Exhibit 13

2005 Annual Report



---

2005 Annual Report



|                                                           |  |   
|---------------------------------------------------------- |  | --
|Table of Contents                                          |  |   
|                                                           | 
|Letter to Stockholders                                     |  | 1 
|                                                           | 
|Historical Timeline                                        |  | 2 
|                                                           | 
|Significant Trends                                         |  | 3 
|                                                           | 
|Financial Highlights Summary                               |  | 4 
|                                                           | 
|Consolidated Balance Sheets                                |  | 5 
|                                                           | 
|Consolidated Statements of Income                          |  | 6 
|                                                           | 
|Consolidated Statements of Changes in Stockholders Equity |  | 7 
|                                                           | 
|Consolidated Statements of Cash Flows                      |  | 8 
|                                                           | 
|Notes to Consolidated Financial Statements                 |  | 9 
|                                                           | 
|Independent Auditors Report                               |  | 30
|                                                           | 
|Managements Discussion and Analysis                       |  | 31
|                                                           | 
|Mission Statement                                          |  | 49
|                                                           | 
|Board of Directors and Officers                            |  | 50
|                                                           | 
|Bank Employees                                             |  | 51
|                                                           | 
|Stockholder Information                                    |  | 53
|                                                           | 
|Office Locations                                           |  | 54



---

Letter to Stockholders

March 3, 2006

To our Stockholders, Friends and Neighbors:

No doubt the cover of our 2005 Annual Report will attract your attention! We believe the cover says it all with regard to our companys potential.
While 2005 was an outstanding year for the bank, we believe great opportunities lie ahead; or as the cover reflects, The Sky Is The Limit! The pages of this report illustrate the basis of our enthusiasm as we celebrate a banner year and
begin working hard for an even more profitable 2006.

Take a look at the timeline accompanying this letter. We feel it reflects a history
of growth that positively reinforces the value of your investment in our bank.

The directors, management, and staff of Waccamaw
Bankshares, Inc. are delighted to report record profits for the year 2005. Net earnings for the year ending December 31, 2005 were $3,035,000 a 25.7% increase over the $2,414,319 earned in 2004. Waccamaw Bankshares assets crossed the $300
million threshold and ended the year at $322,792,000 which is equal to a 25% increase for the year.

We are equally pleased to report
several significant events that should positively impact our companys future. In July, we opened an office in the heart of downtown Southport, North Carolina. The opening of this office brought our plans of entering the robust Southport area
market to reality. In the closing days of the year, we opened our eighth office in Elizabethtown, North Carolina; establishing a presence in our fourth county in the Southeastern corner of North Carolina. The Bladen County market has been
significant to us over the years and we are delighted to have the opportunity to serve this community. In December we announced what could be considered the banks most significant event of the year as we announced the pending acquisition of
the Bank of Heath Springs located in Lancaster County, South Carolina. The Bank of Heath Springs is a fine institution with high quality management. Through this acquisition, Waccamaw Bank will expand its financial center network into contiguous
areas of South Carolina.

The year was full of growth and exciting expansion. Our staff has never been more capable. For the hard work and
dedication they put into our bank every day, we remain deeply thankful. We continue to strengthen not only the financial results of the company but the quality and depth of service levels provided to our ever faithful customers. As we look forward
to 2006 with tremendous optimism, we will seek to build upon expansion opportunities and look forward to communicating our progress. The purpose of this expansion is twofold: to provide increased customer convenience and more importantly, to provide
an even greater return to our devoted shareholder base.

Thank you for banking with Waccamaw Bank. Your continued support through your
banking business is invaluable to the success of our company. We appreciate your loyalty and friendship. As always, we encourage you to share your comments, ideas or questions any time.



|                |  |                      
|--------------- |  | ---------------------
|Sincerely,      |  |                      
|                | 
|James G. Graham |  | Alan W. Thompson     
|                | 
|President/CEO   |  | Chairman of the Board



1



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Growing Coastal Carolinas Strong



|      |  |                                                                                            
|----- |  | -------------------------------------------------------------------------------------------
|1997  |  |                                                                                            
|8.28  |  | Waccamaw Bank receives approval from NC Banking Commission                                 
|9.2   |  | First Waccamaw Bank office opens for business                                              
|9.8   |  | Tabor City Office opens                                                                    
|9.22  |  | First Chadbourn Office opens                                                               
|12.31 |  | Assets total $20,530,222 ($531,000) profits                                                
|      | 
|1998  |  |                                                                                            
|2.5   |  | Chadbourn Office moves to 633 N. Brown Street                                              
|12.31 |  | Assets total $40,484,998 ($988,000) profits                                                
|      | 
|1999  |  |                                                                                            
|1.1   |  | James G. Graham hired as President, Chief Executive Officer                                
|5.1   |  | Tabor City Office relocates to 105 Hickman Road                                            
|12.31 |  | Assets total $57,340,000; an increase of 42% $392,000 profits; an increase of 97%          
|      | 
|2000  |  |                                                                                            
|3.1   |  | Bank assets reach milestone of $100 million. Stock split declared (6-5)                    
|3.1   |  | Shallotte Office opens                                                                     
|3.15  |  | Chadbourn Office relocates to permanent facility at 111 Strawberry Boulevard               
|6.1   |  | Construction begins on corporate office at 110 J.K. Powell Boulevard in Whiteville         
|12.1  |  | Holden Beach Office opens                                                                  
|12.31 |  | Assets total $101,442,144; a 77% increase $652,654 profits; a 66% increase                 
|      | 
|2001  |  |                                                                                            
|5.11  |  | New Corporate Office opens at 110 North J. K. Powell Boulevard                             
|6.30  |  | Waccamaw Bankshares created Stock split declared (6-5)                                     
|12.31 |  | Assets total $132,000,000; 30% increase $1,024,354 profits; 54% increase                   
|      | 
|2002  |  |                                                                                            
|4.1   |  | Waccamaw Financial Services introduced                                                     
|12.31 |  | Assets total $161,315,000; 22% increase $1,550,000 profits; 52% increase                   
|      | 
|2003  |  |                                                                                            
|3.26  |  | Waccamaw Bankshares listed on NASCAW SmallCap Markets                                      
|12.31 |  | Assets total $193,206,943; 20% increase $2,006,783 profits; 29% increase                   
|      | 
|2004  |  |                                                                                            
|6.9   |  | Stock split declared (6-5) Wilmington Office opens                                         
|6.15  |  | Waccamaw Bankshares listed in North Carolinas Top 100 Companies Stock split declared (2-1)
|12.31 |  | Assets total $258,164,000; 33.6% increase $2,414,319 profits; 20.3% increase               
|      | 
|2005  |  |                                                                                            
|7.12  |  | Waccamaw Bankshares named Top 200 Publicly Traded companies in NC                          
|7.28  |  | Business North Carolina names Waccamaw Bankshares in Top 75 Public NC Companies            
|8.28  |  | Southport Office opens                                                                     
|12.13 |  | New Operations and Training Center to be created in downtown Whiteville                    
|12.19 |  | Waccamaw Bank and Bank of Heath Springs announce definite merger agreement                 
|12.28 |  | Elizabethtown Office opens                                                                 
|12.31 |  | Assets total $322,790,000; 25% increase $3,035,000 profits; 25.7% increase                 



2



---

Significant Trends

LOGO

LOGO



3



---

Financial Highlights Summary1



|                                 |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|-------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                 |  | 2005 |         |   | 2004 |   |         | 2003 |  |   | 2002    |   |  | 2001 |        
|Summary of Operations            |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|                                 |  |      |         |   |     
|Interest income                  |  | $    | 18,228  |   |      | $ | 11,450  |      |  | $ | 9,957   |   |  | $    | 9,594   |   |  | $ | 8,789   |  
|Interest expense                 |  |      | 7,536   |   |      |   | 3,766   |      |  |   | 3,627   |   |  |      | 3,978   |   |  |   | 4,518   |  
|                                 |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net interest income              |  |      | 10,692  |   |      |   | 7,684   |      |  |   | 6,330   |   |  |      | 5,616   |   |  |   | 4,271   |  
|Provision for loan losses        |  |      | 1,370   |   |      |   | 819     |      |  |   | 730     |   |  |      | 794     |   |  |   | 612     |  
|Other income                     |  |      | 2,269   |   |      |   | 2,445   |      |  |   | 2,053   |   |  |      | 1,370   |   |  |   | 1,243   |  
|Other expense                    |  |      | 6,967   |   |      |   | 5,687   |      |  |   | 4,436   |   |  |      | 3,893   |   |  |   | 3,890   |  
|Income tax (expense) benefit     |  |      | (1,589  | ) |      |   | (1,209  | )    |  |   | (1,210  | ) |  |      | (740    | ) |  |   | 12      |  
|                                 |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net income                       |  | $    | 3,035   |   |      | $ | 2,414   |      |  | $ | 2,007   |   |  | $    | 1,559   |   |  | $ | 1,024   |  
|                                 |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Per Share Data2                  |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|                                 |  |      |         |   |     
|Basic earnings per share         |  | $    | .67     |   |      | $ | .54     |      |  | $ | .45     |   |  | $    | .36     |   |  | $ | .24     |  
|Diluted earnings per share       |  |      | .64     |   |      |   | .52     |      |  |   | .43     |   |  |      | .34     |   |  |   | .23     |  
|Book value                       |  |      | 4.93    |   |      |   | 4.39    |      |  |   | 3.80    |   |  |      | 3.32    |   |  |   | 2.97    |  
|                                 |  |      |         |   |     
|Average Balance Sheet Summary    |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|                                 |  |      |         |   |     
|Loans, net                       |  | $    | 238,579 |   |      | $ | 168,757 |      |  | $ | 137,403 |   |  | $    | 114,823 |   |  | $ | 84,209  |  
|Securities                       |  |      | 31,257  |   |      |   | 29,068  |      |  |   | 19,663  |   |  |      | 18,309  |   |  |   | 18,577  |  
|Total assets                     |  |      | 302,381 |   |      |   | 217,035 |      |  |   | 177,563 |   |  |      | 152,559 |   |  |   | 120,646 |  
|Deposits                         |  |      | 252,994 |   |      |   | 169,162 |      |  |   | 147,663 |   |  |      | 125,725 |   |  |   | 100,220 |  
|Shareholders equity             |  |      | 20,254  |   |      |   | 17,941  |      |  |   | 15,633  |   |  |      | 13,611  |   |  |   | 12,247  |  
|                                 |  |      |         |   |     
|Selected Ratios                  |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|                                 |  |      |         |   |     
|Average equity to average assets |  |      | 6.70    | % |      |   | 8.27    | %    |  |   | 8.80    | % |  |      | 8.92    | % |  |   | 10.15   | %
|Return on average assets         |  |      | 1.00    | % |      |   | 1.11    | %    |  |   | 1.13    | % |  |      | 1.02    | % |  |   | 0.85    | %
|Return on average equity         |  |      | 14.98   | % |      |   | 13.46   | %    |  |   | 12.84   | % |  |      | 11.46   | % |  |   | 8.36    | %

---

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

|2 | Adjusted for the effects of 6 for 5 stock splits in 2001, 2003 and 2004 and 2 for 1 stock
split in 2004.
|- | --------------------------------------------------------------------------------------------------------



4



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Consolidated Balance Sheets

December 31, 2005 and 2004



|                                                                                                                     |  |      |             |   |      |   |            
|-------------------------------------------------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | -----------
|                                                                                                                     |  | 2005 |             |   | 2004
|Assets                                                                                                               |  |      |             |   |      |   |            
|Cash and due from banks                                                                                              |  | $    | 6,954,425   |   |      | $ | 3,751,318  
|Interest-bearing deposits with banks                                                                                 |  |      | 707,708     |   |      |   | 974,469    
|Federal funds sold                                                                                                   |  |      | 8,281,000   |   |      |   | 4,529,000  
|Investment securities, available for sale                                                                            |  |      | 33,208,250  |   |      |   | 28,599,527 
|Restricted equity securities                                                                                         |  |      | 2,005,906   |   |      |   | 1,632,605  
|Loans, net of allowance for loan losses of $3,939,002 in 2005 and $2,791,008 in 2004                                 |  |      | 257,574,925 |   |      |   | 206,666,022
|Property and equipment, net                                                                                          |  |      | 3,380,179   |   |      |   | 3,301,220  
|Intangible assets, net                                                                                               |  |      | 877,736     |   |      |   | 1,104,916  
|Accrued income                                                                                                       |  |      | 1,604,477   |   |      |   | 1,137,359  
|Bank owned life insurance                                                                                            |  |      | 5,208,929   |   |      |   | 5,030,074  
|Other assets                                                                                                         |  |      | 2,988,464   |   |      |   | 1,685,931  
|                                                                                                                     |  |      |             |   |      |   |            
|Total assets                                                                                                         |  | $    | 322,791,999 |   |      | $ | 258,412,441
|                                                                                                                     |  |      |             |   |      |   |            
|Liabilities and Stockholders Equity                                                                                 |  |      |             |   |      |   |            
|                                                                                                                     |  |     
|Liabilities                                                                                                          |  |      |             |   |      |   |            
|Noninterest-bearing deposits                                                                                         |  | $    | 25,348,916  |   |      | $ | 19,065,902 
|Interest-bearing deposits                                                                                            |  |      | 245,686,552 |   |      |   | 188,575,792
|                                                                                                                     |  |      |             |   |      |   |            
|Total deposits                                                                                                       |  |      | 271,035,468 |   |      |   | 207,641,694
|Securities sold under agreements to repurchase                                                                       |  |      | 2,736,000   |   |      |   | 3,268,000  
|Short-term borrowings                                                                                                |  |      | 10,000,000  |   |      |   |           
|Long-term debt                                                                                                       |  |      | 6,500,000   |   |      |   | 18,500,000 
|Guaranteed preferred beneficial interest in the companys junior subordinated debentures                             |  |      | 8,248,000   |   |      |   | 8,248,000  
|Accrued interest payable                                                                                             |  |      | 1,065,996   |   |      |   | 594,989    
|Other liabilities                                                                                                    |  |      | 707,891     |   |      |   | 261,201    
|                                                                                                                     |  |      |             |   |      |   |            
|Total liabilities                                                                                                    |  |      | 300,293,355 |   |      |   | 238,513,884
|                                                                                                                     |  |      |             |   |      |   |            
|Commitments and contingencies                                                                                        |  |      |            |   |      |   |           
|                                                                                                                     |  |     
|Stockholders equity                                                                                                 |  |      |             |   |      |   |            
|Preferred stock, no par value; 1,000,000 shares authorized; none outstanding                                         |  |      |            |   |      |   |           
|Common stock, no par; 25,000,000 shares authorized; 4,564,587 shares issued in 2005; 4,530,402 shares issued in 2004 |  |      | 13,256,961  |   |      |   | 13,142,612 
|Retained earnings                                                                                                    |  |      | 9,564,875   |   |      |   | 6,529,502  
|Accumulated other comprehensive (loss) income                                                                        |  |      | (323,192    | ) |      |   | 226,443    
|                                                                                                                     |  |      |             |   |      |   |            
|Total stockholders equity                                                                                           |  |      | 22,498,644  |   |      |   | 19,898,557 
|                                                                                                                     |  |      |             |   |      |   |            
|Total liabilities and stockholders equity                                                                           |  | $    | 322,791,999 |   |      | $ | 258,412,441
|                                                                                                                     |  |      |             |   |      |   |            

See Notes to Consolidated Financial Statements



5



---

Consolidated Statements of Income

Years ended December 31, 2005, 2004, and 2003



|                                                                           |  |      |            |   |      |   |            |      |  |   |            |  
|-------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                           |  | 2005 |            |   | 2004 |   |            | 2003 | 
|Interest income                                                            |  |      |            |   |      |   |            |      |  |   |            |  
|Loans and fees on loans                                                    |  | $    | 16,330,154 |   |      | $ | 10,137,520 |      |  | $ | 8,968,847  |  
|Money market investments                                                   |  |      | 436,147    |   |      |   | 33,007     |      |  |   | 88,882     |  
|Investment securities, taxable                                             |  |      | 1,365,852  |   |      |   | 1,179,519  |      |  |   | 831,482    |  
|Investment securities, nontaxable                                          |  |      | 95,806     |   |      |   | 100,430    |      |  |   | 67,937     |  
|                                                                           |  |      |            |   |      |   |            |      |  |   |            |  
|Total interest income                                                      |  |      | 18,227,959 |   |      |   | 11,450,476 |      |  |   | 9,957,148  |  
|                                                                           |  |      |            |   |      |   |            |      |  |   |            |  
|Interest expense                                                           |  |      |            |   |      |   |            |      |  |   |            |  
|Deposits                                                                   |  |      | 6,313,174  |   |      |   | 3,004,161  |      |  |   | 3,304,587  |  
|Federal funds purchased and securities sold under agreements to repurchase |  |      | 76,247     |   |      |   | 40,978     |      |  |   | 29,082     |  
|Other borrowed funds                                                       |  |      | 1,146,161  |   |      |   | 720,841    |      |  |   | 293,882    |  
|                                                                           |  |      |            |   |      |   |            |      |  |   |            |  
|Total interest expense                                                     |  |      | 7,535,582  |   |      |   | 3,765,980  |      |  |   | 3,627,551  |  
|                                                                           |  |      |            |   |      |   |            |      |  |   |            |  
|Net interest income                                                        |  |      | 10,692,377 |   |      |   | 7,684,496  |      |  |   | 6,329,597  |  
|                                                                           |  |      |           
|Provision for loan losses                                                  |  |      | 1,370,000  |   |      |   | 819,500    |      |  |   | 730,000    |  
|                                                                           |  |      |            |   |      |   |            |      |  |   |            |  
|Net interest income after provision for loan losses                        |  |      | 9,322,377  |   |      |   | 6,864,996  |      |  |   | 5,599,597  |  
|                                                                           |  |      |            |   |      |   |            |      |  |   |            |  
|Noninterest income                                                         |  |      |            |   |      |   |            |      |  |   |            |  
|Service charges on deposit accounts                                        |  |      | 1,094,649  |   |      |   | 991,701    |      |  |   | 989,517    |  
|Mortgage origination income                                                |  |      | 270,321    |   |      |   | 195,679    |      |  |   | 284,620    |  
|Other operating income                                                     |  |      | 674,351    |   |      |   | 585,740    |      |  |   | 446,282    |  
|Income from mortgage banking investee                                      |  |      |           |   |      |   | 296,633    |      |  |   | 249,254    |  
|Earnings on bank owned life insurance                                      |  |      | 193,639    |   |      |   | 227,160    |      |  |   | 18,930     |  
|Net realized (losses) gains on sale or maturity of investment securities   |  |      | (1,062     | ) |      |   | 14,388     |      |  |   | 64,802     |  
|Net realized gains on sale of investment in mortgage banking investee      |  |      | 36,848     |   |      |   | 134,025    |      |  |   |           |  
|                                                                           |  |      |            |   |      |   |            |      |  |   |            |  
|Total noninterest income                                                   |  |      | 2,268,746  |   |      |   | 2,445,326  |      |  |   | 2,053,405  |  
|                                                                           |  |      |            |   |      |   |            |      |  |   |            |  
|Noninterest expense                                                        |  |      |            |   |      |   |            |      |  |   |            |  
|Salaries and employee benefits                                             |  |      | 3,733,723  |   |      |   | 3,003,019  |      |  |   | 2,273,418  |  
|Occupancy and equipment                                                    |  |      | 805,095    |   |      |   | 692,298    |      |  |   | 640,473    |  
|Data processing                                                            |  |      | 629,080    |   |      |   | 431,415    |      |  |   | 340,913    |  
|Amortization expense                                                       |  |      | 252,712    |   |      |   | 252,036    |      |  |   | 227,181    |  
|Foreclosed assets expense, net                                             |  |      |           |   |      |   | 35,060     |      |  |   |           |  
|Other expense                                                              |  |      | 1,545,972  |   |      |   | 1,273,294  |      |  |   | 954,483    |  
|                                                                           |  |      |            |   |      |   |            |      |  |   |            |  
|Total noninterest expense                                                  |  |      | 6,966,582  |   |      |   | 5,687,122  |      |  |   | 4,436,468  |  
|                                                                           |  |      |            |   |      |   |            |      |  |   |            |  
|Income before income taxes                                                 |  |      | 4,624,541  |   |      |   | 3,623,200  |      |  |   | 3,216,534  |  
|                                                                           |  |      |           
|Income tax expense                                                         |  |      | (1,589,168 | ) |      |   | (1,208,881 | )    |  |   | (1,209,751 | )
|                                                                           |  |      |            |   |      |   |            |      |  |   |            |  
|Net income                                                                 |  | $    | 3,035,373  |   |      | $ | 2,414,319  |      |  | $ | 2,006,783  |  
|                                                                           |  |      |            |   |      |   |            |      |  |   |            |  
|Basic earnings per share                                                   |  | $    | .67        |   |      | $ | .54        |      |  | $ | .45        |  
|                                                                           |  |      |            |   |      |   |            |      |  |   |            |  
|Diluted earnings per share                                                 |  | $    | .64        |   |      | $ | .52        |      |  | $ | .43        |  
|                                                                           |  |      |            |   |      |   |            |      |  |   |            |  
|Weighted average shares outstanding                                        |  |      | 4,543,386  |   |      |   | 4,507,523  |      |  |   | 4,430,974  |  
|                                                                           |  |      |            |   |      |   |            |      |  |   |            |  
|Weighted average dilutive shares outstanding                               |  |      | 4,766,013  |   |      |   | 4,595,501  |      |  |   | 4,664,662  |  
|                                                                           |  |      |            |   |      |   |            |      |  |   |            |  

See Notes to Consolidated Financial Statements



6



---

Consolidated Statements of Changes in Stockholders Equity

Years ended December 31, 2005, 2004 and 2003



|                                                                                                                     |  |           |   |  |             |            |   |                           |   |                                            |  |   |          |   |  |   |            |  
|-------------------------------------------------------------------------------------------------------------------- |  | --------- | - |  | ----------- | ---------- | - | ------------------------- | - | ------------------------------------------ |  | - | -------- | - |  | - | ---------- | -
|                                                                                                                     |  | Shares    |   |  | CommonStock |            |   | RetainedEarnings(Deficit) |   | AccumulatedOtherComprehensiveIncome (Loss) |  |   | Total    |  
|December 31, 2002                                                                                                    |  | 1,528,110 |   |  | $           | 12,445,385 |   |                           | $ | 2,108,400                                  |  | $ | 39,875   |   |  | $ | 14,593,660 |  
|Comprehensive income                                                                                                 |  |           |   |  |             |            |   |                           |   |                                            |  |   |          |   |  |   |            |  
|Net income                                                                                                           |  |          |   |  |             |           |   |                           |   | 2,006,783                                  |  |   |         |   |  |   | 2,006,783  |  
|Net change in unrealized appreciation on investment securities available for sale, net of income taxes of $46,546    |  |          |   |  |             |           |   |                           |   |                                           |  |   | 90,354   |   |  |   | 90,354     |  
|Reclassification adjustment, net of income taxes of ($22,033)                                                        |  |          |   |  |             |           |   |                           |   |                                           |  |   | (42,769  | ) |  |   | (42,769    | )
|                                                                                                                     |  |           |   |  |             |            |   |                           |   |                                            |  |   |          |   |  |   |            |  
|Total comprehensive income                                                                                           |  |           |   |  |             |            |   |                           |   |                                            |  |   |          |   |  |   | 2,054,368  |  
|                                                                                                                     |  |           |   |  |            
|Issuance of common stock                                                                                             |  | 5,589     |   |  |             | 125,529    |   |                           |   |                                           |  |   |         |   |  |   | 125,529    |  
|Exercise of stock options                                                                                            |  | 18,598    |   |  |             | 206,590    |   |                           |   |                                           |  |   |         |   |  |   | 206,590    |  
|Stock split                                                                                                          |  | 307,475   |   |  |             |           |   |                           |   |                                           |  |   |         |   |  |   |           |  
|Stock issuance costs                                                                                                 |  |          |   |  |             | (17,174    | ) |                           |   |                                           |  |   |         |   |  |   | (17,174    | )
|                                                                                                                     |  |           |   |  |             |            |   |                           |   |                                            |  |   |          |   |  |   |            |  
|December 31, 2003                                                                                                    |  | 1,859,772 |   |  |             | 12,760,330 |   |                           |   | 4,115,183                                  |  |   | 87,460   |   |  |   | 16,962,973 |  
|                                                                                                                     |  |           |   |  |            
|Comprehensive income                                                                                                 |  |           |   |  |             |            |   |                           |   |                                            |  |   |          |   |  |   |            |  
|Net income                                                                                                           |  |          |   |  |             |           |   |                           |   | 2,414,319                                  |  |   |         |   |  |   | 2,414,319  |  
|Net change in unrealized appreciation on investment securities available for sale, net of income taxes of $76,489    |  |          |   |  |             |           |   |                           |   |                                           |  |   | 148,479  |   |  |   | 148,479    |  
|Reclassification adjustment, net of income taxes of ($4,892)                                                         |  |          |   |  |             |           |   |                           |   |                                           |  |   | (9,496   | ) |  |   | (9,496     | )
|                                                                                                                     |  |           |   |  |             |            |   |                           |   |                                            |  |   |          |   |  |   |            |  
|Total comprehensive income                                                                                           |  |           |   |  |             |            |   |                           |   |                                            |  |   |          |   |  |   | 2,553,302  |  
|                                                                                                                     |  |           |   |  |            
|Issuance of common stock                                                                                             |  | 4,720     |   |  |             | 127,100    |   |                           |   |                                           |  |   |         |   |  |   | 127,100    |  
|Exercise of stock options                                                                                            |  | 36,336    |   |  |             | 278,630    |   |                           |   |                                           |  |   |         |   |  |   | 278,630    |  
|Stock split                                                                                                          |  | 2,630,336 |   |  |             |           |   |                           |   |                                           |  |   |         |   |  |   |           |  
|Redemption of fractional shares                                                                                      |  | (762      | ) |  |             | (23,448    | ) |                           |   |                                           |  |   |         |   |  |   | (23,448    | )
|                                                                                                                     |  |           |   |  |             |            |   |                           |   |                                            |  |   |          |   |  |   |            |  
|December 31, 2004                                                                                                    |  | 4,530,402 |   |  |             | 13,142,612 |   |                           |   | 6,529,502                                  |  |   | 226,443  |   |  |   | 19,898,557 |  
|                                                                                                                     |  |           |   |  |            
|Comprehensive income                                                                                                 |  |           |   |  |             |            |   |                           |   |                                            |  |   |          |   |  |   |            |  
|Net income                                                                                                           |  |          |   |  |             |           |   |                           |   | 3,035,373                                  |  |   |         |   |  |   | 3,035,373  |  
|Net change in unrealized appreciation on investment securities available for sale, net of income taxes of ($283,507) |  |          |   |  |             |           |   |                           |   |                                           |  |   | (550,336 | ) |  |   | (550,336   | )
|Reclassification adjustment, net of income taxes of $361                                                             |  |          |   |  |             |           |   |                           |   |                                           |  |   | 701      |   |  |   | 701        |  
|                                                                                                                     |  |           |   |  |             |            |   |                           |   |                                            |  |   |          |   |  |   |            |  
|Total comprehensive income                                                                                           |  |           |   |  |             |            |   |                           |   |                                            |  |   |          |   |  |   | 2,485,738  |  
|                                                                                                                     |  |           |   |  |            
|Exercise of stock options                                                                                            |  | 34,185    |   |  |             | 114,349    |   |                           |   |                                           |  |   |         |   |  |   | 114,349    |  
|                                                                                                                     |  |           |   |  |             |            |   |                           |   |                                            |  |   |          |   |  |   |            |  
|December 31, 2005                                                                                                    |  | 4,564,587 |   |  | $           | 13,256,961 |   |                           | $ | 9,564,875                                  |  | $ | (323,192 | ) |  | $ | 22,498,644 |  
|                                                                                                                     |  |           |   |  |             |            |   |                           |   |                                            |  |   |          |   |  |   |            |  

See Notes to Consolidated Financial Statements



7



---

Consolidated Statements of Cash Flows

Years ended December 31, 2005, 2004 and 2003



|                                                                          |  |      |             |   |      |   |             |      |  |   |             |  
|------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | ---- |  | - | ----------- | -
|                                                                          |  | 2005 |             |   | 2004 |   |             | 2003 | 
|Cash flows from operating activities                                      |  |      |             |   |      |   |             |      |  |   |             |  
|Net income                                                                |  | $    | 3,035,373   |   |      | $ | 2,414,319   |      |  | $ | 2,006,783   |  
|Adjustments to reconcile net income to net cash provided by operations:   |  |      |             |   |      |   |             |      |  |   |             |  
|Depreciation and amortization                                             |  |      | 522,383     |   |      |   | 492,479     |      |  |   | 474,689     |  
|Provision for loan losses                                                 |  |      | 1,370,000   |   |      |   | 819,500     |      |  |   | 730,000     |  
|Accretion of discount on securities, net of amortization of premiums      |  |      | 87,726      |   |      |   | 72,515      |      |  |   | 141,632     |  
|(Gain) loss on sale of investment securities                              |  |      | 1,062       |   |      |   | (14,388     | )    |  |   | (64,802     | )
|Gain on sale of investment in mortgage banking investee                   |  |      | (36,848     | ) |      |   | (134,025    | )    |  |   |            |  
|Income from bank owned life insurance                                     |  |      | (178,855    | ) |      |   | (212,376    | )    |  |   | (17,698     | )
|Deferred taxes                                                            |  |      | (456,679    | ) |      |   | (147,704    | )    |  |   | (121,998    | )
|Benefit of non qualified stock option exercise                            |  |      |            |   |      |   | 116,729     |      |  |   | 65,590      |  
|Changes in assets and liabilities:                                        |  |      |             |   |      |   |             |      |  |   |             |  
|Accrued income                                                            |  |      | (467,118    | ) |      |   | (264,650    | )    |  |   | 189,256     |  
|Other assets                                                              |  |      | (500,798    | ) |      |   | (208,215    | )    |  |   | (65,798     | )
|Accrued interest payable                                                  |  |      | 471,007     |   |      |   | 68,113      |      |  |   | (260,076    | )
|Other liabilities                                                         |  |      | 446,690     |   |      |   | (378,864    | )    |  |   | 352,733     |  
|                                                                          |  |      |             |   |      |   |             |      |  |   |             |  
|Net cash provided by operating activities                                 |  |      | 4,293,943   |   |      |   | 2,623,433   |      |  |   | 3,430,311   |  
|                                                                          |  |      |             |   |      |   |             |      |  |   |             |  
|Cash flows from investing activities                                      |  |      |             |   |      |   |             |      |  |   |             |  
|Net (increase) decrease in federal funds sold                             |  |      | (3,752,000  | ) |      |   | 5,587,000   |      |  |   | (7,408,000  | )
|Net increase (decrease) in securities sold under agreements to repurchase |  |      | (532,000    | ) |      |   | (386,000    | )    |  |   | (2,417,000  | )
|Purchases of investment securities                                        |  |      | (14,430,495 | ) |      |   | (14,725,560 | )    |  |   | (19,331,048 | )
|Maturities of investment securities                                       |  |      | 7,058,846   |   |      |   | 7,715,390   |      |  |   | 10,941,773  |  
|Net increase in loans                                                     |  |      | (52,310,314 | ) |      |   | (65,143,092 | )    |  |   | (17,403,099 | )
|Proceeds from sales of investment securities                              |  |      | 1,468,057   |   |      |   | 1,117,880   |      |  |   | 5,002,965   |  
|Investment in bank owned life insurance                                   |  |      |            |   |      |   |            |      |  |   | (4,800,000  | )
|Purchases of property and equipment                                       |  |      | (367,814    | ) |      |   | (410,799    | )    |  |   | (15,429     | )
|                                                                          |  |      |             |   |      |   |             |      |  |   |             |  
|Net cash used in investing activities                                     |  |      | (62,865,720 | ) |      |   | (66,245,181 | )    |  |   | (35,429,838 | )
|                                                                          |  |      |             |   |      |   |             |      |  |   |             |  
|Cash flows from financing activities                                      |  |      |             |   |      |   |             |      |  |   |             |  
|Net increase in noninterest-bearing deposits                              |  |      | 6,283,014   |   |      |   | 2,696,402   |      |  |   | 3,176,702   |  
|Net increase in interest-bearing deposits                                 |  |      | 57,110,760  |   |      |   | 50,149,363  |      |  |   | 20,895,791  |  
|Net increase in junior subordinated debentures                            |  |      |            |   |      |   |            |      |  |   | 8,248,000   |  
|Net proceeds from long-term debt                                          |  |      | (2,000,000  | ) |      |   | 10,000,000  |      |  |   | (100,000    | )
|Proceeds from issuance of common stock                                    |  |      | 114,349     |   |      |   | 161,901     |      |  |   | 141,000     |  
|Stock issuance costs and redemption of fractional shares                  |  |      |            |   |      |   | (23,448     | )    |  |   | (17,174     | )
|                                                                          |  |      |             |   |      |   |             |      |  |   |             |  
|Net cash provided by financing activities                                 |  |      | 61,508,123  |   |      |   | 62,984,218  |      |  |   | 32,344,319  |  
|                                                                          |  |      |             |   |      |   |             |      |  |   |             |  
|Increase (decrease) in cash and cash equivalents                          |  |      | 2,936,346   |   |      |   | (637,530    | )    |  |   | 344,792     |  
|Cash and cash equivalents, beginning                                      |  |      | 4,725,787   |   |      |   | 5,363,317   |      |  |   | 5,018,525   |  
|                                                                          |  |      |             |   |      |   |             |      |  |   |             |  
|Cash and cash equivalents, ending                                         |  | $    | 7,662,133   |   |      | $ | 4,725,787   |      |  | $ | 5,363,317   |  
|                                                                          |  |      |             |   |      |   |             |      |  |   |             |  
|Supplemental disclosure of cash flow information                          |  |      |             |   |      |   |             |      |  |   |             |  
|Interest paid                                                             |  | $    | 7,064,575   |   |      | $ | 3,697,867   |      |  | $ | 3,887,627   |  
|                                                                          |  |      |             |   |      |   |             |      |  |   |             |  
|Taxes paid                                                                |  | $    | 2,068,880   |   |      | $ | 1,614,361   |      |  | $ | 1,145,811   |  
|                                                                          |  |      |             |   |      |   |             |      |  |   |             |  
|Supplemental disclosure of noncash activities                             |  |      |             |   |      |   |             |      |  |   |             |  
|Common stock issued as payment of directors fees                          |  | $    |            |   |      | $ | 127,100     |      |  | $ | 125,529     |  
|                                                                          |  |      |             |   |      |   |             |      |  |   |             |  
|Stock received for equity in mortgage banking investee                    |  | $    |            |   |      | $ | 131,378     |      |  | $ |            |  
|                                                                          |  |      |             |   |      |   |             |      |  |   |             |  
|Real estate acquired in settlement of loans                               |  | $    | 31,411      |   |      | $ |            |      |  | $ |            |  
|                                                                          |  |      |             |   |      |   |             |      |  |   |             |  

See Notes to Consolidated Financial Statements



8



---

Notes to Consolidated Financial Statements

Note 1. Organization and Summary of Significant Accounting Policies

Organization

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

During 2001, Waccamaw Bankshares, Inc. (Company), a financial holding company chartered in North Carolina was formed. On June 30, 2001, Waccamaw Bankshares, Inc. acquired all the outstanding shares of Waccamaw
Bank in a tax-free exchange.

Waccamaw Financial Services, Inc. is a wholly owned subsidiary of Waccamaw Bank in which the primary business activity is
investment and insurance services.

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

Critical Accounting Policies

The notes to our audited consolidated financial statements for the year ended December 31, 2005
contain a summary of our significant accounting policies. We believe our policies, with respect to the methodology for our determination of the allowance for loan losses, and asset impairment judgments, including the recoverability of intangible
assets, involve a higher degree of complexity and require management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could
cause reported results to differ materially. These critical policies and their application are periodically reviewed with the Audit Committee and our Board of Directors.

Principles of Consolidation

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

Business Segments

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

Use of
Estimates

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

Material estimates that are particularly susceptible to significant change relate to the determination
of the allowance for loan losses, the valuation of deferred tax assets and the valuation of real estate acquired in connection with foreclosures



9



---

Notes to Consolidated Financial Statements

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

Use of Estimates, continued

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.

Primarily all of the Banks loan portfolio consists of loans in its market area. Accordingly, the
ultimate collectibility of a substantial portion of the Banks loan portfolio and the recovery of a substantial portion of the carrying amount of foreclosed real estate are susceptible to changes in local market conditions. Management believes
the economic outlook is positive.

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

Cash and Cash Equivalents

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

Interest-Bearing Deposits with Banks

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

Trading Securities

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

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 estimating other-than-temporary
impairment losses, management considers (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 Receivable

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



10



---

Notes to Consolidated Financial Statements

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

Loans Receivable, continued

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

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

Allowance for Loan Losses

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

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

The allowance consists of specific, general and unallocated components. The
specific component relates to loans that are classified as either doubtful, substandard or special mention. For such loans that are also classified as impaired, 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-classified 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 specific and general 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 disclosures.



11



---

Notes to Consolidated Financial Statements

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

Property and Equipment

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



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

Stock-based Compensation

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

Transfers of Financial Assets

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

Advertising Expense

The Company expenses advertising costs as
they are incurred. Advertising expense for the years ended December 31, 2005, 2004, and 2003 was approximately $187,000, $161,000 and $98,000, respectively.

Income Taxes

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

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

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.



12



---

Notes to Consolidated Financial Statements

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 shares.

Foreclosed Assets

Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed
by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets.

Comprehensive Income

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

Financial Instruments

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

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

Fair Value of Financial Instruments

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

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

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



13



---

Notes to Consolidated Financial Statements

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

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

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

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

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

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

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

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

Reclassification

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

Recent Accounting Pronouncements

On March 9, 2004, the SEC Staff issued Staff Accounting Bulletin No. 105, Application of Accounting Principles to Loan Commitments (SAB 105). SAB 105 clarifies existing accounting practices relating to the valuation of
issued loan commitments, including interest rate lock commitments (IRLC), subject to SFAS No. 149 and Derivative Implementation Group Issue C13, Scope Exceptions: When a Loan Commitment is included in the Scope of Statement 133.
Furthermore, SAB 105 disallows the inclusion of the values of a servicing component and other internally developed intangible assets in the initial and subsequent IRLC valuation. The provisions of SAB 105 were effective for loan commitments entered
into after March 31, 2004. The Company adopted the provisions of SAB 105 effective April 1, 2004. Since the provisions of SAB 105 affect only the timing of the recognition of mortgage banking income, the adoption of SAB 105 did not have a
material adverse effect on either the Companys consolidated financial position or consolidated results of operations.

In December 2004, the
Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 123(R) (SFAS No. 123(R)), Share-Based Payment, which is a revision of FASB Statement No. 123 Accounting for
Stock-Based Compensation and supersedes APB Opinion No. 25 Accounting for Stock Issued to Employees. SFAS No. 123(R) requires companies to recognize in the income statement the grant-date fair value of stock options and
other equity-based compensation issued to employees over the period during which an employee is required to provide service in exchange for the award, which will often be the shorter of the vesting period or the period the employee will be
retirement eligible



14



---

Notes to Consolidated Financial Statements

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

Recent Accounting
Pronouncements, continued

SFAS No. 123(R) sets accounting requirements for share-based compensation to employees, including
employee-stock purchase plans (ESPPs). Awards to most nonemployee directors will be accounted for as employee awards. This Statement was to be effective for public companies that do not file as small business issuers as of the beginning of interim
or annual reporting periods beginning after June 15, 2005. In April 2005, the Securities and Exchange Commission (SEC) issued Release No. 2005-57, which defers the effective date of SFAS No. 123(R) for many registrants. Registrants
that do not file as small business users must adopt SFAS No. 123(R) as of the beginning of their first annual period beginning after June 15, 2005. Accordingly, the Company adopted SFAS No. 123(R) on January 1, 2006, and believes
it will not have a material effect on the consolidated financial statements.

In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (SAB
107), which contains guidance on applying the requirements in SFAS No. 123(R). SAB 107 provides guidance on valuation techniques, development of assumptions used in valuing employee share options and related MD&A disclosures. SAB 107 is
effective for the period in which SFAS No. 123(R) is adopted. The Company adopted SAB 107 on January 1, 2006, and believes it will not have a material effect on the consolidated financial statements.

In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154 (SFAS No. 154), Accounting Changes and Error Corrections, which
replaces APB Opinion No. 20 Accounting Changes and FASB Statement No. 3 Reporting Accounting Changes in Interim Financial Statements. SFAS No. 154 changes the requirements for the accounting for and reporting
of a change in an accounting principle. SFAS No. 154 requires retrospective application for voluntary changes in an accounting principle unless it is impracticable to do so. SFAS No. 154 is effective for accounting changes made in fiscal
years beginning after December 15, 2005. The Company adopted SFAS No. 154 on January 1, 2006 with no expected material effect on its consolidated financial statements.

Note 2. Restrictions on Cash

To comply with banking regulation, the Bank is required to maintain certain average
cash reserve balances. The daily average cash reserve requirement was approximately $1,030,000 and $810,000 for the period including December 31, 2005 and 2004, respectively.

Note 3. 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 Cost |            | Unrealized Gains |   | Unrealized Losses |  | Fair Value
|2005:                             |  |                |            |                  |   |                   |  |            |         |  |   |           
|Mortgage backed securities        |  | $              | 17,663,191 |                  | $ | 13,575            |  | $          | 208,221 |  | $ | 17,468,545
|Corporate securities              |  |                | 11,916,478 |                  |   | 399,838           |  |            | 649,793 |  |   | 11,666,523
|Municipal Securities              |  |                | 4,110,546  |                  |   | 15,283            |  |            | 52,647  |  |   | 4,073,182 
|Restricted equity securities      |  |                | 2,005,906  |                  |   |                  |  |            |        |  |   | 2,005,906 
|                                  |  |                |            |                  |   |                   |  |            |         |  |   |           
|                                  |  | $              | 35,696,121 |                  | $ | 428,696           |  | $          | 910,661 |  | $ | 35,214,156
|                                  |  |                |            |                  |   |                   |  |            |         |  |   |           
|2004:                             |  |                |            |                  |   |                   |  |            |         |  |   |           
|U.S. Government agency securities |  | $              | 500,000    |                  | $ | 3,155             |  | $          |        |  | $ | 503,155   
|Mortgage backed securities        |  |                | 14,750,287 |                  |   | 41,553            |  |            | 95,843  |  |   | 14,695,997
|Corporate securities              |  |                | 10,677,594 |                  |   | 470,759           |  |            | 76,266  |  |   | 11,072,087
|Municipal Securities              |  |                | 2,318,868  |                  |   | 16,566            |  |            | 7,146   |  |   | 2,328,288 
|Restricted equity securities      |  |                | 1,632,605  |                  |   |                  |  |            |        |  |   | 1,632,605 
|                                  |  |                |            |                  |   |                   |  |            |         |  |   |           
|                                  |  | $              | 29,879,354 |                  | $ | 532,033           |  | $          | 179,255 |  | $ | 30,232,132
|                                  |  |                |            |                  |   |                   |  |            |         |  |   |           



15



---

Notes to Consolidated Financial Statements

Note 3. Securities, continued

Restricted equity securities are carried at cost and consist of investments in stock
of the Federal Home Loan Bank of Atlanta (FHLB), The Bankers Bank and The Federal Reserve Bank of Richmond (Federal Reserve). All of those entities are correspondents of the Bank. The FHLB requires financial institutions to make equity investments
in the FHLB in order to borrow from it. The Bank is required to hold that stock so long as it borrows from the FHLB. The Federal Reserve requires banks to purchase stock as a condition of membership in the Federal Reserve system. The Banks
stock in The Bankers Bank is restricted only in the fact that the stock may only be repurchased by the respective company.

Investment securities with
market values of $11,291,803 and $13,767,323 at December 31, 2005 and 2004, respectively were pledged as collateral on public deposits and for other banking purposes as required or permitted by law. Gross realized gains and losses for the years
ended December 31, 2005, 2004 and 2003 are as follows:



|                |  |      |        |   |      |   |         |      |  |   |        |  
|--------------- |  | ---- | ------ | - | ---- | - | ------- | ---- |  | - | ------ | -
|                |  | 2005 |        |   | 2004 |   |         | 2003 | 
|Realized gains  |  | $    |       |   |      | $ | 149,255 |      |  | $ | 65,637 |  
|Realized losses |  |      | (1,062 | ) |      |   | (842    | )    |  |   | (835   | )
|                |  |      |        |   |      |   |         |      |  |   |        |  
|                |  | $    | (1,062 | ) |      | $ | 148,413 |      |  | $ | 64,802 |  
|                |  |      |        |   |      |   |         |      |  |   |        |  

The scheduled contractual maturities of securities (all available for sale) at
December 31, 2005 are as follows:



|                              |  |                |            |            |   |           
|----------------------------- |  | -------------- | ---------- | ---------- | - | ----------
|                              |  | Amortized Cost |            | Fair Value
|Due in one year or less       |  | $              | 131,378    |            | $ | 277,760   
|Due in one through five years |  |                | 2,372,966  |            |   | 2,232,568 
|Due in five through ten years |  |                | 3,956,350  |            |   | 3,409,101 
|Due after ten years           |  |                | 27,229,521 |            |   | 27,288,821
|Restricted equity securities  |  |                | 2,005,906  |            |   | 2,005,906 
|                              |  |                |            |            |   |           
|                              |  | $              | 35,696,121 |            | $ | 35,214,156
|                              |  |                |            |            |   |           

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, 2005 and December 31, 2004.



|                                      |  |                     |            |                   |                   |          |            |       |                   |           |  |            |          |                   |  |   |            |  |   |          |  
|------------------------------------- |  | ------------------- | ---------- | ----------------- | ----------------- | -------- | ---------- | ----- | ----------------- | --------- |  | ---------- | -------- | ----------------- |  | - | ---------- |  | - | -------- | -
|                                      |  | Less Than 12 Months |            |                   | 12 Months or More |          |            | Total |                  
|December 31, 2005                     |  | Fair Value          |            | Unrealized Losses |                   |          | Fair Value |       | Unrealized Losses |           |  | Fair Value |          | Unrealized Losses | 
|                                      |  |                     |            |                   |                   |          |            |       |                   |           |  |            |          |                   |  |   |            |  |   |          |  
|Mortgage backed securities            |  | $                   | 9,010,162  |                   | $                 | (90,010  | )          |       | $                 | 4,900,246 |  | $          | (118,221 | )                 |  | $ | 13,910,408 |  | $ | (208,221 | )
|Corporate securities                  |  |                     | 894,652    |                   |                   | (93,723  | )          |       |                   | 3,958,648 |  |            | (556,070 | )                 |  |   | 4,853,300  |  |   | (649,793 | )
|Municipal securities                  |  |                     | 3,095,231  |                   |                   | (45,065  | )          |       |                   | 249,819   |  |            | (7,582   | )                 |  |   | 3,345,050  |  |   | (52,647  | )
|Restricted equity securities          |  |                     |           |                   |                   |         |            |       |                   |          |  |            |         |                   |  |   |           |  |   |         |  
|                                      |  |                     |            |                   |                   |          |            |       |                   |           |  |            |          |                   |  |   |            |  |   |          |  
|Total temporarily impaired securities |  | $                   | 13,000,045 |                   | $                 | (228,798 | )          |       | $                 | 9,108,713 |  | $          | (681,863 | )                 |  | $ | 22,108,758 |  | $ | (910,661 | )
|                                      |  |                     |            |                   |                   |          |            |       |                   |           |  |            |          |                   |  |   |            |  |   |          |  
|                                      |  |                     |           
|                                      |  | Less Than 12 Months |            |                   | 12 Months or More |          |            | Total |                  
|December 31, 2004                     |  | Fair Value          |            | Unrealized Losses |                   |          | Fair Value |       | Unrealized Losses |           |  | Fair Value |          | Unrealized Losses | 
|                                      |  |                     |            |                   |                   |          |            |       |                   |           |  |            |          |                   |  |   |            |  |   |          |  
|Mortgage backed securities            |  | $                   | 5,409,714  |                   | $                 | (46,092  | )          |       | $                 | 2,249,727 |  | $          | (49,752  | )                 |  | $ | 7,659,441  |  | $ | (95,844  | )
|Corporate securities                  |  |                     | 3,939,001  |                   |                   | (76,266  | )          |       |                   |          |  |            |         |                   |  |   | 3,939,001  |  |   | (76,266  | )
|Municipal securities                  |  |                     | 1,226,117  |                   |                   | (1,986   | )          |       |                   | 356,055   |  |            | (5,159   | )                 |  |   | 1,582,172  |  |   | (7,145   | )
|Restricted equity securities          |  |                     |           |                   |                   |         |            |       |                   |          |  |            |         |                   |  |   |           |  |   |         |  
|                                      |  |                     |            |                   |                   |          |            |       |                   |           |  |            |          |                   |  |   |            |  |   |          |  
|Total temporarily impaired securities |  | $                   | 10,574,832 |                   | $                 | (124,344 | )          |       | $                 | 2,605,782 |  | $          | (54,911  | )                 |  | $ | 13,180,614 |  | $ | (179,255 | )
|                                      |  |                     |            |                   |                   |          |            |       |                   |           |  |            |          |                   |  |   |            |  |   |          |  



16



---

Notes to Consolidated Financial Statements

Note 3. Securities, continued

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.

Note 4. Loans Receivable

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



|                                  |  |              |         |   |      |   |         |  
|--------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | -
|                                  |  | In Thousands |        
|                                  |  | 2005         |         |   | 2004 |  
|Commercial                        |  | $            | 29,036  |   |      | $ | 30,928  |  
|Real estate:                      |  |              |         |   |      |   |         |  
|Construction and land development |  |              | 83,575  |   |      |   | 37,529  |  
|Residential, 1-4 families         |  |              | 62,796  |   |      |   | 58,484  |  
|Residential, 5 or more families   |  |              | 4,495   |   |      |   | 3,600   |  
|Farmland                          |  |              | 2,545   |   |      |   | 2,119   |  
|Nonfarm, nonresidential           |  |              | 67,199  |   |      |   | 65,156  |  
|Agricultural                      |  |              | 388     |   |      |   | 1,976   |  
|Consumer                          |  |              | 10,544  |   |      |   | 8,564   |  
|Other                             |  |              | 1,327   |   |      |   | 1,471   |  
|                                  |  |              |         |   |      |   |         |  
|                                  |  |              | 261,905 |   |      |   | 209,827 |  
|                                  |  |             
|Deferred loan fees, net of costs  |  |              | (391    | ) |      |   | (370    | )
|Allowance for loan losses         |  |              | (3,939  | ) |      |   | (2,791  | )
|                                  |  |              |         |   |      |   |         |  
|                                  |  | $            | 257,575 |   |      | $ | 206,666 |  
|                                  |  |              |         |   |      |   |         |  

Approximately $24,000,000 in 1-4 family residential loans were pledged as collateral securing Federal Home Loan
Bank advances included in long-term debt at December 31, 2005.

Note 5. Allowance for Loan Losses

Changes in the allowance for loan losses are as follows:



|                                  |  |      |           |   |      |   |           |      |  |   |           |  
|--------------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                  |  | 2005 |           |   | 2004 |   |           | 2003 | 
|Balance, beginning                |  | $    | 2,791,008 |   |      | $ | 2,218,053 |      |  | $ | 1,854,194 |  
|                                  |  |      |          
|Provision charged to expense      |  |      | 1,370,000 |   |      |   | 819,500   |      |  |   | 730,000   |  
|Recoveries of amounts charged off |  |      | 47,685    |   |      |   | 26,673    |      |  |   | 26,461    |  
|Amounts charged off               |  |      | (269,691  | ) |      |   | (273,218  | )    |  |   | (392,602  | )
|                                  |  |      |           |   |      |   |           |      |  |   |           |  
|Balance, ending                   |  | $    | 3,939,002 |   |      | $ | 2,791,008 |      |  | $ | 2,218,053 |  
|                                  |  |      |           |   |      |   |           |      |  |   |           |  



|                                                                     |  |      |           |      |   |          
|-------------------------------------------------------------------- |  | ---- | --------- | ---- | - | ---------
|                                                                     |  | 2005 |           | 2004
|Impaired loans without a valuation allowance                         |  | $    | 1,795,417 |      | $ | 1,881,157
|Impaired loans with a valuation allowance                            |  |      |          |      |   |         
|                                                                     |  |      |           |      |   |          
|Total impaired loans                                                 |  | $    | 1,795,417 |      | $ | 1,881,157
|                                                                     |  |      |           |      |   |          
|Valuation allowance related to impaired loans                        |  | $    |          |      | $ |         
|                                                                     |  |      |           |      |   |          
|Total nonaccrual loans                                               |  | $    | 1,711,000 |      | $ | 1,723,000
|                                                                     |  |      |           |      |   |          
|Total loans past due ninety days or more and still accruing interest |  | $    | 250,000   |      | $ | 628,000  
|                                                                     |  |      |           |      |   |          



17



---

Notes to Consolidated Financial Statements

Note 5. Allowance for Loan Losses, continued

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



|                                                             |  |      |           |      |   |           |  |   |        
|------------------------------------------------------------ |  | ---- | --------- | ---- | - | --------- |  | - | -------
|                                                             |  | 2005 |           | 2004 |   | 2003     
|Average investment in impaired loans                         |  | $    | 1,172,568 |      | $ | 1,536,732 |  | $ | 494,189
|                                                             |  |      |           |      |   |           |  |   |        
|Interest income recognized on impaired loans                 |  | $    | 134,546   |      | $ | 325,089   |  | $ | 51,513 
|                                                             |  |      |           |      |   |           |  |   |        
|Interest income recognized on a cash basis on impaired loans |  | $    | 98,622    |      | $ | 325,089   |  | $ | 51,513 
|                                                             |  |      |           |      |   |           |  |   |        

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

Note 6. Property and Equipment

Components of Property and Equipment

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



|                              |  |      |           |      |   |          
|----------------------------- |  | ---- | --------- | ---- | - | ---------
|                              |  | 2005 |           | 2004
|Land                          |  | $    | 325,444   |      | $ | 324,000  
|Buildings                     |  |      | 2,157,442 |      |   | 1,970,772
|Leasehold improvements        |  |      | 556,992   |      |   | 550,516  
|Furniture and equipment       |  |      | 1,720,149 |      |   | 1,546,925
|                              |  |      |           |      |   |          
|                              |  |      | 4,760,027 |      |   | 4,392,213
|                              |  |     
|Less accumulated depreciation |  |      | 1,379,848 |      |   | 1,090,993
|                              |  |      |           |      |   |          
|                              |  | $    | 3,380,179 |      | $ | 3,301,220
|                              |  |      |           |      |   |          

Depreciation expense reported in net income was approximately $295,000, $265,000, and $248,000 for the years ended
December 31, 2005, 2004 and 2003, respectively.

Leases

The Bank leases nine banking facilities under agreements accounted for as operating leases. Rent expense was approximately $178,000, $130,000, and $113,000 in 2005, 2004, and 2003, respectively. Future minimum lease
payments under non-cancelable commitments are as follows.



|           |  |         
|---------- |  | --------
|2006       |  | 211,042 
|2007       |  | 217,205 
|2008       |  | 219,823 
|2009       |  | 172,244 
|2010       |  | 67,074  
|Thereafter |  | 33,600  
|           |  |         
|           |  | $920,988
|           |  |         



18



---

Notes to Consolidated Financial Statements

Note 7. Intangible Assets

The book value of purchased intangible assets at December 31, 2005 and 2004 was
$877,736 and $1,104,916, respectively. Details are as follows:



|                            |  |                         |           |                          |   |                       |  |                          |           |  |   |          
|--------------------------- |  | ----------------------- | --------- | ------------------------ | - | --------------------- |  | ------------------------ | --------- |  | - | ---------
|                            |  | As of December 31, 2005 |           | As of December 31, 2004 
|                            |  | Gross Carrying Amount   |           | Accumulated Amortization |   | Gross Carrying Amount |  | Accumulated Amortization
|Amortized intangible assets |  |                         |           |                          |   |                       |  |                          |           |  |   |          
|Deposit premium             |  | $                       | 2,139,919 |                          | $ | 1,348,850             |  | $                        | 2,139,919 |  | $ | 1,141,669
|Other                       |  |                         | 200,000   |                          |   | 113,333               |  |                          | 200,000   |  |   | 93,334   
|                            |  |                         |           |                          |   |                       |  |                          |           |  |   |          
|Total                       |  | $                       | 2,339,919 |                          | $ | 1,462,183             |  | $                        | 2,339,919 |  | $ | 1,235,003
|                            |  |                         |           |                          |   |                       |  |                          |           |  |   |          

Amortization expense is calculated on a straight-line basis over a period of ten years and was approximately
$227,000 in 2005, 2004 and 2003. Management expects amortization expense to be approximately $227,000 in each of the next four years.

Note 8. Deposits

The aggregate amount of time deposits in denominations of $100,000 or more at December 31, 2005 and 2004 was approximately $84,827,000 and
$64,577,000, respectively. At December 31, 2005, the scheduled maturities of time deposits (in thousands) are as follows:



|                        |  |   |         
|----------------------- |  | - | --------
|Three months or less    |  | $ | 37,672  
|Four months to one year |  |   | 99,818  
|Two to three years      |  |   | 18,329  
|Over three years        |  |   | 7,738   
|                        |  |   |         
|                        |  |   | $163,557
|                        |  |   |         

Note 9. Borrowed Funds

Securities sold under agreements to repurchase and federal funds purchased

Securities sold under agreements to repurchase and
federal funds purchased generally mature within one to seven days from the transaction date. Additional information is summarized below:



|                                                       |  |      |           |   |      |   |            |  
|------------------------------------------------------ |  | ---- | --------- | - | ---- | - | ---------- | -
|                                                       |  | 2005 |           |   | 2004 |  
|Outstanding balance at December 31                     |  | $    | 2,736,000 |   |      | $ | 3,268,000  |  
|                                                       |  |      |           |   |      |   |            |  
|Year-end weighted average rate                         |  |      | 3.13      | % |      |   | 1.09       | %
|                                                       |  |      |           |   |      |   |            |  
|Daily average outstanding during the period            |  | $    | 3,618,334 |   |      | $ | 6,975,593  |  
|                                                       |  |      |           |   |      |   |            |  
|Average rate for the year                              |  |      | 2.11      | % |      |   | .59        | %
|                                                       |  |      |           |   |      |   |            |  
|Maximum outstanding at any month-end during the period |  | $    | 5,394,000 |   |      | $ | 13,865,000 |  
|                                                       |  |      |           |   |      |   |            |  

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.

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 $13,000,000 and a secured line of credit with a correspondent bank for $15,000,000. In addition, the Bank has
the ability to borrow up to ten percent of total bank assets from the Federal Home Loan Bank of Atlanta, subject to the pledging of specific bank assets as collateral. At December 31, 2005 and 2004 there were no amounts outstanding under these
credit facilities.



19



---

Notes to Consolidated Financial Statements

Note 9. Borrowed Funds, continued

Short-term borrowings

Short-term borrowings consisted of three variable rate FHLB advances of $2,000,000, $3,000,000 and $5,000,000 at December 31, 2005. There were no short-term
borrowings at December 31, 2004.

Long-term debt

At December 31, 2005 and 2004, $6,500,000 and $18,500,000, respectively were outstanding under Federal Home Loan Bank advances. Approximately $24,000,000 in 1-4 family residential loans and $743,000 in FHLB stock were pledged as
collateral for the FHLB advances at December 31, 2005.



|              |  |         |           |      |               |   |  |                      
|------------- |  | ------- | --------- | ---- | ------------- | - |  | ---------------------
|Maturity Date |  | Advance |           | Rate |               |   | 
|02/10/10      |  | $       | 2,500,000 |      | Fixed at 5.85 | % |  | Convertible quarterly
|09/29/15      |  |         | 4,000,000 |      | Fixed at 4.06 | % |  | Convertible 9/29/09  
|              |  | $       | 6,500,000 |      |               |   |  |                      

Note 10. Fair Value of Financial Instruments

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



|                                                                           |  |                   |         |                   |   |                |  |            |         |  |   |        
|-------------------------------------------------------------------------- |  | ----------------- | ------- | ----------------- | - | -------------- |  | ---------- | ------- |  | - | -------
|                                                                           |  | December 31, 2005 |         | December 31, 2004
|                                                                           |  | Carrying Amount   |         | Fair Value        |   | CarryingAmount |  | Fair Value
|Financial Assets                                                           |  |                   |         |                   |   |                |  |            |         |  |   |        
|Cash and due from banks                                                    |  | $                 | 6,954   |                   | $ | 6,954          |  | $          | 3,751   |  | $ | 3,751  
|Interest-bearing deposits with banks                                       |  |                   | 708     |                   |   | 708            |  |            | 974     |  |   | 974    
|Federal funds sold                                                         |  |                   | 8,281   |                   |   | 8,281          |  |            | 4,529   |  |   | 4,529  
|Investment securities                                                      |  |                   | 33,208  |                   |   | 33,208         |  |            | 28,600  |  |   | 28,600 
|Restricted equity securities                                               |  |                   | 2,006   |                   |   | 2,006          |  |            | 1,633   |  |   | 1,633  
|Loans, net of allowance for loan losses                                    |  |                   | 257,575 |                   |   | 256,445        |  |            | 206,666 |  |   | 205,369
|                                                                           |  |                   |         |                  
|Financial Liabilities                                                      |  |                   |         |                   |   |                |  |            |         |  |   |        
|Deposits                                                                   |  |                   | 271,035 |                   |   | 271,719        |  |            | 207,642 |  |   | 209,284
|Securities sold under agreements to repurchase and federal funds purchased |  |                   | 2,736   |                   |   | 2,736          |  |            | 3,268   |  |   | 3,268  
|Short-term borrowings                                                      |  |                   | 10,000  |                   |   | 10,000         |  |            |        |  |   |       
|Long-term debt                                                             |  |                   | 6,500   |                   |   | 6,493          |  |            | 18,500  |  |   | 18,636 
|Junior subordinated debentures                                             |  |                   | 8,248   |                   |   | 7,999          |  |            | 8,248   |  |   | 8,315  
|                                                                           |  |                   |         |                  
|Off-Balance-Sheet Assets (Liabilities)                                     |  |                   |         |                   |   |                |  |            |         |  |   |        
|Commitments to extend credit and standby letters of credit                 |  |                   |        |                   |   |               |  |            |        |  |   |       



20



---

Notes to Consolidated Financial Statements

Note 11. Earnings per Share

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



|                                                     |  |      |           |      |   |           |  |   |          
|---------------------------------------------------- |  | ---- | --------- | ---- | - | --------- |  | - | ---------
|                                                     |  | 2005 |           | 2004 |   | 2003     
|Net income (income available to common shareholders) |  | $    | 3,035,373 |      | $ | 2,414,319 |  | $ | 2,006,783
|                                                     |  |      |           |      |   |           |  |   |          
|Weighted average common shares outstanding           |  |      | 4,543,386 |      |   | 4,507,523 |  |   | 4,430,974
|Effect of dilutive securities, options               |  |      | 222,627   |      |   | 87,978    |  |   | 233,688  
|                                                     |  |      |           |      |   |           |  |   |          
|Weighted average common shares outstanding, diluted  |  |      | 4,766,013 |      |   | 4,595,501 |  |   | 4,664,662
|                                                     |  |      |           |      |   |           |  |   |          
|Basic earnings per share                             |  | $    | .67       |      | $ | .54       |  | $ | .45      
|                                                     |  |      |           |      |   |           |  |   |          
|Diluted earnings per share                           |  | $    | .64       |      | $ | .52       |  | $ | .43      
|                                                     |  |      |           |      |   |           |  |   |          

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

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

The Trusts preferred securities and common securities may be included in the Companys Tier I capital for regulatory
capital adequacy purposes to the extent that they do not exceed 33.3% of the Companys total Tier I capital excluding these securities. Amounts in excess of this ratio will not be considered Tier I capital but may be included in the calculation
of the Companys total risk-based capital ratio. The Companys obligations with respect to the issuance of the Trusts preferred securities and common securities constitute a full and unconditional guarantee by the Company of the
Trusts obligations with respect to the preferred securities and common securities. Subject to certain exceptions and limitations, the Company may elect from time to time to defer interest payments on its junior subordinated debentures, which
would result in a deferral of distribution payments on the Trusts preferred trust securities and common securities. As a result of the Companys adoption of Financial Interpretation Number (FIN) 46, the Trusts common securities have
been presented as a component of other assets.

Note 13. Employee Benefit Plans

Defined Contribution Plan

The Bank maintains a profit sharing plan pursuant to Section 401(k) of the
Internal Revenue Code. The plan covers substantially all employees at least 21 years of age who have completed at least twelve months of service. Participants may contribute a percentage of compensation, subject to a maximum allowed under the Code.
The bank contributes up to 3% of an employees compensation which vests over a five-year period. The Banks aggregate contribution was $42,603, $32,713 and $31,361 for the years ended December 31, 2005, 2004 and 2003, respectively.



21



---

Notes to Consolidated Financial Statements

Note 13. Employee Benefit Plans, continued

Stock Option Plans

The Company maintains Incentive and Nonstatutory Stock Option Plans which reserve 458,257 shares each for issuance. Options granted under both plans expire no more than
10 years from date of grant. Option exercise price, under both plans shall be set by the Board of Directors at the date of grant, but shall not be less than 100% of fair market value of the related stock at the date of the grant. Under both plans,
vesting is determined by the specific option agreements.

Activity under the plans during the years ended December 31, 2005 and 2004 (adjusted for
stock splits) is summarized below:



|                          |  |                     |   |  |                    |   |  |                     |   |  |         |  
|------------------------- |  | ------------------- | - |  | ------------------ | - |  | ------------------- | - |  | ------- | -
|                          |  | Incentive Plan      |   |  | Non-statutory Plan |  
|                          |  | Available for Grant |   |  | Granted            |   |  | Available for Grant |   |  | Granted |  
|Balance December 31, 2003 |  | 28,761              |   |  | 86,765             |   |  | 13,490              |   |  | 62,849  |  
|                          |  |                     |   | 
|Stock split               |  | 40,247              |   |  | 121,488            |   |  | 18,826              |   |  | 87,979  |  
|Forfeited                 |  | 1,108               |   |  | (1,108             | ) |  |                    |   |  |        |  
|Granted                   |  | (11,400             | ) |  | 11,400             |   |  | (15,000             | ) |  | 15,000  |  
|Exercised                 |  |                    |   |  | (24,040            | ) |  |                    |   |  | (33,076 | )
|                          |  |                     |   |  |                    |   |  |                     |   |  |         |  
|Balance December 31, 2004 |  | 58,716              |   |  | 194,505            |   |  | 17,316              |   |  | 132,752 |  
|                          |  |                     |   | 
|Plan adopted amended      |  | 138,136             |   |  |                   |   |  | 138,136             |   |  |        |  
|Forfeited                 |  |                    |   |  |                   |   |  |                    |   |  |        |  
|Granted                   |  | (146,000            | ) |  | 146,000            |   |  | (81,000             | ) |  | 81,000  |  
|Exercised                 |  |                    |   |  | (22,281            | ) |  |                    |   |  | (11,904 | )
|                          |  |                     |   |  |                    |   |  |                     |   |  |         |  
|Balance December 31, 2005 |  | 50,852              |   |  | 318,224            |   |  | 74,452              |   |  | 201,848 |  
|                          |  |                     |   |  |                    |   |  |                     |   |  |         |  



22



---

Notes to Consolidated Financial Statements

Note 13. Employee Benefit Plans, continued

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



|                                                                               |  |      |           |   |      |   |           |      |  |   |           |  
|------------------------------------------------------------------------------ |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                                                               |  | 2005 |           |   | 2004 |   |           | 2003 | 
|Outstanding options at December 31:                                            |  |      |           |   |      |   |           |      |  |   |           |  
|Weighted average exercise price:                                               |  |      |           |   |      |   |           |      |  |   |           |  
|Beginning of the year                                                          |  | $    | 4.97      |   |      | $ | 3.76      |      |  | $ | 3.00      |  
|End of the year                                                                |  | $    | 10.60     |   |      | $ | 4.97      |      |  | $ | 3.76      |  
|Range of exercise prices:                                                      |  |      |           |   |      |   |           |      |  |   |           |  
|From                                                                           |  | $    | 2.65      |   |      | $ | 2.65      |      |  | $ | 2.65      |  
|To                                                                             |  | $    | 19.75     |   |      | $ | 19.75     |      |  | $ | 10.90     |  
|Weighted average remaining contractual life in months                          |  |      | 79        |   |      |   | 62        |      |  |   | 67        |  
|Exercisable options                                                            |  |      | 449,048   |   |      |   | 246,757   |      |  |   | 264,530   |  
|Weighted average exercise price of exercisable options                         |  | $    | 10.20     |   |      | $ | 3.06      |      |  | $ | 2.64      |  
|                                                                               |  |      |          
|Weighted average exercise price of options:                                    |  |      |           |   |      |   |           |      |  |   |           |  
|Granted during the year                                                        |  | $    | 17.71     |   |      | $ | 16.74     |      |  | $ | 10.78     |  
|Exercised during the year                                                      |  | $    | 3.35      |   |      | $ | 2.86      |      |  | $ | 2.92      |  
|Forfeited during the year                                                      |  | $    |          |   |      | $ | 4.61      |      |  | $ | 2.65      |  
|Expired during the year                                                        |  | $    |          |   |      | $ |          |      |  | $ |          |  
|                                                                               |  |      |          
|Grant-date fair value:                                                         |  |      |           |   |      |   |           |      |  |   |           |  
|Options granted during the year                                                |  | $    | 1,349,340 |   |      | $ | 121,680   |      |  | $ | 86,888    |  
|                                                                               |  |      |          
|Significant assumptions used in determining fair value:                        |  |      |           |   |      |   |           |      |  |   |           |  
|Risk-free interest rate                                                        |  |      | 5.25      | % |      |   | 3.25      | %    |  |   | 2.00      | %
|Expected life in years                                                         |  |      | 10        |   |      |   | 10        |      |  |   | 10        |  
|Expected dividends                                                             |  |      | 0.0       | % |      |   | 0.0       | %    |  |   | 0.0       | %
|Expected volatility                                                            |  |      | .17       | % |      |   | .44       | %    |  |   | .17       | %
|                                                                               |  |      |          
|Results of operations:                                                         |  |      |           |   |      |   |           |      |  |   |           |  
|Compensation cost recognized in income for all stock-based compensation awards |  | $    |          |   |      | $ |          |      |  | $ |          |  
|                                                                               |  |      |           |   |      |   |           |      |  |   |           |  
|Pro forma net income, based on SFAS No. 123                                    |  | $    | 2,241,301 |   |      | $ | 2,360,035 |      |  | $ | 1,897,484 |  
|                                                                               |  |      |           |   |      |   |           |      |  |   |           |  
|Pro forma earnings per common share, based on SFAS No. 123                     |  | $    | .49       |   |      | $ | .52       |      |  | $ | .43       |  
|                                                                               |  |      |           |   |      |   |           |      |  |   |           |  
|Pro forma earnings per fully dilutive common share, based on SFAS No. 123      |  | $    | .47       |   |      | $ | .51       |      |  | $ | .41       |  
|                                                                               |  |      |           |   |      |   |           |      |  |   |           |  



23



---

Notes to Consolidated Financial Statements

Note 14. Income Taxes

Current and Deferred Income Tax Components

The components of income tax expense are as follows:



|                             |  |      |           |   |      |   |           |      |  |   |           |  
|---------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                             |  | 2005 |           |   | 2004 |   |           | 2003 | 
|Current                      |  | $    | 2,045,847 |   |      | $ | 1,356,585 |      |  | $ | 1,331,749 |  
|Deferred                     |  |      | (456,679  | ) |      |   | (147,704  | )    |  |   | (121,998  | )
|                             |  |      |           |   |      |   |           |      |  |   |           |  
|Income tax expense (benefit) |  | $    | 1,589,168 |   |      | $ | 1,208,881 |      |  | $ | 1,209,751 |  
|                             |  |      |           |   |      |   |           |      |  |   |           |  

Rate Reconciliation

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



|                                                 |  |      |           |   |      |   |           |      |  |   |           |  
|------------------------------------------------ |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                                 |  | 2005 |           |   | 2004 |   |           | 2003 | 
|Tax at statutory federal rate                    |  | $    | 1,572,344 |   |      | $ | 1,231,888 |      |  | $ | 1,093,621 |  
|Tax exempt interest                              |  |      | (38,040   | ) |      |   | (40,533   | )    |  |   | (31,784   | )
|Tax exempt income from bank owned life insurance |  |      | (65,836   | ) |      |   | (77,234   | )    |  |   | (6,436    | )
|State income tax, net of federal benefit         |  |      | 218,173   |   |      |   | 137,359   |      |  |   | 132,079   |  
|Other                                            |  |      | (97,473   | ) |      |   | (42,599   | )    |  |   | 22,271    |  
|                                                 |  |      |           |   |      |   |           |      |  |   |           |  
|Income tax expense (benefit)                     |  | $    | 1,589,168 |   |      | $ | 1,208,881 |      |  | $ | 1,209,751 |  
|                                                 |  |      |           |   |      |   |           |      |  |   |           |  

Deferred Income Tax Analysis

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



|                                                 |  |      |           |   |      |   |           |  
|------------------------------------------------ |  | ---- | --------- | - | ---- | - | --------- | -
|                                                 |  | 2005 |           |   | 2004 |  
|Deferred tax assets                              |  |      |           |   |      |   |           |  
|Allowance for loan losses                        |  | $    | 1,359,364 |   |      | $ | 927,386   |  
|Pre-opening expenses                             |  |      | 426       |   |      |   | 1,707     |  
|Accrued expenses                                 |  |      | 20,838    |   |      |   | 45,378    |  
|Deposit premium amortization                     |  |      | 208,312   |   |      |   | 173,977   |  
|Deferred loan fees                               |  |      | 150,788   |   |      |   | 142,599   |  
|Allowance for other real estate owned            |  |      | 13,494    |   |      |   | 13,494    |  
|Unrealized loss on securities available for sale |  |      | 188,793   |   |      |   |          |  
|                                                 |  |      |           |   |      |   |           |  
|Deferred tax assets                              |  |      | 1,942,015 |   |      |   | 1,304,541 |  
|                                                 |  |      |           |   |      |   |           |  
|Deferred tax liabilities                         |  |      |           |   |      |   |           |  
|Unrealized gain on securities available for sale |  |      |          |   |      |   | (132,276  | )
|Depreciation                                     |  |      | (328,280  | ) |      |   | (337,608  | )
|Accretion of bond discount                       |  |      | (17,880   | ) |      |   | (16,550   | )
|                                                 |  |      |           |   |      |   |           |  
|Deferred tax liabilities                         |  |      | (346,160  | ) |      |   | (486,434  | )
|                                                 |  |      |           |   |      |   |           |  
|Net deferred tax asset                           |  | $    | 1,595,855 |   |      | $ | 818,107   |  
|                                                 |  |      |           |   |      |   |           |  

Note 15. Commitments and Contingencies

Litigation

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



24



---

Notes to Consolidated Financial Statements

Note 15. Commitments and Contingencies, continued

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:



|                             |  |      |            |      |   |           
|---------------------------- |  | ---- | ---------- | ---- | - | ----------
|                             |  | 2005 |            | 2004
|Commitments to extend credit |  | $    | 52,574,000 |      | $ | 47,127,000
|Stand-by letters of credit   |  |      | 1,325,000  |      |   | 371,000   
|                             |  |      |            |      |   |           
|                             |  | $    | 53,899,000 |      | $ | 47,498,000
|                             |  |      |            |      |   |           

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

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

Concentrations of Credit Risk

Substantially all of the Banks loans and commitments to extend credit have been granted to customers in the Banks market area and such customers are generally
depositors of the Bank. The concentrations of credit by type of loan are set forth in Note 4. The distribution of commitments to extend credit approximates the distribution of loans outstanding. The Banks primary focus is toward commercial,
consumer and small business transactions, and accordingly, it does not have a significant number of credits to any single borrower or group of related borrowers in excess of $3,000,000.

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

Note 16. Regulatory Restrictions

Dividends

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



25



---

Notes to Consolidated Financial Statements

Note 16. Regulatory Restrictions, continued

Capital Requirements

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

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital to risk-weighted assets, and of Tier I capital to average assets, as all those terms are defined in the regulations. Management believes, as of December 31, 2005 and 2004, that the Company and the Bank
met all capital adequacy requirements to which they are subject.

As of December 31, 2005 and 2004, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier I risk-based, and
Tier I leverage ratios as set forth in the following table. There are no conditions or events since the notification that management believes have changed the Banks category.

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



|                                        |  |        |        |       |                          |   |        |                                                                          |        |  |     |        |  |       |        |  |      |  
|--------------------------------------- |  | ------ | ------ | ----- | ------------------------ | - | ------ | ------------------------------------------------------------------------ | ------ |  | --- | ------ |  | ----- | ------ |  | ---- | -
|                                        |  | Actual |        |       | Minimum Capital Required |   |        | Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions |       
|                                        |  | Amount |        | Ratio |                          |   | Amount |                                                                          | Ratio  |  |     | Amount |  | Ratio |       
|December 31, 2005                       |  |        |        |       |                          |   |        |                                                                          |        |  |     |        |  |       |        |  |      |  
|Total capital to risk- weighted assets  |  |        |        |       |                          |   |        |                                                                          |        |  |     |        |  |       |        |  |      |  
|Consolidated                            |  | $      | 33,420 |       | 12.36                    | % |        | $                                                                        | 21,629 |  | 8.0 | %      |  | $     | n/a    |  | n/a  |  
|Bank                                    |  | $      | 32,116 |       | 11.94                    | % |        | $                                                                        | 21,509 |  | 8.0 | %      |  | $     | 26,886 |  | 10.0 | %
|                                        |  |        |        |       |                          |  
|Tier 1 capital to risk- weighted assets |  |        |        |       |                          |   |        |                                                                          |        |  |     |        |  |       |        |  |      |  
|Consolidated                            |  | $      | 30,042 |       | 11.11                    | % |        | $                                                                        | 10,813 |  | 4.0 | %      |  | $     | n/a    |  | n/a  |  
|Bank                                    |  | $      | 28,738 |       | 10.69                    | % |        | $                                                                        | 10,755 |  | 4.0 | %      |  | $     | 16,132 |  | 6.0  | %
|                                        |  |        |        |       |                          |  
|Tier 1 capital to average assets        |  |        |        |       |                          |   |        |                                                                          |        |  |     |        |  |       |        |  |      |  
|Consolidated                            |  | $      | 30,042 |       | 9.37                     | % |        | $                                                                        | 12,828 |  | 4.0 | %      |  | $     | n/a    |  | n/a  |  
|Bank                                    |  | $      | 28,738 |       | 9.00                     | % |        | $                                                                        | 12,777 |  | 4.0 | %      |  | $     | 15,971 |  | 5.0  | %



26



---

Notes to Consolidated Financial Statements

Note 16. Regulatory Restrictions, continued



|                                        |  |        |        |       |                          |   |        |                                                                          |        |  |     |        |  |       |        |  |      |  
|--------------------------------------- |  | ------ | ------ | ----- | ------------------------ | - | ------ | ------------------------------------------------------------------------ | ------ |  | --- | ------ |  | ----- | ------ |  | ---- | -
|                                        |  | Actual |        |       | Minimum Capital Required |   |        | Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions |       
|                                        |  | Amount |        | Ratio |                          |   | Amount |                                                                          | Ratio  |  |     | Amount |  | Ratio |       
|December 31, 2004                       |  |        |        |       |                          |   |        |                                                                          |        |  |     |        |  |       |        |  |      |  
|Total capital to risk- weighted assets  |  |        |        |       |                          |   |        |                                                                          |        |  |     |        |  |       |        |  |      |  
|Consolidated                            |  | $      | 29,360 |       | 13.64                    | % |        | $                                                                        | 17,220 |  | 8.0 | %      |  | $     | n/a    |  | n/a  |  
|Bank                                    |  | $      | 23,962 |       | 11.40                    | % |        | $                                                                        | 16,817 |  | 8.0 | %      |  | $     | 21,021 |  | 10.0 | %
|                                        |  |        |        |       |                          |  
|Tier 1 capital to risk- weighted assets |  |        |        |       |                          |   |        |                                                                          |        |  |     |        |  |       |        |  |      |  
|Consolidated                            |  | $      | 22,668 |       | 10.53                    | % |        | $                                                                        | 8,610  |  | 4.0 | %      |  | $     | n/a    |  | n/a  |  
|Bank                                    |  | $      | 21,334 |       | 10.15                    | % |        | $                                                                        | 8,409  |  | 4.0 | %      |  | $     | 12,613 |  | 6.0  | %
|                                        |  |        |        |       |                          |  
|Tier 1 capital to average assets        |  |        |        |       |                          |   |        |                                                                          |        |  |     |        |  |       |        |  |      |  
|Consolidated                            |  | $      | 22,668 |       | 9.44                     | % |        | $                                                                        | 9,609  |  | 4.0 | %      |  | $     | n/a    |  | n/a  |  
|Bank                                    |  | $      | 21,334 |       | 9.07                     | % |        | $                                                                        | 9,410  |  | 4.0 | %      |  | $     | 11,762 |  | 5.0  | %

Inter-company transactions

Legal lending limits on loans by the Bank to the Company are governed by Federal Reserve Act 23A, and differ from legal lending limits on loans to external customers. Generally, a bank may lend up to 10% of its
capital and surplus to its parent, if the loan is secured. If collateral is in the form of stocks, bonds, debentures or similar obligations, it must have a market value when the loan is made of at least 20% more than the amount of the loan, and if
obligations of a state or political subdivision or agency thereof, it must have a market value of at least 10% more than the amount of the loan. If such loans are secured by obligations of the United States or agencies thereof, or by notes, drafts,
bills of exchange or bankers acceptances eligible for rediscount or purchase by a Federal Reserve Bank, requirements for collateral in excess of loan amount do not apply. Under this definition, the legal lending limit for the Bank on loans to
the Company was approximately $2,200,000 at December 31, 2005. No 23A transactions existed at December 31, 2005 or 2004.

Note 17.
Transactions with Related Parties

Loans

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



|                        |  |      |           |   |      |   |           |  
|----------------------- |  | ---- | --------- | - | ---- | - | --------- | -
|                        |  | 2005 |           |   | 2004 |  
|Balance, beginning      |  | $    | 1,183,661 |   |      | $ | 1,605,082 |  
|Change in relationships |  |      |          |   |      |   | (135,304  | )
|New loans and advances  |  |      | 330,153   |   |      |   | 293,255   |  
|Repayments              |  |      | (530,171  | ) |      |   | (579,372  | )
|                        |  |      |           |   |      |   |           |  
|Balance, ending         |  | $    | 983,643   |   |      | $ | 1,183,661 |  
|                        |  |      |           |   |      |   |           |  



27



---

Notes to Consolidated Financial Statements

Note 18. Parent Company Financial Information

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

Balance Sheets

December 31, 2005 and 2004



|                                                                                 |  |      |            |   |      |   |           
|-------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ----------
|                                                                                 |  | 2005 |            |   | 2004
|Assets                                                                           |  |      |            |   |      |   |           
|Cash and due from banks                                                          |  | $    | 127,943    |   |      | $ | 168,625   
|Investment in subsidiary bank at equity                                          |  |      | 29,194,584 |   |      |   | 22,565,414
|Investment securities, available for sale                                        |  |      | 381,864    |   |      |   | 1,387,832 
|Loans                                                                            |  |      | 382,696    |   |      |   | 3,546,241 
|Other assets                                                                     |  |      | 731,867    |   |      |   | 566,519   
|                                                                                 |  |      |            |   |      |   |           
|Total assets                                                                     |  | $    | 30,818,954 |   |      | $ | 28,234,631
|                                                                                 |  |      |            |   |      |   |           
|Liabilities                                                                      |  |      |            |   |      |   |           
|Long-term debt                                                                   |  | $    |           |   |      | $ |          
|Junior subordinated debt                                                         |  |      | 8,248,000  |   |      |   | 8,248,000 
|Other liabilities                                                                |  |      | 72,310     |   |      |   | 88,074    
|                                                                                 |  |      |            |   |      |   |           
|Total liabilities                                                                |  |      | 8,320,310  |   |      |   | 8,336,074 
|                                                                                 |  |      |            |   |      |   |           
|Stockholders equity                                                             |  |      |            |   |      |   |           
|Common stock                                                                     |  |      | 13,256,961 |   |      |   | 13,142,612
|Retained earnings                                                                |  |      | 9,564,875  |   |      |   | 6,529,502 
|Unrealized appreciation on subsidiarys investment securities available for sale |  |      | (323,192   | ) |      |   | 226,443   
|                                                                                 |  |      |            |   |      |   |           
|Total stockholders equity                                                       |  |      | 22,498,644 |   |      |   | 19,898,557
|                                                                                 |  |      |            |   |      |   |           
|Total liabilities and stockholders equity                                       |  | $    | 30,818,954 |   |      | $ | 28,234,631
|                                                                                 |  |      |            |   |      |   |           

Statements of Operations

Years ended December 31, 2005 and 2004



|                                                                                  |  |      |          |   |      |   |        
|--------------------------------------------------------------------------------- |  | ---- | -------- | - | ---- | - | -------
|                                                                                  |  | 2005 |          |   | 2004
|Income                                                                            |  |      |          |   |      |   |        
|Loans and fees on loans                                                           |  | $    | 144,750  |   |      | $ | 214,541
|Investment securities, taxable                                                    |  |      | 45,149   |   |      |   | 55,904 
|Investment securities, non-taxable                                                |  |      | 5,000    |   |      |   | 2,375  
|Income from mortgage banking investee                                             |  |      |         |   |      |   | 296,633
|Net realized gains on sale or maturity of investment securities                   |  |      | 36,848   |   |      |   | 134,025
|                                                                                  |  |      |          |   |      |   |        
|Total income                                                                      |  |      | 231,747  |   |      |   | 703,478
|                                                                                  |  |     
|Expenses                                                                          |  |      |          |   |      |   |        
|Professional fees                                                                 |  |      | 7,108    |   |      |   | 6,897  
|Franchise tax                                                                     |  |      | 20,229   |   |      |   | 14,142 
|Interest expense                                                                  |  |      | 513,806  |   |      |   | 352,666
|Management fees                                                                   |  |      | 25,531   |   |      |   | 24,855 
|Other expenses                                                                    |  |      | 39,507   |   |      |   | 45,094 
|                                                                                  |  |      |          |   |      |   |        
|Total expenses                                                                    |  |      | 606,181  |   |      |   | 443,654
|                                                                                  |  |      |          |   |      |   |        
|Income (loss) before tax expense and equity in undistributed income of subsidiary |  |      | (374,434 | ) |      |   | 259,824
|                                                                                  |  |      |          |   |      |   |        



28



---

Notes to Consolidated Financial Statements

Note 18. Parent Company Financial Information, continued

Statements of Operations, continued



|                                                           |  |   |           |   |  |   |           |  
|---------------------------------------------------------- |  | - | --------- | - |  | - | --------- | -
|Federal income tax (expense) benefit                       |  |   | 193,939   |   |  |   | (20,003   | )
|State income tax (expense)                                 |  |   | 39,992    |   |  |   | (20,408   | )
|                                                           |  |   |           |   |  |   |           |  
|Total income tax (expense) benefit                         |  |   | 233,931   |   |  |   | (40,411   | )
|                                                           |  |   |           |   |  |   |           |  
|Income before equity in undistributed income of subsidiary |  |   | (140,503  | ) |  |   | 219,413   |  
|Equity in undistributed income of subsidiary               |  |   | 3,175,876 |   |  |   | 2,194,906 |  
|                                                           |  |   |           |   |  |   |           |  
|Net income                                                 |  | $ | 3,035,373 |   |  | $ | 2,414,319 |  
|                                                           |  |   |           |   |  |   |           |  

Statements of Cash Flows

Years ended December 31, 2005 and 2004



|                                                                     |  |      |            |   |      |   |            |  
|-------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                                                     |  | 2005 |            |   | 2004 |  
|Cash flows from operating activities                                 |  |      |            |   |      |   |            |  
|Net income                                                           |  | $    | 3,035,373  |   |      | $ | 2,414,319  |  
|Adjustments:                                                         |  |      |            |   |      |   |            |  
|Amortization                                                         |  |      | 24,000     |   |      |   | 24,000     |  
|Accretion of discount on securities, net of amortization of premiums |  |      | 1,530      |   |      |   | 855        |  
|Gain on sale of investment in mortgage banking investee              |  |      |           |   |      |   | (134,025   | )
|Deferred taxes                                                       |  |      | 8,316      |   |      |   | 42,418     |  
|Benefit of nonqualified stock option exercise                        |  |      |           |   |      |   | 116,729    |  
|Increase in equity in undistributed income of subsidiary             |  |      | (3,175,876 | ) |      |   | (2,194,906 | )
|(Increase) decrease in other assets                                  |  |      | (197,664   | ) |      |   | (166,425   | )
|Increase (decrease) in other liabilities                             |  |      | (14,255    | ) |      |   | 74,675     |  
|                                                                     |  |      |            |   |      |   |            |  
|Net cash provided (used) by operating activities                     |  |      | (318,576   | ) |      |   | 177,640    |  
|                                                                     |  |      |            |   |      |   |            |  
|Cash flows from investing activities                                 |  |      |            |   |      |   |            |  
|Issuance of long-term debt to subsidiary                             |  |      | (4,000,000 | ) |      |   |           |  
|Purchases of investment securities                                   |  |      |           |   |      |   | (1,104,555 | )
|Sales of investment securities                                       |  |      | 1,000,000  |   |      |   |           |  
|Sales of equity in mortgage banking investee                         |  |      |           |   |      |   | 265,427    |  
|Net decrease (increase) in loans                                     |  |      | 3,163,545  |   |      |   | (3,546,241 | )
|                                                                     |  |      |            |   |      |   |            |  
|Net cash provided (used) by investing activities                     |  |      | 163,545    |   |      |   | (4,385,369 | )
|                                                                     |  |      |            |   |      |   |            |  
|Cash flows from financing activities                                 |  |      |            |   |      |   |            |  
|Issuance of common stock                                             |  |      | 114,349    |   |      |   | 138,453    |  
|                                                                     |  |      |            |   |      |   |            |  
|Net cash provided (used) by financing activities                     |  |      | 114,349    |   |      |   | 138,453    |  
|                                                                     |  |      |            |   |      |   |            |  
|Increase (decrease) in cash and due from banks                       |  |      | (40,682    | ) |      |   | (4,069,276 | )
|Cash and cash equivalents, beginning                                 |  |      | 168,625    |   |      |   | 4,237,901  |  
|                                                                     |  |      |            |   |      |   |            |  
|Cash and cash equivalents, ending                                    |  | $    | 127,943    |   |      | $ | 168,625    |  
|                                                                     |  |      |            |   |      |   |            |  



29



---

Independent Auditors Report

Board of Directors and Stockholders

Waccamaw Bankshares, Inc.

Whiteville, North Carolina

We have audited the consolidated balance sheets of Waccamaw Bankshares, Inc. as of December 31, 2005 and 2004 and the related consolidated statements of income,
changes in stockholders equity and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of Waccamaw Bankshares, Inc. at December 31, 2005 and 2004, and the results of its operations and its cash flows for each of the three years in the period ended
December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.

/s/ Larrowe & Company, P.L.C.

Galax, Virginia

February 27, 2006



30



---

Managements Discussion and Analysis

MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following presents managements discussion and analysis of the financial condition and results of operations of the Company as of
December 31, 2005 and 2004 and the years then ended. This discussion should be read in conjunction with the Companys Financial Statements and the Notes thereto.

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

Overview

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

The Companys total
assets were $322.8 million at December 31, 2005 as compared to $258.4 million at December 31, 2004. Virtually all of this asset growth was funded by new deposits. Total deposits at December 31, 2005 increased 30.5% to $271.0 million.
Total deposits were $207.6 million at December 31, 2004. The Bank used these resources primarily to fund new loans and purchase investment securities. The Banks net loans increased to $257.6 million at the end of 2005, an increase of
$50.9 million over the 2004 amount of $206.7 million. Investment securities were $35.2 million and $30.2 million at December 31, 2005 and 2004, respectively.

Critical Accounting Policies

The Companys financial statements are prepared in accordance with accounting principles generally
accepted in the United States (GAAP). The notes to the audited consolidated financial statements included in the Companys Annual Report on Form 10-K for the year ended December 31, 2005 contain a summary of its significant accounting
policies. Management believes the Companys policies with respect to the methodology for the determination of the allowance for loan losses and asset impairment judgments, such as the recoverability of intangible assets, involve a higher degree
of complexity and require management to make difficult and subjective judgments that often require assumptions or estimates about highly uncertain matters. Accordingly, the Company considers the policies related to those areas as critical.

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



31



---

Managements Discussion and Analysis

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

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



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



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



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



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



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



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

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

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

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

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



32



---

Managements Discussion and Analysis

Net Interest Income and Average Balances (thousands)



|                                             |  |                            |         |                 |          |             |  |          |                 |  |                  |         |             |   |        |                  |      |                  |  |             |         |  |   |       |  |      |  
|-------------------------------------------- |  | -------------------------- | ------- | --------------- | -------- | ----------- |  | -------- | --------------- |  | ---------------- | ------- | ----------- | - | ------ | ---------------- | ---- | ---------------- |  | ----------- | ------- |  | - | ----- |  | ---- | -
|                                             |  | Periods Ended December 31, |        
|                                             |  | 2005                       |         |                 | 2004     |             |  | 2003     |                
|                                             |  | Interest                   |         |                 | Interest |             |  | Interest |                
|                                             |  | Average Balance            |         | Income/Expenses |          | Yield/ Cost |  |          | Average Balance |  | Income/ Expenses |         | Yield/ Cost |   |        | Average Balances |      | Income/ Expenses |  | Yield/ Cost |        
|Interest-earning assets:                     |  |                            |         |                 |          |             |  |          |                 |  |                  |         |             |   |        |                  |      |                  |  |             |         |  |   |       |  |      |  
|Investment securities                        |  | $                          | 31,257  |                 | $        | 1,435       |  | 4.59     | %               |  | $                | 29,068  |             | $ | 1,270  |                  | 4.37 | %                |  | $           | 19,663  |  | $ | 894   |  | 4.55 | %
|Federal funds sold                           |  |                            | 13,595  |                 |          | 436         |  | 3.21     | %               |  |                  | 2,543   |             |   | 33     |                  | 1.30 | %                |  |             | 8,333   |  |   | 89    |  | 1.07 | %
|Deposits with banks                          |  |                            | 889     |                 |          | 27          |  | 3.03     | %               |  |                  | 614     |             |   | 9      |                  | 1.47 | %                |  |             | 448     |  |   | 5     |  | 1.12 | %
|Loans, net1,2                                |  |                            | 238,579 |                 |          | 16,330      |  | 6.84     | %               |  |                  | 168,757 |             |   | 10,138 |                  | 6.01 | %                |  |             | 137,403 |  |   | 8,969 |  | 6.53 | %
|                                             |  |                            |         |                 |          |             |  |          |                 |  |                  |         |             |   |        |                  |      |                  |  |             |         |  |   |       |  |      |  
|Total interest-earning assets                |  |                            | 284,320 |                 |          | 18,228      |  |          |                 |  |                  | 200,982 |             |   | 11,450 |                  |      |                  |  |             | 165,847 |  |   | 9,957 |  |      |  
|                                             |  |                            |         |                 |          |             |  |          |                 |  |                  |         |             |   |        |                  |      |                  |  |             |         |  |   |       |  |      |  
|Yield on average interest- earning assets    |  |                            |         |                 |          |             |  | 6.41     | %               |  |                  |         |             |   |        |                  | 5.70 | %                |  |             |         |  |   |       |  | 6.00 | %
|                                             |  |                            |         |                 |          |             |  |          |                 |  |                  |         |             |   |        |                  |      |                  |  |             |         |  |   |       |  |      |  
|Non-interest-earning assets:                 |  |                            |         |                 |          |             |  |          |                 |  |                  |         |             |   |        |                  |      |                  |  |             |         |  |   |       |  |      |  
|Cash                                         |  |                            | 5,704   |                 |          |             |  |          |                 |  |                  | 4,545   |             |   |        |                  |      |                  |  |             | 4,923   |  |   |       |  |      |  
|Premises and equipment                       |  |                            | 3,397   |                 |          |             |  |          |                 |  |                  | 3,211   |             |   |        |                  |      |                  |  |             | 3,341   |  |   |       |  |      |  
|Interest receivable and other                |  |                            | 8,960   |                 |          |             |  |          |                 |  |                  | 8,297   |             |   |        |                  |      |                  |  |             | 3,452   |  |   |       |  |      |  
|                                             |  |                            |         |                 |          |             |  |          |                 |  |                  |         |             |   |        |                  |      |                  |  |             |         |  |   |       |  |      |  
|Total noninterest-earning assets             |  |                            | 18,061  |                 |          |             |  |          |                 |  |                  | 16,053  |             |   |        |                  |      |                  |  |             | 11,716  |  |   |       |  |      |  
|                                             |  |                            |         |                 |          |             |  |          |                 |  |                  |         |             |   |        |                  |      |                  |  |             |         |  |   |       |  |      |  
|Total assets                                 |  | $                          | 302,381 |                 |          |             |  |          |                 |  | $                | 217,035 |             |   |        |                  |      |                  |  | $           | 177,563 |  |   |       |  |      |  
|                                             |  |                            |         |                 |          |             |  |          |                 |  |                  |         |             |   |        |                  |      |                  |  |             |         |  |   |       |  |      |  
|Interest-bearing liabilities:                |  |                            |         |                 |          |             |  |          |                 |  |                  |         |             |   |        |                  |      |                  |  |             |         |  |   |       |  |      |  
|Demand deposits                              |  | $                          | 17,803  |                 |          | 130         |  | .73      | %               |  | $                | 14,177  |             |   | 72     |                  | .51  | %                |  | $           | 12,901  |  |   | 61    |  | .48  | %
|Savings deposits                             |  |                            | 52,562  |                 |          | 1,091       |  | 2.08     | %               |  |                  | 31,308  |             |   | 378    |                  | 1.21 | %                |  |             | 22,298  |  |   | 265   |  | 1.19 | %
|Time deposits                                |  |                            | 158,227 |                 |          | 5,093       |  | 3.22     | %               |  |                  | 104,973 |             |   | 2,554  |                  | 2.43 | %                |  |             | 97,923  |  |   | 2,978 |  | 3.04 | %
|Short-term borrowings                        |  |                            | 3,618   |                 |          | 76          |  | 2.11     | %               |  |                  | 6,976   |             |   | 41     |                  | .59  | %                |  |             | 4,510   |  |   | 29    |  | .64  | %
|Long-term borrowings                         |  |                            | 24,282  |                 |          | 1,146       |  | 4.72     | %               |  |                  | 22,262  |             |   | 721    |                  | 3.24 | %                |  |             | 8,806   |  |   | 294   |  | 3.34 | %
|                                             |  |                            |         |                 |          |             |  |          |                 |  |                  |         |             |   |        |                  |      |                  |  |             |         |  |   |       |  |      |  
|Total interest-bearing liabilities           |  |                            | 256,492 |                 |          | 7,536       |  |          |                 |  |                  | 179,696 |             |   | 3,766  |                  |      |                  |  |             | 146,438 |  |   | 3,627 |  |      |  
|                                             |  |                            |         |                 |          |             |  |          |                 |  |                  |         |             |   |        |                  |      |                  |  |             |         |  |   |       |  |      |  
|Cost of average interest-bearing liabilities |  |                            |         |                 |          |             |  | 2.94     | %               |  |                  |         |             |   |        |                  | 2.10 | %                |  |             |         |  |   |       |  | 2.48 | %
|                                             |  |                            |         |                 |          |             |  |          |                 |  |                  |         |             |   |        |                  |      |                  |  |             |         |  |   |       |  |      |  
|Non-interest-bearing liabilities:            |  |                            |         |                 |          |             |  |          |                 |  |                  |         |             |   |        |                  |      |                  |  |             |         |  |   |       |  |      |  
|Demand deposits                              |  |                            | 24,402  |                 |          |             |  |          |                 |  |                  | 18,704  |             |   |        |                  |      |                  |  |             | 14,541  |  |   |       |  |      |  
|Interest payable and other                   |  |                            | 1,233   |                 |          |             |  |          |                 |  |                  | 694     |             |   |        |                  |      |                  |  |             | 951     |  |   |       |  |      |  
|                                             |  |                            |         |                 |          |             |  |          |                 |  |                  |         |             |   |        |                  |      |                  |  |             |         |  |   |       |  |      |  
|Total noninterest- bearing liabilities       |  |                            | 25,635  |                 |          |             |  |          |                 |  |                  | 19,398  |             |   |        |                  |      |                  |  |             | 15,492  |  |   |       |  |      |  
|                                             |  |                            |         |                 |          |             |  |          |                 |  |                  |         |             |   |        |                  |      |                  |  |             |         |  |   |       |  |      |  
|Total liabilities                            |  |                            | 282,127 |                 |          |             |  |          |                 |  |                  | 199,094 |             |   |        |                  |      |                  |  |             | 161,930 |  |   |       |  |      |  
|Stockholders equity                         |  |                            | 20,254  |                 |          |             |  |          |                 |  |                  | 17,941  |             |   |        |                  |      |                  |  |             | 15,633  |  |   |       |  |      |  
|                                             |  |                            |         |                 |          |             |  |          |                 |  |                  |         |             |   |        |                  |      |                  |  |             |         |  |   |       |  |      |  
|Total liabilities and stockholders equity   |  | $                          | 302,381 |                 |          |             |  |          |                 |  | $                | 217,035 |             |   |        |                  |      |                  |  | $           | 177,563 |  |   |       |  |      |  
|                                             |  |                            |         |                 |          |             |  |          |                 |  |                  |         |             |   |        |                  |      |                  |  |             |         |  |   |       |  |      |  
|Net interest income                          |  |                            |         |                 | $        | 10,692      |  |          |                 |  |                  |         |             | $ | 7,684  |                  |      |                  |  |             |         |  | $ | 6,330 |  |      |  
|                                             |  |                            |         |                 |          |             |  |          |                 |  |                  |         |             |   |        |                  |      |                  |  |             |         |  |   |       |  |      |  
|Net yield on interest-earning assets         |  |                            |         |                 |          |             |  | 3.76     | %               |  |                  |         |             |   |        |                  | 3.82 | %                |  |             |         |  |   |       |  | 3.82 | %
|                                             |  |                            |         |                 |          |             |  |          |                 |  |                  |         |             |   |        |                  |      |                  |  |             |         |  |   |       |  |      |  

---

|1 | Average loan balances include nonaccrual loans.
|- | -----------------------------------------------

|2 | Deferred loan fees are included in interest income.
|- | ---------------------------------------------------



33



---

Managements Discussion and Analysis

Net Interest Income

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

Interest income during 2005 was $18.2
million, an increase of 59.2% over the 2004 total of $11.5 million. Interest income for 2003 was $10.0 million. These increases are due to the increase in the level of average earning assets in the past three years. Average earning assets were
$284.3 million during 2005, an increase of 41.5%. Average earning assets increased 21.2% to $201.0 million during 2004 over the 2003 balance of $165.8 million. Yields on interest-earning assets during 2005, 2004, and 2003 were 6.4%, 5.7%, and 6.0%,
respectively.

Interest rates charged on loans vary with the degree of risk, maturity and amount of the loan. Competitive pressures, money market rates,
availability of funds, and government regulation also influence interest rates. On average, loans yielded 6.8%, 6.0% and 6.5% during 2005, 2004, and 2003, respectively. Yield on loans increased in 2005 due to the rising interest rate environment and
decreased in 2004 primarily as a result of the falling interest rate environment.

Interest expense was $7.5 million during 2005, an increase of 100.1%.
Interest expense in 2004 was $3.8 million, an increase of 3.8% over 2003. The increase in 2005 is a result of the rising rate environment and growth in certificates of deposit. The average rate paid on interest-bearing liabilities during 2005, 2004,
and 2003 was 2.9%, 2.1%, and 2.5%, respectively.

Net interest income was $10.7 million during 2005, an increase of 39.1% over 2004. During 2004 net
interest income increased to $7.7 million. Net interest income was $6.3 million in 2003. These increases are due to increased levels of average earning assets and liabilities, while yields and costs of funds increased in 2005. Net interest margin
was 3.8% for all three years ended 2005, 2004, and 2003.



34



---

Managements Discussion and Analysis

The effects of changes in volumes and rates on net interest income for 2005, 2004 and 2003 are shown in the table below.

Rate/Volume Variance Analysis (thousands)



|                              |  |                         |       |                         |                       |        |                         |  |   |                         |   |  |        |       |   |  |   |      |   |  |   |       |  
|----------------------------- |  | ----------------------- | ----- | ----------------------- | --------------------- | ------ | ----------------------- |  | - | ----------------------- | - |  | ------ | ----- | - |  | - | ---- | - |  | - | ----- | -
|                              |  | 2005 Compared to 2004   |       |                         | 2004 Compared to 2003 |       
|                              |  | Interest                |       |                         | Interest              |       
|                              |  | Income/Expense Variance |       | VarianceAttributable to |                       |        | Income/Expense Variance |  |   | VarianceAttributable to |  
|                              |  |                         | Rate  |                         |                       | Volume |                         |  |   | Rate                    |   |  | Volume |      
|Interest-earning assets:      |  |                         |       |                         |                       |        |                         |  |   |                         |   |  |        |       |   |  |   |      |   |  |   |       |  
|Loans                         |  | $                       | 6,192 |                         | $                     | 1,560  |                         |  | $ | 4,632                   |   |  | $      | 1,169 |   |  | $ | (714 | ) |  | $ | 1,883 |  
|Investment securities         |  |                         | 165   |                         |                       | 66     |                         |  |   | 99                      |   |  |        | 376   |   |  |   | (34  | ) |  |   | 410   |  
|Deposits with banks           |  |                         | 18    |                         |                       | 13     |                         |  |   | 5                       |   |  |        | 4     |   |  |   | 2    |   |  |   | 2     |  
|Federal funds sold            |  |                         | 403   |                         |                       | 102    |                         |  |   | 301                     |   |  |        | (56   | ) |  |   | 19   |   |  |   | (75   | )
|                              |  |                         |       |                         |                       |        |                         |  |   |                         |   |  |        |       |   |  |   |      |   |  |   |       |  
|Total                         |  |                         | 6,778 |                         |                       | 1,741  |                         |  |   | 5,037                   |   |  |        | 1,493 |   |  |   | (727 | ) |  |   | 2,220 |  
|                              |  |                         |       |                         |                       |        |                         |  |   |                         |   |  |        |       |   |  |   |      |   |  |   |       |  
|Interest-bearing liabilities: |  |                         |       |                         |                       |        |                         |  |   |                         |   |  |        |       |   |  |   |      |   |  |   |       |  
|Demand deposits               |  |                         | 58    |                         |                       | 37     |                         |  |   | 21                      |   |  |        | 11    |   |  |   | 5    |   |  |   | 6     |  
|Savings deposits              |  |                         | 713   |                         |                       | 367    |                         |  |   | 346                     |   |  |        | 113   |   |  |   | 4    |   |  |   | 109   |  
|Time deposits                 |  |                         | 2,539 |                         |                       | 987    |                         |  |   | 1,552                   |   |  |        | (424  | ) |  |   | (595 | ) |  |   | 171   |  
|Short-term borrowings         |  |                         | 35    |                         |                       | 43     |                         |  |   | (8                      | ) |  |        | 12    |   |  |   | (2   | ) |  |   | 14    |  
|Long-term debt                |  |                         | 425   |                         |                       | 354    |                         |  |   | 71                      |   |  |        | 427   |   |  |   | (5   | ) |  |   | 432   |  
|                              |  |                         |       |                         |                       |        |                         |  |   |                         |   |  |        |       |   |  |   |      |   |  |   |       |  
|Total                         |  |                         | 3,770 |                         |                       | 1,788  |                         |  |   | 1,982                   |   |  |        | 139   |   |  |   | (593 | ) |  |   | 732   |  
|                              |  |                         |       |                         |                       |        |                         |  |   |                         |   |  |        |       |   |  |   |      |   |  |   |       |  
|Net interest income           |  | $                       | 3,008 |                         | $                     | (47    | )                       |  | $ | 3,055                   |   |  | $      | 1,354 |   |  | $ | (134 | ) |  | $ | 1,488 |  
|                              |  |                         |       |                         |                       |        |                         |  |   |                         |   |  |        |       |   |  |   |      |   |  |   |       |  

---

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

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

Provision for Loan Losses

The provision for loan losses is charged to income in an amount necessary to maintain an allowance for loan
losses adequate to provide for expected losses in the Banks loan portfolio. The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as either doubtful, substandard or
special mention. For such loans that are also classified as impaired, 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-classified 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 specific and general losses in the portfolio.

The provision for loan loss expense was $1,370,000, $819,500, and $730,000 during 2005, 2004, and 2003 respectively. The Banks allowance for loan losses as a
percentage of gross loans was 1.5%, 1.3% and 1.5% at the end of 2005, 2004, and 2003, respectively. Additional information regarding loan loss provisions is discussed in Nonperforming and Problem Assets.



35



---

Managements Discussion and Analysis

Noninterest Income

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

Noninterest income totaled $2.3 million, $2.4 million, and $2.1 million during 2005, 2004, and 2003, respectively. Noninterest income decreased in 2005
primarily due to the loss of mortgage income from Sidus, LLC which was sold in the fourth quarter of 2004. The majority of the noninterest income is from service charges on deposit accounts. This will most likely increase as the number of deposit
accounts grow. This is also true of ATM and check cashing fees. The Banks fee structure is reviewed annually to determine if adjustments to fees are warranted.

Mortgage origination fees increased 37.8% to $270,000 from 2004 to 2005 due to strong housing demand in the existing market areas. These fees decreased $89,000 from 2003 to 2004 due to decreased demand as a result of
rising interest rates. The Bank purchased life insurance for certain of its key employees in December, 2004 providing $193,000, $227,000 and $19,000 of noninterest income for the years ended December 31, 2005, 2004 and 2003, respectively.

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

Sources of Noninterest Income (thousands)



|                                                        |  |      |       |   |      |   |       |      |  |   |       |  
|------------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                                        |  | 2005 |       |   | 2004 |   |       | 2003 | 
|Service charges on deposit accounts                     |  | $    | 1,095 |   |      | $ | 992   |      |  | $ | 990   |  
|Check sales                                             |  |      | (15   | ) |      |   | (8    | )    |  |   | (1    | )
|ATM and check cashing fees                              |  |      | 468   |   |      |   | 347   |      |  |   | 256   |  
|Gain on sale of investment securities                   |  |      | (1    | ) |      |   | 14    |      |  |   | 65    |  
|Gain on sale of investment in mortgage banking investee |  |      |      |   |      |   | 134   |      |  |   |      |  
|Mortgage origination                                    |  |      | 270   |   |      |   | 196   |      |  |   | 285   |  
|Investment fee income                                   |  |      | 87    |   |      |   | 85    |      |  |   | 94    |  
|Insurance commission                                    |  |      | 44    |   |      |   | 103   |      |  |   | 37    |  
|Income from mortgage banking investee                   |  |      | 37    |   |      |   | 297   |      |  |   | 249   |  
|Earnings on bank owned life insurance                   |  |      | 193   |   |      |   | 227   |      |  |   | 19    |  
|Other                                                   |  |      | 91    |   |      |   | 58    |      |  |   | 59    |  
|                                                        |  |      |       |   |      |   |       |      |  |   |       |  
|Total noninterest income                                |  | $    | 2,269 |   |      | $ | 2,445 |      |  | $ | 2,053 |  
|                                                        |  |      |       |   |      |   |       |      |  |   |       |  

Noninterest Expense

Noninterest expense for 2005, 2004, and 2003 was $7.0 million, $5.7 million and $4.4 million, respectively. The majority of the increase in noninterest expense for 2005 was attributed to personnel expense and the expenses related to the
full year expenses related to the branch in Wilmington, NC along with new branch expenses related to the openings of Southport, NC and Elizabethtown, NC. The overhead ratio of noninterest expense to adjusted total revenues (net interest income plus
noninterest income excluding securities transactions) was 54%, 56% and 53% in 2005, 2004, and 2003, respectively. Management expects the overhead ratio to continue to improve as the Company grows.



36



---

Managements Discussion and Analysis

Total personnel expenses, the largest component of noninterest expense, was $3.7 million, $3.0 million and $2.3 million during 2005, 2004 and 2003, respectively. Personnel expenses increased 24.3% during 2005 and
32.1% during 2004. This was due to Bank growth and the addition of senior management. Management expects these costs to continue to increase as the Company grows.

Combined occupancy and furniture and equipment expense was $805,000, $692,000 and $640,000, or 11.6%, 12.2% and 14.4% of noninterest expense during 2005, 2004 and 2003, respectively. Professional services expense, fees paid to attorneys,
independent auditors, consultants and state examiners was $192,000, $195,000, $67,000 in 2005, 2004 and 2003, respectively. The majority of the $128,000 increase in 2004 was due to the preparation for compliance with Section 404 of the
Sarbanes-Oxley Act of 2002.

Advertising and public relations expense increased to $187,000 in 2005 from $161,000 in 2004. The Company began aggressively
marketing loan and deposit products in 2005 with the additional marketing expenses related to the new branch openings in Southport, NC and Elizabethtown, NC. Data processing and credit card processing fees were $629,000, $431,000 and $341,000 during
2005, 2004 and 2003, respectively. These fees relate directly to the number of accounts serviced and transactions processed.

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. Accordingly, management believes the Companys overhead ratio
will continue to improve. The primary elements of noninterest expense for the past three years are summarized in the following table.

Sources of Noninterest Expense (thousands)



|                                 |  |      |       |      |   |       |  |   |      
|-------------------------------- |  | ---- | ----- | ---- | - | ----- |  | - | -----
|                                 |  | 2005 |       | 2004 |   | 2003 
|Salaries and wages               |  | $    | 3,125 |      | $ | 2,455 |  | $ | 1,807
|Employee benefits                |  |      | 608   |      |   | 548   |  |   | 466  
|                                 |  |      |       |      |   |       |  |   |      
|Total personnel expense          |  |      | 3,733 |      |   | 3,003 |  |   | 2,273
|Occupancy expense                |  |      | 555   |      |   | 472   |  |   | 448  
|Furniture and equipment          |  |      | 250   |      |   | 220   |  |   | 192  
|Printing and supplies            |  |      | 101   |      |   | 90    |  |   | 76   
|Professional services            |  |      | 192   |      |   | 195   |  |   | 67   
|Postage and office supplies      |  |      | 84    |      |   | 71    |  |   | 67   
|Telephone                        |  |      | 73    |      |   | 65    |  |   | 58   
|Dues and subscriptions           |  |      | 30    |      |   | 28    |  |   | 23   
|Education and seminars           |  |      | 35    |      |   | 28    |  |   | 9    
|Foreclosed assets expense        |  |      |      |      |   | 35    |  |   |     
|Franchise and local taxes        |  |      | 56    |      |   | 45    |  |   | 42   
|Advertising and public relations |  |      | 187   |      |   | 161   |  |   | 98   
|Director fees                    |  |      | 119   |      |   | 118   |  |   | 127  
|Data processing services         |  |      | 629   |      |   | 431   |  |   | 341  
|Amortization of deposit premium  |  |      | 253   |      |   | 252   |  |   | 227  
|Other operating expense          |  |      | 670   |      |   | 473   |  |   | 388  
|                                 |  |      |       |      |   |       |  |   |      
|Total other expenses             |  | $    | 6,967 |      | $ | 5,687 |  | $ | 4,436
|                                 |  |      |       |      |   |       |  |   |      



37



---

Managements Discussion and Analysis

Income Taxes

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

Income tax expense was $1,589,000, $1,209,000 and $1,210,000 for 2005, 2004 and 2003, respectively. Net deferred income tax benefits of approximately $1,596,000 and
$818,000 at December 31, 2005 and 2004, respectively, were included in other assets. At December 31, 2005, $189,000 of the total deferred tax asset is applicable to unrealized depreciation on investment securities available for sale.

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

Earning Assets

Average earning assets were $284.3 million during 2005, an increase of 41.5% over 2004. Average earning assets were $201.0 million in 2004, an increase of 21.2% over the
$165.8 million balance for 2003. Total average earning assets represented 94.0%, 92.6%, and 93.4% of total average assets during the years ended December 31, 2005, 2004 and 2003, respectively. A summary of average assets is shown in the
following table.

Average Asset Mix (thousands)



|                        |  |                 |         |         |        |   |                 |      |         |  |        |                 |  |         |         |  |        |  
|----------------------- |  | --------------- | ------- | ------- | ------ | - | --------------- | ---- | ------- |  | ------ | --------------- |  | ------- | ------- |  | ------ | -
|                        |  | 2005            |         |         | 2004   |   |                 | 2003 |        
|                        |  | Average Balance |         | Percent |        |   | Average Balance |      | Percent |  |        | Average Balance |  | Percent |        
|Earnings assets:        |  |                 |         |         |        |   |                 |      |         |  |        |                 |  |         |         |  |        |  
|Loans, net              |  | $               | 238,579 |         | 78.90  | % |                 | $    | 168,757 |  | 77.76  | %               |  | $       | 137,403 |  | 77.38  | %
|Investment securities   |  |                 | 31,257  |         | 10.34  |   |                 |      | 29,068  |  | 13.39  |                 |  |         | 19,663  |  | 11.08  |  
|Federal funds sold      |  |                 | 13,595  |         | 4.50   |   |                 |      | 2,543   |  | 1.17   |                 |  |         | 8,333   |  | 4.69   |  
|Deposits with banks     |  |                 | 889     |         | .29    |   |                 |      | 614     |  | .28    |                 |  |         | 448     |  | .25    |  
|                        |  |                 |         |         |        |   |                 |      |         |  |        |                 |  |         |         |  |        |  
|Total earning assets    |  |                 | 284,320 |         | 94.03  |   |                 |      | 200,982 |  | 92.60  |                 |  |         | 165,847 |  | 93.40  |  
|                        |  |                 |         |         |        |  
|Nonearning assets:      |  |                 |         |         |        |   |                 |      |         |  |        |                 |  |         |         |  |        |  
|Cash and due from banks |  |                 | 5,704   |         | 1.89   |   |                 |      | 4,545   |  | 2.09   |                 |  |         | 4,923   |  | 2.77   |  
|Premises and equipment  |  |                 | 3,397   |         | 1.12   |   |                 |      | 3,211   |  | 1.48   |                 |  |         | 3,341   |  | 1.88   |  
|Other assets            |  |                 | 8,960   |         | 2.96   |   |                 |      | 8,297   |  | 3.83   |                 |  |         | 3,452   |  | 1.95   |  
|                        |  |                 |         |         |        |   |                 |      |         |  |        |                 |  |         |         |  |        |  
|Total nonearning assets |  |                 | 18,061  |         | 5.97   |   |                 |      | 16,053  |  | 7.40   |                 |  |         | 11,716  |  | 6.60   |  
|                        |  |                 |         |         |        |   |                 |      |         |  |        |                 |  |         |         |  |        |  
|Total assets            |  | $               | 302,381 |         | 100.00 | % |                 | $    | 217,035 |  | 100.00 | %               |  | $       | 177,563 |  | 100.00 | %
|                        |  |                 |         |         |        |   |                 |      |         |  |        |                 |  |         |         |  |        |  

Loans

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



38



---

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 84.2%, 79.5%, and 60.7% of total loans at December 31, 2005, 2004, and 2003,
respectively. Total loans secured by one-to-four family residential properties represented 24.0%, 27.9%, and 26.5% of total loans at the end of 2005, 2004 and 2003, respectively. Loans for commercial and business purposes were $29.0 million, $30.9
million and $43.1 million, or 11.1%, 14.7% and 29.7% of total loans outstanding at December 31, 2005, 2004 and 2003, respectively.

The amounts of
gross loans outstanding by type at December 31, 2005 through December 31, 2001 are shown in the following table.

Loan
Portfolio Summary (thousands)



|                             |  |      |         |      |   |         |  |      |         |      |   |         |  |   |        
|---------------------------- |  | ---- | ------- | ---- | - | ------- |  | ---- | ------- | ---- | - | ------- |  | - | -------
|                             |  | 2005 |         | 2004 |   | 2003    |  | 2002 |         | 2001
|Construction and development |  | $    | 83,575  |      | $ | 37,529  |  | $    | 23,389  |      | $ | 23,690  |  | $ | 11,083 
|Farmland                     |  |      | 2,545   |      |   | 2,119   |  |      | 2,141   |      |   | 1,297   |  |   | 1,111  
|1-4 family residential       |  |      | 62,796  |      |   | 58,484  |  |      | 38,354  |      |   | 32,224  |  |   | 30,675 
|Multifamily residential      |  |      | 4,495   |      |   | 3,600   |  |      | 1,899   |      |   | 1,487   |  |   | 772    
|Nonfarm, nonresidential      |  |      | 67,199  |      |   | 65,156  |  |      | 22,130  |      |   | 6,400   |  |   | 3,860  
|                             |  |      |         |      |   |         |  |      |         |      |   |         |  |   |        
|Total real estate            |  |      | 220,610 |      |   | 166,888 |  |      | 87,913  |      |   | 65,098  |  |   | 47,501 
|Agricultural                 |  |      | 388     |      |   | 1,976   |  |      | 3,238   |      |   | 3,223   |  |   | 1,547  
|Commercial and industrial    |  |      | 29,036  |      |   | 30,928  |  |      | 43,068  |      |   | 46,625  |  |   | 38,305 
|Consumer                     |  |      | 10,544  |      |   | 8,564   |  |      | 8,775   |      |   | 11,109  |  |   | 14,512 
|Other                        |  |      | 1,327   |      |   | 1,471   |  |      | 1,819   |      |   | 1,661   |  |   | 600    
|                             |  |      |         |      |   |         |  |      |         |      |   |         |  |   |        
|Total                        |  | $    | 261,905 |      | $ | 209,827 |  | $    | 144,813 |      | $ | 127,716 |  | $ | 102,465
|                             |  |      |         |      |   |         |  |      |         |      |   |         |  |   |        

The maturity/repricing distribution of loans as of December 31, 2005 are set
forth in the following table.

Maturity Schedule of Loans (thousands)



|                                   |  |                         |        |                            |   |        |  |              |         |   |   |         |  |       
|---------------------------------- |  | ----------------------- | ------ | -------------------------- | - | ------ |  | ------------ | ------- | - | - | ------- |  | ------
|                                   |  | CommercialandIndustrial |        | ConstructionandDevelopment |   | Others |  | Total Amount |         | %
|Three months or less               |  | $                       | 16,662 |                            | $ | 49,338 |  | $            | 93,315  |   | $ | 159,315 |  | 60.83 
|Over three months to twelve months |  |                         | 1,431  |                            |   | 4,120  |  |              | 7,359   |   |   | 12,910  |  | 4.93  
|Over one year to five years        |  |                         | 7,379  |                            |   | 21,300 |  |              | 33,370  |   |   | 62,049  |  | 23.69 
|Over five years                    |  |                         | 3,564  |                            |   | 8,817  |  |              | 15,250  |   |   | 27,631  |  | 10.55 
|                                   |  |                         |        |                            |   |        |  |              |         |   |   |         |  |       
|Total loans                        |  | $                       | 29,036 |                            | $ | 83,575 |  | $            | 149,294 |   | $ | 261,905 |  | 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.



39



---

Managements Discussion and Analysis

Management of the investment portfolio is conservative with virtually all investments taking the form of purchases of 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 (thousands)



|                           |  |                    |      |   |                         |   |       |                           |  |            |                          |   |  |   |        |   |  |   |       |   |  |   |        |  |   |        |  
|-------------------------- |  | ------------------ | ---- | - | ----------------------- | - | ----- | ------------------------- |  | ---------- | ------------------------ | - |  | - | ------ | - |  | - | ----- | - |  | - | ------ |  | - | ------ | -
|                           |  | December 31, 2005  |     
|                           |  | Amortized Cost Due |      |   | EquitySecurities        |   |       | Total                     |  | Fair Value |                         
|                           |  | In One Yr.Or Less  |      |   | In OneThroughFive Years |   |       | After OneThroughTen Years |  |            | After FiveAfter TenYears |   |  |   |       
|Investment securities      |  |                    |      |   |                         |   |       |                           |  |            |                          |   |  |   |        |   |  |   |       |   |  |   |        |  |   |        |  
|US Government agencies     |  | $                  |     |   |                         | $ |      |                           |  | $          |                         |   |  | $ |       |   |  | $ |      |   |  | $ |       |  | $ |       |  
|Municipal securities       |  |                    |     |   |                         |   | 258   |                           |  |            | 875                      |   |  |   | 2,978  |   |  |   |      |   |  |   | 4,111  |  |   | 4,073  |  
|Corporate securities       |  |                    | 131  |   |                         |   | 1,988 |                           |  |            | 2,000                    |   |  |   | 7,797  |   |  |   |      |   |  |   | 11,916 |  |   | 11,666 |  
|Mortgage-backed securities |  |                    |     |   |                         |   | 127   |                           |  |            | 1,081                    |   |  |   | 16,455 |   |  |   |      |   |  |   | 17,663 |  |   | 17,469 |  
|Equity securities          |  |                    |     |   |                         |   |      |                           |  |            |                         |   |  |   |       |   |  |   | 2,006 |   |  |   | 2,006  |  |   | 2,006  |  
|                           |  |                    |      |   |                         |   |       |                           |  |            |                          |   |  |   |        |   |  |   |       |   |  |   |        |  |   |        |  
|Total                      |  | $                  | 131  |   |                         | $ | 2,373 |                           |  | $          | 3,956                    |   |  | $ | 27,230 |   |  | $ | 2,006 |   |  | $ | 35,696 |  | $ | 35,214 |  
|                           |  |                    |      |   |                         |   |       |                           |  |            |                          |   |  |   |        |   |  |   |       |   |  |   |        |  |   |        |  
|Weighted average yields    |  |                    |      |   |                         |   |       |                           |  |            |                          |   |  |   |        |   |  |   |       |   |  |   |        |  |   |        |  
|U.S. Government agencies   |  |                    |     | % |                         |   |      | %                         |  |            |                         | % |  |   |       | % |  |   |      | % |  |   |        |  |   |       | %
|Municipal securities       |  |                    |     | % |                         |   | 2.70  | %                         |  |            | 4.00                     | % |  |   | 4.17   | % |  |   |      | % |  |   |        |  |   | 3.90   | %
|Corporate securities       |  |                    | 6.10 | % |                         |   | 4.73  | %                         |  |            | 5.58                     | % |  |   | 7.39   | % |  |   |      | % |  |   |        |  |   | 6.88   | %
|Mortgage-backed securities |  |                    |     | % |                         |   | 6.27  | %                         |  |            | 3.80                     | % |  |   | 3.78   | % |  |   |      | % |  |   |        |  |   | 3.80   | %
|                           |  |                    |      |   |                         |   |       |                           |  |            |                          |   |  |   |        |   |  |   |       |   |  |   |        |  |   |        |  
|Consolidated               |  |                    | 6.10 | % |                         |   | 4.59  | %                         |  |            | 4.74                     | % |  |   | 4.86   | % |  |   |      | % |  |   |        |  |   | 4.89   | %
|                           |  |                    |      |   |                         |   |       |                           |  |            |                          |   |  |   |        |   |  |   |       |   |  |   |        |  |   |        |  



|                           |  |           |        |           |   |       
|-------------------------- |  | --------- | ------ | --------- | - | ------
|                           |  | 2004     
|                           |  | BookValue |        | FairValue
|Investment securities      |  |           |        |           |   |       
|US Government agencies     |  | $         | 500    |           | $ | 503   
|Municipal securities       |  |           | 2,319  |           |   | 2,328 
|Corporate securities       |  |           | 10,677 |           |   | 11,072
|Mortgage-backed securities |  |           | 14,750 |           |   | 14,696
|Equity securities          |  |           | 1,633  |           |   | 1,633 
|                           |  |           |        |           |   |       
|Total                      |  | $         | 29,879 |           | $ | 30,232
|                           |  |           |        |           |   |       

The interest rate environment and the need for liquidity resulted in an annualized average yield on the investment
portfolio of 4.6%, 4.4%, and 4.6% during 2005, 2004 and 2003, respectively. At December 31, 2005, 2004 and 2003, the market value of the investment portfolio was $35.2 million, $30.2 million, and $24.1 million, respectively. Amortized cost was
$35.7 million, $29.9 million, and $23.9 million.



40



---

Managements Discussion and Analysis

Federal Funds Sold

Federal funds represent the most liquid portion of the Banks invested funds and generally
the lowest yielding portion of earning assets. However, because of the flat yield curve and the need to maintain liquidity, management maintained a significant amount of Federal funds during the past three years. Average Federal funds sold totaled
$13.6 million, $2.5 million, and $8.3 million in 2005, 2004, and 2003, respectively. Year-end Federal funds sold were $8.3 million and $4.5 million at December 31, 2005 and 2004, respectively.

Deposits

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

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

Average total deposits were $253.0 million during 2005. This is an increase of 49.6% over 2004. Average total deposits were $169.2 million for the year ended December 31, 2004, an increase of 14.6% over 2003. Substantially all of those
deposits were core deposits. The percentage of the Banks average deposits that were interest bearing in 2005 was 90.4% and 88.9% during 2004 and 90.2% during 2003. Average demand deposits which earn no interest were $24.4 million, $18.7
million and $14.5 million for the periods ended December 31, 2005, 2004 and 2003, respectively.

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



41



---

Managements Discussion and Analysis

Average deposits and related average rates paid for the periods ended December 31, 2005, 2004, and 2003 are summarized in the following table.

Average Deposit Mix (thousands)



|                                    |  |        |         |      |      |   |        |      |         |  |      |        |  |      |         |  |      |  
|----------------------------------- |  | ------ | ------- | ---- | ---- | - | ------ | ---- | ------- |  | ---- | ------ |  | ---- | ------- |  | ---- | -
|                                    |  | 2005   |         |      | 2004 |   |        | 2003 |        
|                                    |  | Amount |         | Rate |      |   | Amount |      | Rate    |  |      | Amount |  | Rate |        
|Interest bearing deposits:          |  |        |         |      |      |   |        |      |         |  |      |        |  |      |         |  |      |  
|Demand accounts                     |  | $      | 17,803  |      | .73  | % |        | $    | 14,177  |  | 0.51 | %      |  | $    | 12,901  |  | 0.48 | %
|Money market                        |  |        | 45,980  |      | 2.25 |   |        |      | 25,422  |  | 1.35 |        |  |      | 16,999  |  | 1.35 |  
|Savings                             |  |        | 6,582   |      | .85  |   |        |      | 5,886   |  | 0.55 |        |  |      | 5,299   |  | 0.55 |  
|Time deposit                        |  |        | 158,227 |      | 3.22 |   |        |      | 104,973 |  | 2.43 |        |  |      | 97,923  |  | 3.04 |  
|                                    |  |        |         |      |      |   |        |      |         |  |      |        |  |      |         |  |      |  
|Total interest bearing deposits     |  |        | 228,592 |      | 2.76 |   |        |      | 150,458 |  | 2.00 |        |  |      | 133,122 |  | 2.48 |  
|Noninterest bearing demand deposits |  |        | 24,402  |      |      |   |        |      | 18,704  |  |      |        |  |      | 14,541  |  |      |  
|                                    |  |        |         |      |      |   |        |      |         |  |      |        |  |      |         |  |      |  
|Total deposits                      |  | $      | 252,994 |      |      |   |        | $    | 169,162 |  |      |        |  | $    | 147,663 |  |      |  
|                                    |  |        |         |      |      |   |        |      |         |  |      |        |  |      |         |  |      |  

The following table provides maturity information relating to time deposits of
$100,000 or more at December 31, 2005.

Large Time Deposit Maturities, (thousands)



|                                                    |  |   |       
|--------------------------------------------------- |  | - | ------
|Remaining maturity of three months or less          |  | $ | 15,796
|Remaining maturity over three through twelve months |  |   | 51,696
|Remaining maturity over twelve months               |  |   | 17,335
|                                                    |  |   |       
|Total time deposits of $100,000 or more             |  | $ | 84,827
|                                                    |  |   |       

Short-Term Debt

Other borrowed funds consisting of securities sold under agreements to repurchase and Federal funds purchased were $2.7 million, $3.3 million, and $3.7 million at December 31, 2005, 2004 and 2003, respectively. Average short-term debt
was $3.6 million, $7.0 million, and $4.5 million during 2005, 2004 and 2003, respectively. The related interest expense was $76,247, $40,978, and $29,082 during 2005, 2004, and 2003, respectively.

Long-Term Debt

As a member of the Federal Home Loan Bank of Atlanta,
the Bank has the ability to borrow up to 10% of total assets in the form of FHLB advances. At December 31, 2005 and 2004 advances of $6.5 million and $18.5 million, respectively were outstanding. The average amount outstanding during 2005 and
2004 was $16.0 million and $14.0 million, respectively. Approximately $24,000,000 in 1-4 family residential loans were pledged as collateral for the FHLB advances at December 31, 2005.



|              |  |         |           |      |               |   |  |                      
|------------- |  | ------- | --------- | ---- | ------------- | - |  | ---------------------
|Maturity Date |  | Advance |           | Rate |               |   | 
|02/10/10      |  | $       | 2,500,000 |      | Fixed at 5.85 | % |  | Convertible quarterly
|09/29/15      |  |         | 4,000,000 |      | Fixed at 4.06 | % |  | Convertible 9/29/09  
|              |  |         |           |      |               |   |  |                      
|              |  | $       | 6,500,000 |      |               |   |  |                      
|              |  |         |           |      |               |   |  |                      



42



---

Managements Discussion and Analysis

Capital Adequacy

Stockholders equity was $22.5 million at December 31, 2005. This was a 13.1% increase
over the $19.9 million at the end of 2004. Average stockholders equity as a percentage of average total assets was 6.7%, 8.3% and 8.8% for 2005, 2004, and 2003, respectively.

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

The Trust Preferred securities are accounted for as long-term debt in the accompanying financial statements, however, for regulatory capital
purposes, the majority of this issuance is considered Tier I capital with the remainder qualifying as Tier II capital. The following tables illustrate the Companys and the Banks respective capital position and ratios along with minimum
regulatory ratios at December 31, 2005.

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, 2005, the Companys Tier 1 risk-weighted capital ratio and total capital ratio were 11.1% and 12.4%, 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, 2005, the Banks capital ratios were as follows: Tier I leverage ratio, 9.0%, Tier I risk-based capital ratio, 10.7% and total risk-based ratio, 11.9%. These capital ratios were sufficient at December 31, 2005 to classify
the Bank as well capitalized in accordance with the FDICs regulatory capital rules. The Companys and Banks actual capital amounts and ratios are presented in the following table.

Capital Requirements (thousands)

Waccamaw
Bankshares, Inc.



|              |  |                  |        |               |                |   |                    |               |               |  |       |        |  |               |        |  |       |  
|------------- |  | ---------------- | ------ | ------------- | -------------- | - | ------------------ | ------------- | ------------- |  | ----- | ------ |  | ------------- | ------ |  | ----- | -
|              |  |                  |        |               |                |   | Risk-based Capital |              
|              |  | Leverage Capital |        |               | Tier I Capital |   |                    | Total Capital |              
|              |  | Amount           |        | Percentage(1) |                |   | Amount             |               | Percentage(2) |  |       | Amount |  | Percentage(2) |       
|Actual        |  | $                | 30,042 |               | 9.37           | % |                    | $             | 30,042        |  | 11.11 | %      |  | $             | 33,420 |  | 12.36 | %
|Required      |  |                  | 12,828 |               | 4.00           | % |                    |               | 10,813        |  | 4.00  | %      |  |               | 21,629 |  | 8.00  | %
|              |  |                  |        |               |                |  
|Waccamaw Bank |  |                  |        |               |                |   |                    |               |               |  |       |        |  |               |        |  |       |  
|              |  |                  |       
|              |  |                  |        |               |                |   | Risk-based Capital |              
|              |  | Leverage Capital |        |               | Tier I Capital |   |                    | Total Capital |              
|              |  | Amount           |        | Percentage(1) |                |   | Amount             |               | Percentage(2) |  |       | Amount |  | Percentage(2) |       
|Actual        |  | $                | 28,738 |               | 9.00           | % |                    | $             | 28,738        |  | 10.69 | %      |  | $             | 32,116 |  | 11.94 | %
|Required      |  |                  | 12,777 |               | 4.00           | % |                    |               | 10,755        |  | 4.00  | %      |  |               | 21,509 |  | 8.00  | %

---

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

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



43



---

Managements Discussion and Analysis

Nonperforming and Problem Assets

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

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

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

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



44



---

Managements Discussion and Analysis

Allowance for Loan Losses (thousands)



|                                                           |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|---------------------------------------------------------- |  | ---------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                           |  | 2005                   |         |   | 2004 |   |         | 2003 |  |   | 2002    |   |  | 2001 |        
|                                                           |  | (Dollars in thousands) |        
|Balance at beginning of period                             |  | $                      | 2,791   |   |      | $ | 2,218   |      |  | $ | 1,854   |   |  | $    | 1,422   |   |  | $ | 977     |  
|                                                           |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Charge-offs:                                               |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Construction loans                                         |  |                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Commercial and industrial loans                            |  |                        | (86     | ) |      |   | (63     | )    |  |   | (14     | ) |  |      | (15     | ) |  |   |        |  
|Consumer and other                                         |  |                        | (184    | ) |      |   | (210    | )    |  |   | (378    | ) |  |      | (373    | ) |  |   | (208    | )
|                                                           |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total charge-offs                                          |  |                        | (270    | ) |      |   | (273    | )    |  |   | (392    | ) |  |      | (388    | ) |  |   | (208    | )
|                                                           |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Recoveries:                                                |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Construction loans                                         |  |                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Commercial and industrial loans                            |  |                        | 34      |   |      |   | 17      |      |  |   |        |   |  |      |        |   |  |   |        |  
|Consumer and other                                         |  |                        | 14      |   |      |   | 10      |      |  |   | 26      |   |  |      | 26      |   |  |   | 41      |  
|                                                           |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total recoveries                                           |  |                        | 48      |   |      |   | 27      |      |  |   | 26      |   |  |      | 26      |   |  |   | 41      |  
|                                                           |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net charge-offs                                            |  |                        | (222    | ) |      |   | (246    | )    |  |   | (366    | ) |  |      | (362    | ) |  |   | (167    | )
|                                                           |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Allowance allocated to purchased loans                     |  |                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|                                                           |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Provision for loan losses                                  |  |                        | 1,370   |   |      |   | 819     |      |  |   | 730     |   |  |      | 794     |   |  |   | 612     |  
|                                                           |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Balance at the end of the year                             |  | $                      | 3,939   |   |      | $ | 2,791   |      |  | $ | 2,218   |   |  | $    | 1,854   |   |  | $ | 1,422   |  
|                                                           |  |                        |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total loans outstanding at year-end                        |  | $                      | 261,905 |   |      | $ | 209,827 |      |  | $ | 144,813 |   |  | $    | 127,716 |   |  | $ | 102,465 |  
|                                                           |  |                        |         |   |     
|Average net loans outstanding for the year                 |  | $                      | 238,579 |   |      | $ | 168,757 |      |  | $ | 137,403 |   |  | $    | 114,823 |   |  | $ | 84,209  |  
|                                                           |  |                        |         |   |     
|Allowance for loan losses to loans outstanding             |  |                        | 1.50    | % |      |   | 1.33    | %    |  |   | 1.53    | % |  |      | 1.45    | % |  |   | 1.39    | %
|                                                           |  |                        |         |   |     
|Ratio of net loan charge-offs to average loans outstanding |  |                        | 0.09    | % |      |   | 0.15    | %    |  |   | 0.27    | % |  |      | 0.32    | % |  |   | 0.20    | %

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 (thousands)



|                             |  |        |       |      |        |        |   |       |  |        |  |      |       |        |        |      |   |        |  |        |  |   |       |  |       
|---------------------------- |  | ------ | ----- | ---- | ------ | ------ | - | ----- |  | ------ |  | ---- | ----- | ------ | ------ | ---- | - | ------ |  | ------ |  | - | ----- |  | ------
|                             |  | 2005   |       | 2004 |        | 2003   |   | 2002  |  | 2001  
|                             |  | Amount |       | %(1) |        | Amount |   | %(1)  |  | Amount |  | %(1) |       | Amount |        | %(1) |   | Amount |  | %(1)_ 
|Construction and development |  | $      | 1,320 |      | 31.91  |        | $ | 253   |  | 17.89  |  | $    | 351   |        | 16.15  |      | $ | 346    |  | 18.55  |  | $ | 151   |  | 10.82 
|Farmland                     |  |        | 33    |      | 0.97   |        |   | 28    |  | 1.01   |  |      | 30    |        | 1.48   |      |   | 22     |  | 1.02   |  |   | 16    |  | 1.08  
|1-4 family residential       |  |        | 911   |      | 23.98  |        |   | 702   |  | 27.87  |  |      | 575   |        | 26.48  |      |   | 451    |  | 25.23  |  |   | 433   |  | 29.94 
|Multifamily residential      |  |        | 49    |      | 1.71   |        |   | 39    |  | 1.72   |  |      | 23    |        | 1.31   |      |   | 22     |  | 1.16   |  |   | 9     |  | 0.75  
|Nonfarm, nonresidential      |  |        | 1,048 |      | 25.66  |        |   | 358   |  | 31.05  |  |      | 299   |        | 15.28  |      |   | 92     |  | 5.01   |  |   | 48    |  | 3.77  
|                             |  |        |       |      |        |        |   |       |  |        |  |      |       |        |        |      |   |        |  |        |  |   |       |  |       
|Total real estate            |  |        | 3,361 |      | 84.23  |        |   | 1,380 |  | 79.54  |  |      | 1,278 |        | 60.70  |      |   | 933    |  | 50.97  |  |   | 657   |  | 46.36 
|                             |  |        |       |      |        |        |   |       |  |       
|Agricultural                 |  |        | 5     |      | 0.14   |        |   | 28    |  | 0.94   |  |      | 52    |        | 2.24   |      |   | 52     |  | 2.52   |  |   | 21    |  | 1.51  
|Commercial and industrial    |  |        | 389   |      | 11.09  |        |   | 1,241 |  | 14.74  |  |      | 711   |        | 29.74  |      |   | 676    |  | 36.51  |  |   | 537   |  | 37.38 
|Consumer                     |  |        | 168   |      | 4.03   |        |   | 124   |  | 4.08   |  |      | 149   |        | 6.06   |      |   | 167    |  | 8.69   |  |   | 200   |  | 14.16 
|Other                        |  |        | 16    |      | 0.51   |        |   | 18    |  | 0.70   |  |      | 28    |        | 1.26   |      |   | 26     |  | 1.31   |  |   | 7     |  | 0.59  
|                             |  |        |       |      |        |        |   |       |  |        |  |      |       |        |        |      |   |        |  |        |  |   |       |  |       
|Total                        |  | $      | 3,939 |      | 100.00 |        | $ | 2,791 |  | 100.00 |  | $    | 2,218 |        | 100.00 |      | $ | 1,854  |  | 100.00 |  | $ | 1,422 |  | 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, 2005.



45



---

Managements Discussion and Analysis

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

Nonperforming Assets (in thousands)



|                                                           |  |      |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |     |  
|---------------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | - |  | ---- | ----- | - |  | - | --- | -
|                                                           |  | 2005 |       |   | 2004 |   |       | 2003 |  |   | 2002  |   |  | 2001 |      
|Nonaccrual loans                                           |  | $    | 1,711 |   |      | $ | 1,723 |      |  | $ | 701   |   |  | $    | 1,800 |   |  | $ |    |  
|Loans past due 90 days or more and still accruing interest |  |      | 250   |   |      |   | 628   |      |  |   | 486   |   |  |      | 173   |   |  |   |    |  
|                                                           |  |      |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |     |  
|Total nonperforming loans                                  |  |      | 1,961 |   |      |   | 2,351 |      |  |   | 1,187 |   |  |      | 1,973 |   |  |   |    |  
|Other real estate and repossessed personal property        |  |      | 140   |   |      |   | 82    |      |  |   | 164   |   |  |      | 140   |   |  |   | 42  |  
|                                                           |  |      |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |     |  
|Total nonperforming assets                                 |  | $    | 2,101 |   |      | $ | 2,433 |      |  | $ | 1,351 |   |  | $    | 2,113 |   |  | $ | 42  |  
|                                                           |  |      |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |     |  
|Nonperforming assets as a percentage of:                   |  |      |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   |     |  
|Total assets                                               |  |      | .65   | % |      |   | .94   | %    |  |   | .70   | % |  |      | 1.31  | % |  |   | .03 | %
|Total loans                                                |  |      | .80   | % |      |   | 1.16  | %    |  |   | .93   | % |  |      | 1.65  | % |  |   | .04 | %

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

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

At December 31, 2005, the Bank was cumulatively asset-sensitive (earning assets subject to interest rate changes exceeded interest-bearing liabilities subject to changes in interest rates). Demand, savings and
money market accounts repricing within three months was $82.1 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.



46



---

Managements Discussion and Analysis

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

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

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

Interest Rate Sensitivity



|                                                             |  |                                        |         |   |             |   |         |              |  |   |                |    |  |       |        |   |  |   |         |  
|------------------------------------------------------------ |  | -------------------------------------- | ------- | - | ----------- | - | ------- | ------------ |  | - | -------------- | -- |  | ----- | ------ | - |  | - | ------- | -
|                                                             |  | December 31, 2005 Maturities/Repricing |        
|                                                             |  | 1-3 Months                             |         |   | 4-12 Months |   |         | 13-60 Months |  |   | Over 60 Months |    |  | Total |       
|Earning assets:                                              |  |                                        |         |   |             |   |         |              |  |   |                |    |  |       |        |   |  |   |         |  
|Loans                                                        |  | $                                      | 159,315 |   |             | $ | 12,910  |              |  | $ | 62,049         |    |  | $     | 27,631 |   |  | $ | 261,905 |  
|Investments                                                  |  |                                        | 278     |   |             |   |        |              |  |   | 2,232          |    |  |       | 32,704 |   |  |   | 35,214  |  
|Federal funds sold                                           |  |                                        | 8,281   |   |             |   |        |              |  |   |               |    |  |       |       |   |  |   | 8,281   |  
|Deposits with banks                                          |  |                                        | 708     |   |             |   |        |              |  |   |               |    |  |       |       |   |  |   | 708     |  
|                                                             |  |                                        |         |   |             |   |         |              |  |   |                |    |  |       |        |   |  |   |         |  
|Total                                                        |  |                                        | 168,582 |   |             |   | 12,910  |              |  |   | 64,281         |    |  |       | 60,335 |   |  |   | 306,108 |  
|                                                             |  |                                        |         |   |             |   |         |              |  |   |                |    |  |       |        |   |  |   |         |  
|Interest-bearing liabilities:                                |  |                                        |         |   |             |   |         |              |  |   |                |    |  |       |        |   |  |   |         |  
|Demand accounts                                              |  |                                        | 20,062  |   |             |   |        |              |  |   |               |    |  |       |       |   |  |   | 20,062  |  
|Savings and money market                                     |  |                                        | 62,067  |   |             |   |        |              |  |   |               |    |  |       |       |   |  |   | 62,067  |  
|Time deposits                                                |  |                                        | 37,528  |   |             |   | 99,961  |              |  |   | 18,330         |    |  |       | 7,738  |   |  |   | 163,557 |  
|Repurchase agreements and purchased funds                    |  |                                        | 2,736   |   |             |   |        |              |  |   |               |    |  |       |       |   |  |   | 2,736   |  
|Short-term borrowings                                        |  |                                        |        |   |             |   | 10,000  |              |  |   |               |    |  |       |       |   |  |   | 10,000  |  
|Long-term debt                                               |  |                                        |        |   |             |   |        |              |  |   |               |    |  |       | 6,500  |   |  |   | 6,500   |  
|Junior subordinated debentures                               |  |                                        | 8,248   |   |             |   |        |              |  |   |               |    |  |       |       |   |  |   | 8,248   |  
|                                                             |  |                                        |         |   |             |   |         |              |  |   |                |    |  |       |        |   |  |   |         |  
|Total                                                        |  |                                        | 130,641 |   |             |   | 109,961 |              |  |   | 18,330         |    |  |       | 14,238 |   |  |   | 273,170 |  
|                                                             |  |                                        |         |   |             |   |         |              |  |   |                |    |  |       |        |   |  |   |         |  
|Interest rate gap                                            |  | $                                      | 37,941  |   |             | $ | (97,051 | )            |  | $ | 45,951         |    |  | $     | 46,097 |   |  | $ | 32,938  |  
|                                                             |  |                                        |         |   |             |   |         |              |  |   |                |    |  |       |        |   |  |   |         |  
|Cumulative interest sensitivity gap                          |  | $                                      | 37,941  |   |             | $ | (59,110 | )            |  | $ | (13,159        | )  |  | $     | 32,938 |   |  |   |         |  
|Ratio of sensitivity gap to total earnings assets            |  |                                        | 12.39   | % |             |   | (31.70  | )%           |  |   | 15.01          | %  |  |       | 15.06  | % |  |   | 10.76   | %
|Cumulative ratio of sensitivity gap to total earnings assets |  |                                        | 12.39   | % |             |   | (19.31  | )%           |  |   | (4.30          | )% |  |       | 10.76  | % |  |   |         |  

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.



47



---

Managements Discussion and Analysis

Financial Ratios

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

Key Financial Ratios



|                                 |  |       |   |  |       |   |  |       |  
|-------------------------------- |  | ----- | - |  | ----- | - |  | ----- | -
|                                 |  | 2005  |   |  | 2004  |   |  | 2003  |  
|Average equity to average assets |  | 6.70  | % |  | 8.27  | % |  | 8.80  | %
|Return on average assets         |  | 1.00  | % |  | 1.11  | % |  | 1.13  | %
|Return on average equity         |  | 14.98 | % |  | 13.46 | % |  | 12.84 | %



48



---

Mission Statement

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.
| | - |  | -------------------------------------------------------

WACCAMAW BANK

Growing Coastal Carolina Strong



49



---

Board of Directors and Officers



|                        |  |                                                                                   
|----------------------- |  | ----------------------------------------------------------------------------------
|Board of Directors     
|                        | 
|M. B. Bo Biggs        |  | K. M. Biggs, Inc.                                                                 
|                        | 
|Dr. Maudie M. Davis     |  | Principal, South Columbus High School                                             
|                        | 
|E. Autry Dawsey, Sr.    |  | Premiere Enterprises of Whiteville, L.L.C.                                        
|                        | 
|Monroe Enzor III        |  | Broker, Coldwell Banker Sloane Realty                                             
|                        | 
|James G. Graham         |  | President and Chief Executive Officer, Waccamaw Bank and Waccamaw Bankshares, Inc.
|                        | 
|James E. Hill, Jr.      |  | Hill & High, L.L.P.                                                               
|                        | 
|Alan W. Thompson        |  | Thompson, Price, Scott, Adams & Co., P.A.                                         
|                        | 
|Dale Ward               |  | J. D. Wright Roofing Co., Inc.                                                    
|                        | 
|J. Densil Worthington   |  | Worthington Funeral Home, Inc.                                                    
|                       
|Directors Emeritus     
|                        | 
|Michael K. Jones        |  | Jones Stores, Inc. and Related Companies                                          
|                        | 
|Dewey L. Hill           |  | Hillcrest Corp.                                                                   
|                        | 
|Lucian P. Stephens      |  | Blockade Runner Motor Inn, Inc.                                                   
|                       
|Bank Executive Officers
|                        | 
|James G. Graham         |  | President and Chief Executive Officer                                             
|                        | 
|Freda H. Gore           |  | Vice President and Chief Operations Officer                                       
|                        | 
|David A. Godwin         |  | Vice President and Chief Financial Officer                                        
|                        | 
|Richard C. Norris       |  | Vice President and Senior Credit Officer                                          
|                        | 
|Kim T. Hutchens         |  | Vice President and Human Resources/Marketing Officer                              



50



---

Bank Employees



|                     |  |                                  
|-------------------- |  | ---------------------------------
|Main Office         
|                     | 
|Geoffrey R. Hopkins  |  | VP & City Executive              
|Timothy J. Reilly    |  | VP & Commercial Lender           
|Michelle Ward        |  | Administrative Assistant         
|April Wilson         |  | Administrative Assistant         
|Amy Howell           |  | Branch Officer                   
|Michelle Brown       |  | Loan Officer                     
|Kathy Brown          |  | Loan Administrative Assistant    
|Kelly Bass           |  | Customer Service Representative  
|Tori Wilson          |  | Customer Service Representative  
|Misty Hardwick       |  | Teller Supervisor                
|Rosario G. Mincey    |  | Teller                           
|Altanese McCellon    |  | Teller                           
|Brandy Barnhill      |  | Teller                           
|Denise Williamson    |  | Teller                           
|C.W. Singletary, Jr. |  | Floating CSR/Teller              
|Hilda W. Branch      |  | Receptionist                     
|                    
|Tabor City Office   
|                     | 
|Ned Hughes           |  | VP & City Executive              
|Gayle N. Watson      |  | Assistant VP & Branch Manager    
|Tammy C. Simmons     |  | Customer Service                 
|                     |  | Representative/Loan Assistant    
|Sarah W. Currie      |  | Head Teller                      
|M. Pearl Lewis       |  | Teller                           
|Jennifer Russ        |  | CSR/Teller                       
|                    
|Chadbourn Office    
|                     | 
|Mark Madden          |  | Assistant VP & Branch Manager    
|Lou Ellen Williamson |  | Loan Officer                     
|Lori Williams        |  | Customer Service Representative  
|Wanda F. Rozier      |  | Teller Supervisor                
|Pamela M. Thornton   |  | Teller                           
|Rita Spivey          |  | Teller                           
|Wesley Reaves        |  | Teller                           
|Kimberly Graham      |  | Teller                           
|Christy Ward         |  | Part Time Teller                 
|                    
|Shallotte Office    
|                     | 
|Dianne F. McRainey   |  | VP & City Executive              
|Vernon L. Parker     |  | VP & Branch Manager              
|Linwood Johnston     |  | Loan Administrative Assistant    
|Judy Seaboldt        |  | Loan Administrative Assistant    
|Courtney Waddell     |  | Loan Officer/CSR                 
|Penny McKeithan      |  | Teller/Operations                
|Sonja Milligan       |  | Customer Service Representative  
|Barbara Evans        |  | Teller Supervisor                
|Letha Yow            |  | Teller                           
|Ericka King          |  | Teller                           
|                    
|Holden Beach Office 
|                     | 
|Rob Fircetz          |  | VP & Branch Manager              
|Melissa A. King      |  | Loan Officer/CSR                 
|Elizabeth A. Evans   |  | Teller Supervisor                
|Cynthia P. Elliott   |  | Teller                           
|Tiffany Johnson      |  | Teller                           
|                    
|Wilmington Office   
|                     | 
|Jonathan Krieps      |  | VP & City Executive              
|Janie Grainger       |  | Assistant VP & Branch Manager    
|Susie Smythe         |  | Loan Officer Assistant           
|Melissa Phillippi    |  | Customer Service                 
|                     |  | Representative/Teller Supervisor 
|Johnnie Fink         |  | Customer Service Representative  
|Rebecca Spiewak      |  | CSR/Teller                       
|Robbie Holly         |  | Teller                           
|Shamekia Cogdell     |  | Part Time Teller                 
|                    
|Southport Office    
|                     | 
|Russ Thompson        |  | VP & Market Executive            
|Grace Wong-Heck      |  | Loan Administrative Assistant/CSR
|Carolyn Stringer     |  | Mortgage Loan Processor          
|Courtney Aderhold    |  | CSR/Teller                       
|                    
|Elizabethtown Office
|                     | 
|Hayes Petteway       |  | VP & City Executive              
|Debbie Earl          |  | CSR/Teller                       
|Amanda Ray           |  | CSR/Teller                       
|Kimberly Kannon      |  | Teller                           
|                    
|Mortgage Lending    
|                     | 
|Columbus County      |  |                                  
|Robert Bell          |  | Mortgage Banker                  
|                     | 
|Brunswick County     |  |                                  
|Pat Garrell          |  | Mortgage Banker                  
|                     | 
|Brunswick County     |  |                                  
|Kim Neisler          |  | Mortgage Banker                  



51



---

Bank Employees



|                                  |  |                                         
|--------------------------------- |  | ----------------------------------------
|Credit Administration            
|                                  | 
|Janet Smith                       |  | Credit Review                           
|Cindy Ross                        |  | Vice President/Credit Officer           
|George Benton                     |  | Assistant Credit Manager                
|Donna Briley                      |  | Administrative Assistant                
|Ella Scarborough                  |  | Loan Assistant                          
|Roy Thompson                      |  | Loan Assistant                          
|Amanda Williams                   |  | Loan Assistant                          
|Brad Bullard                      |  | Loan Assistant                          
|Gary Vereen                       |  | Loan Assistant                          
|                                 
|Operations & Accounting          
|                                  | 
|Gracie B. McClary                 |  | Vice President & Compliance Officer     
|Mike Lewis                        |  | Assistant VP/Security/Operations Officer
|Deanna Nichols                    |  | Training Officer                        
|Jennifer Noble                    |  | Operations Assistant                    
|Heath Spivey                      |  | Tech Support Operations                 
|Emily Bullard                     |  | Operations Assistant                    
|Judy Harritan                     |  | Operations Assistant                    
|Ann Jernigan                      |  | Operations Assistant                    
|Judyth Richardson                 |  | Staff Accountant                        
|Barbara P. Lanier                 |  | Accounting Assistant                    
|                                 
|Waccamaw Financial Services, Inc.
|                                  | 
|John Hensley                      |  | Vice President & Investments/           
|                                  |  | Insurance Advisor                       
|                                 
|Audit                            
|                                  | 
|Craig Brock                       |  | Internal Auditor                        
|                                 
|Human Resources                  
|                                  | 
|Mary W. Duncan                    |  | Personnel Director                      



52



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Stockholder Information

Annual Meeting

The annual meeting of stockholders will be held Thursday, April 20, 2006 at 7:00 p.m. at the Vineland
Station Train Depot, Whiteville, North Carolina.

Requests for Information

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



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

Federal Deposit Insurance Corporation

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



53



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Office Locations



|                             |  |                            |  |                        
|---------------------------- |  | -------------------------- |  | -----------------------
|Whiteville                   |  | Holden Beach               |  | Elizabethtown          
|110 North J. K. Powell Blvd. |  | 3178 Holden Beach Road     |  | 306 South Poplar Street
|Whiteville, NC 28472         |  | Holden Beach, NC 28462     |  | Elizabethtown, NC 28337
|910.641.0044                 |  | 910.842.7760               |  | 910.862.3450           
|                             |  |                           
|Tabor City                   |  | Wilmington                 |  | Bank of Heath Springs  
|105 Hickman Road             |  | 29 S. Kerr Avenue          |  | 202 N. Main Street     
|Tabor City, NC 28463         |  | Wilmington, NC 28403       |  | Heath Springs, SC 29058
|910.653.3202                 |  | 910.763.4010               |  | 803.273.2015           
|                             |  |                           
|Chadbourn                    |  | Southport                  |  |                        
|111 Strawberry Boulevard     |  | 701 N. Howe Street         |  |                        
|Chadbourn, NC 28431          |  | Southport, NC 28461        |  |                        
|910.654.1005                 |  | 910.457.6999               |  |                        
|                             |  |                           
|Shallotte                    |  | Southport                  |  |                        
|4949 West Main Street        |  | (under construction)       |  |                        
|Shallotte, NC 28459          |  | 4945 Southport-Supply Road |  |                        
|910.754.8499                 |  | Southport, NC 28461        |  |                        



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