472
                
                
                
                87,297
                
                
                
                92,092Federal
      funds sold
                
                
                21,315
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                21,315Deposits
      with banks
                
                
                7,696
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                7,696Total
                
                
                156,266
                
                
                
                42,114
                
                
                
                134,065
                
                
                
                139,122
                
                
                
                471,567Interest-bearing
      liabilities:Demand
      accounts
                
                
                35,476
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                35,476Savings
      and money market
                
                
                111,509
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                111,509Time
      deposits
                
                
                72,814
                
                
                
                136,408
                
                
                
                44,391
                
                
                
                -
                
                
                
                253,613Repurchase
      agreements and purchased funds
                
                
                3,615
                
                
                
                -
                
                
                
                10,000
                
                
                
                7,000
                
                
                
                20,615Other
      short-term borrowings
                
                
                2,500
                
                
                
                1,000
                
                
                
                -
                
                
                
                -
                
                
                
                3,500Long-term
      debt
                
                
                -
                
                
                
                -
                
                
                
                31,000
                
                
                
                12,000
                
                
                
                43,000Subordinated
      debentures
                
                
                12,372
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                12,372Total
                
                
                238,286
                
                
                
                137,408
                
                
                
                85,391
                
                
                
                19,000
                
                
                
                480,085Interest
      rate gap
                
                $
                (82,020
                )
                
                $
                (95,294
                )
                
                $
                48,674
                
                
                $
                120,122
                
                
                $
                (8,518
                )Cumulative
      interest sensitivity gap
                
                $
                (82,020
                )
                
                $
                (177,314
                )
                
                $
                (128,640
                )
                
                $
                (8,518
                )Ratio
      of sensitivity gap to total earnings assets
                
                
                (17.39
                )%
                
                
                (20.21
                )%
                
                
                10.32
                %
                
                
                25.47
                %
                
                
                (1.81
                )%Cumulative
      ratio of sensitivity gap to total earnings assets
                
                
                (17.39
                )%
                
                
                (37.60
                )%
                
                
                (27.28
                )%
                
                
                (1.81
                )%





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.





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.


63





Management’s
Discussion and Analysis








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:





2009
                
                
                2008Commitments
      to extend credit
                
                $
                41,072,000
                
                
                $
                41,067,000Stand-by
      letters of credit
                
                
                796,000
                
                
                
                3,194,000$
                41,868,000
                
                
                $
                44,261,000





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





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





Concentrations
of Credit Risk





Substantially
all of the Bank's loans and commitments to extend credit have been granted to
customers in the Bank's market area and such customers are generally depositors
of the Bank.  The concentrations of credit by type of loan are set
forth in Note 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.


64





Stockholder
Information









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





2009
                        
                        
                        2008
                        
                        
                        2007Average
      equity to average assets
                        
                        5.17
                        %
                        
                        6.20
                        %
                        
                        7.64
                        %Return
      on average assets
                        
                        (2.54
                        )
      %
                        
                        (.38
                        )
      %
                        
                        .89
                        %Return
      on average equity
                        
                        (49.18
                        )
      %
                        
                        (6.11
                        )
      %
                        
                        11.67
                        %




65





Stockholder
Information









Annual
Meeting





The
annual meeting of stockholders will be held Thursday, May 20, 2010 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 and Chief
Executive Officer, at Waccamaw Bankshares, Inc., Post Office Box 2009,
Whiteville, North Carolina, 28472; telephone (910) 641-0044.










Independent Auditors
                        
                        Stock Transfer Agent
                        
                        Legal CounselElliott
      Davis, LLC
                        
                        First
      Shareholder Services
                        
                        Gaeta
      & Eveson, P.A.Certified
      Public Accountants
                        
                        Post
      Office Box 29522
                        
                        700
      Spring Forest Road104
      Cranberry Rd.
                        
                        Raleigh,
      North Carolina  27626-0522
                        
                        Suite
      335Galax,
      Virginia  24333
                        
                        Raleigh,
      North Carolina  27609





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.


66