**Exhibit 13**

2006 was our first step in truly fulfilling our tagline as it states, “Growing Coastal Carolina Strong”. Many might suggest that we change our tagline to “Carolinas” as we outstretched our footprint into South Carolina with two new offices in Heath Springs and Conway. With our shareholders, customers and friends in mind, we will continue to strengthen our current markets in Southeastern North Carolina and further develop the initial foray into the Grand Strand area of South Carolina.

Our 2006 Annual Report depicts the overall growth we have had in our bank; from both the capital and human resource investments.

| **2006 TABLE OF CONTENTS**                                        |
|-------------------------------------------------------------------|
|                                                              |   |   |
| Introduction                                                      |   | 1 |
|                                                              |   |   |
| Statement of Mission                                              |   | 2 |
|                                                              |   |   |
| Stock Performance                                                 |   | 2 |
|                                                              |   |   |
| Financial Highlights                                              |   | 3 |
|                                                              |   |   |
| Significant Trends                                                |   | 3 |
|                                                              |   |   |
| Shareholder Letter                                                |   | 4 |
|                                                              |   |   |
| Board of Directors                                                |   | 6 |
|                                                              |   |   |
| Directors Emeritus                                                |   | 6 |
|                                                              |   |   |
| A Dedication to Autry Dawsey                                      |   | 6 |
|                                                              |   |   |
| Executive Management Team                                         |   | 7 |
|                                                              |   |   |
| Opening New Doors                                                 |   | 8 |
|                                                              |   |   |
| Office Locations                                                  |   | 9 |
|                                                              |   |   |
| Leadership                                                        |   | 10 |
|                                                              |   |   |
| Bank Employees                                                    |   | 12 |
|                                                              |   |   |
| Consolidated Balance Sheets                                       |   | 14 |
|                                                              |   |   |
| Consolidated Statements of Income                                 |   | 15 |
|                                                              |   |   |
| Consolidated Statements of Changes in Stockholders’   Equity |   | 16 |
|                                                              |   |   |
| Consolidated Statements of Cash Flows                             |   | 17 |
|                                                              |   |   |
| Notes to Consolidated Financial Statements                        |   | 19 |
|                                                              |   |   |
| Independent Auditor’s Report                                 |   | 46 |
|                                                              |   |   |
| Management’s Discussion and Analysis                         |   | 47 |
|                                                              |   |   |
| Stockholder Information                                           |   | 63 |

----

Committed to Performance**STATEMENT OF MISSION**

| Waccamaw Bank serves a principled mission: |
|--------------------------------------------|
|                                       | • | to be the strongest independent bank in the coastal   Carolina region; |
|                                       | • | to offer fairly priced products and services that   meet the financial needs of our community; |
|                                       | • | to operate in an efficient manner designed for   customer convenience; |
|                                       | • | to be a good corporate neighbor within our   communities; |
|                                       | • | to maintain safety, soundness and profitability; |
|                                       | • | to care for a quality staff that supports this   mission. |

| **STOCK PERFORMANCE**           |
|---------------------------------|
| **Waccamaw Bankshares, Inc.**   |
|                                 |
| **Split-Adjusted Stock Prices** |

|                        |   | ***Period Ending*** |   |
|-----------------------------|--------|---------------------|--------|
|                        |   |                     |   |
| ***Index***                 |   | **12/31/01**        |   | **12/31/02** |   | **12/31/03** |   | **12/31/04** |   | **12/31/05** |   | **12/31/06** |   |
|                             |   |                     |        |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |
| Waccamaw   Bankshares, Inc. |   |                | 100.00 |   |   | 112.41 |   |   | 204.14 |   |   | 323.74 |   |   | 319.24 |   |   | 294.42 |   |
| NASDAQ   Composite          |   |                | 100.00 |   |   | 68.76 |   |   | 103.67 |   |   | 113.16 |   |   | 115.57 |   |   | 127.58 |   |
| SNL   Southeast Bank Index  |   |                | 100.00 |   |   | 110.46 |   |   | 138.72 |   |   | 164.50 |   |   | 168.39 |   |   | 197.45 |   |

Note: Prices for 12/31/01 through 12/31/02 supplied by company.

| o      | **Since February 1997, Waccamaw Bankshares has   significantly outperformed the major stock indexes**(1) |
|--------|----------------------------------------------------------------------------------------------------------|
|   |                                                                                                     |   |
|   | –                                                                                                   | WBNK:  517.7% |
|   |                                                                                                     |   |
|   | –                                                                                                   | Dow Jones:  82.9% |
|   |                                                                                                     |   |
|   | –                                                                                                   | S&P 500:  80.4% |
|   |                                                                                                     |   |
|   | –                                                                                                   | NASDAQ Bank Index:  154.4% |

|                                                                                                    |
|----------------------------------------------------------------------------------------------------|
|                                                                                                    |
| (1)  Stock price information as of   December 31, 2006.                                  |
| (2)  The price of WBNK’s common stock is   as of December 31st for each year shown. |
| **Data Source:**SNL   Financial; FactSet                                                           |

2

----

**Financial Highlights Summary1**

|                               |   | **2006** |    | **2005** |   | **2004** |   | **2003** |    | **2002** |   |
|------------------------------------|--------|----------|---------|----------|--------|----------|--------|----------|---------|----------|--------|
|                               |   |          |         |     |        |          |   |          |         |     |        |  |   |  |  |   |
| **Summary of Operations**          |   |     |    |     |   |     |   |     |    |     |   |   |   |   |   |   |
| Interest   income                  |   | $        | 25,379  |     | $      | 18,228   |   | $        | 11,450  |     | $      | 9,957 |   | $ | 9,594 |   |
| Interest   expense                 |   |     | (11,226 | )        |   | (7,536   | )      |     | (3,766  | )        |   | (3,627 | ) |   | (3,978 | ) |
|                               |   |          |         |     |        |          |   |          |         |     |        |  |   |  |  |   |
| Net   interest income              |   |     | 14,153  |     |   | 10,692   |   |     | 7,684   |     |   | 6,330 |   |   | 5,616 |   |
| Provision   for loan losses        |   |     | (1,450  | )        |   | (1,370   | )      |     | (819    | )        |   | (730 | ) |   | (794 | ) |
| Other   income                     |   |     | 2,581   |     |   | 2,269    |   |     | 2,445   |     |   | 2,053 |   |   | 1,370 |   |
| Other expense                      |   |     | (9,422  | )        |   | (6,967   | )      |     | (5,687  | )        |   | (4,436 | ) |   | (3,893 | ) |
| Income   tax expense               |   |     | (2,210  | )        |   | (1,589   | )      |     | (1,209  | )        |   | (1,210 | ) |   | (740 | ) |
|                               |   |          |         |     |        |          |   |          |         |     |        |  |   |  |  |   |
| Net   income                       |   | $        | 3,652   |     | $      | 3,035    |   | $        | 2,414   |     | $      | 2,007 |   | $ | 1,559 |   |
|                               |   |          |         |     |        |          |   |          |         |     |        |  |   |  |  |   |
| **Per Share Data2**                |   |     |    |     |   |     |   |     |    |     |   |   |   |   |   |   |
| Basic   earnings per share         |   | $        | .78     |     | $      | .67      |   | $        | .54     |     | $      | .45 |   | $ | .36 |   |
| Diluted   earnings per share       |   |     | .76     |     |   | .64      |   |     | .52     |     |   | .43 |   |   | .34 |   |
| Book   value                       |   |     | 6.35    |     |   | 4.93     |   |     | 4.39    |     |   | 3.80 |   |   | 3.32 |   |
| **Average Balance Sheet Summary**  |   |     |    |     |   |     |   |     |    |     |   |   |   |   |   |   |
| Loans,   net                       |   | $        | 279,625 |     | $      | 238,579  |   | $        | 168,757 |     | $      | 137,403 |   | $ | 114,823 |   |
| Securities                         |   |     | 46,561  |     |   | 31,257   |   |     | 29,068  |     |   | 19,663 |   |   | 18,309 |   |
| Total   assets                     |   |     | 356,675 |     |   | 302,381  |   |     | 217,035 |     |   | 177,563 |   |   | 152,559 |   |
| Deposits                           |   |     | 298,324 |     |   | 252,994  |   |     | 169,162 |     |   | 147,663 |   |   | 125,725 |   |
| Shareholders’   equity        |   |     | 25,945  |     |   | 20,254   |   |     | 17,941  |     |   | 15,633 |   |   | 13,611 |   |
| **Selected Ratios**                |   |     |    |     |   |     |   |     |    |     |   |   |   |   |   |   |
| Average   equity to average assets |   |     | 7.27    | %        |   | 6.70     | %      |     | 8.27    | %        |   | 8.80 | % |   | 8.92 | % |
| Return   on average assets         |   |     | 1.02    | %        |   | 1.00     | %      |     | 1.11    | %        |   | 1.13 | % |   | 1.02 | % |
| Return   on average equity         |   |     | 14.07   | %        |   | 14.98    | %      |     | 13.46   | %        |   | 12.84 | % |   | 11.46 | % |

|   |
|---|
| 1 | In thousands of dollars, except per share data. |
| 2 | Adjusted for the effects of 6 for 5 stock splits in   2003 and 2004 and a 2 for 1 stock split in 2004. |

**SIGNIFICANT TRENDS**

|  |  |
|--|--|

3

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A Letter to Our Shareholders

To our Shareholders, Customers and Friends:

          We are pleased to report that 2006 proved to be another landmark year for Waccamaw Bankshares, Inc. It would be an understatement to say your bank expanded and grew in 2006! As you will read in this report, we were able to achieve record earnings and create countless growth opportunities for our future as well as adding substantial new strength to our management team in many areas. This report reflects our continuing optimism for our company’s growth, profitability, and future in growing Coastal Carolina strong. 

It is with a great deal of pride that the Directors, management and staff of Waccamaw Bankshares, Inc. again report record profits for 2006. Net earnings for the year ending December 31, 2006 were $3,652,016; a 20.3% increase over the $3,035,373 earned in 2005. Waccamaw Bankshares, Inc.’s assets grew to $399,581,293; a 23.7% increase for 2006. Our progress throughout the bank’s history is reflected in our stock price having provided a 517% return to our initial shareholders which is equal to over 69% per year during our nine full years in operation.

In addition to our record earnings for 2006, our most significant achievement was our entry into the South Carolina market. With our acquisition and conversion of the Bank of Heath Springs (located in Lancaster County, South Carolina) in May, we created the opportunity for expansion and further growth into South Carolina. In August, we opened our second office in the Palmetto State with the addition of an office in Conway. 

Having completed the construction of our beautiful new Southport Office located on Southport-Supply Road in Brunswick County, we were able to open our eleventh office in late December. The new office provided our fourth financial center in Brunswick County. This office, pictured on the following pages, will become our bank’s prototype as we build new banking facilities.

While not operating as a “financial center”, we successfully transitioned our Training, Technology, Operations and Credit departments to a separate facility in downtown Whiteville in February. We had a huge turnout from the downtown merchants, Chamber of Commerce, and other supporters for our open house! Our celebration flowed over into the downtown streets. The facility is now home to over twenty staff. We are still expanding in many of these areas in order to support our front line staff in the eleven offices we operate. Another addition to our Operations Center was our new “Imaging” Department. As the name states, this new department has the responsibility of electronically imaging our bank’s documents for safe-keeping without the cost or space associated with paper. 

Our company faced many challenges during the year with the expansion and growth activities. We are proud of the manner our staff rose to each challenge and responded with spirit and enthusiasm. With the addition of new management

Photo Alan W. Thompson Chairman of the Board Waccamaw Bankshares, Inc. 

James G. Graham President & Chief Executive Officer Waccamaw Bank

4

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A Letter to Our Shareholders Continued

in our loan department, operations department, our first internal auditor, and controller, we concentrated on the required internal strength for our bank’s continued prosperity. Additionally, we were able to recruit some outstanding commercial bankers to open new markets for our bank. You will see photographs of these individuals in our new Heath Springs, Conway and Southport Offices on the following pages. We are extremely pleased and excited about these individuals as they make invaluable contributions to our organization.

Another extremely bright spot for our organization in 2006 were the efforts of our mortgage and financial services groups. Under the leadership of Vice President, Kim Neisler, our mortgage services group increased income 38% from 2005. John Hensley in our financial investment services group increased fee income over 232% from a year ago; truly an amazing and much appreciated feat. Both divisions continue to be on track for continued growth in 2007. 

We are appreciative of the shareholders who participated in the rights and the preferred stock offering during 2006. Waccamaw Bankshares, Inc. issued 210,707 shares of additional common stock and 59,192 shares of preferred stock with these offerings. These stock offerings allowed our bank to increase capital in order to support our growth and continued expansion.

As we begin our tenth year in 2007, plans are being made for a year of anniversary events with highlights of our bank’s first ten years of achievements. You will receive information on these events as the year progresses. We are proud of all individuals involved in the efforts that have made our first ten years possible and profitable. 

In closing, we thank you for your confidence and support. Whether you are a new shareholder or one of our founding shareholders, we would like to say, thank you. Each and every relationship associated with our company is valued. We would also like to thank our Waccamaw Bank family for the value they add every day. 

Review and examine this report and feel free to contact us with your comments. We pledge and renew our commitment to you and the company. Thank you for banking with Waccamaw Bank.

Signature James G. Graham President & Chief Executive Officer

Signature Alan W. Thompson Chairman of the Board

5

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Board of Directors

Photo Board of Directors: Back left to right—James E. Hill, Jr., James G. Graham, Monroe Enzor III, E. Autry Dawsey, Sr., M.B. “Bo” Biggs, Densil Worthington, Alan W. Thompson. Front left to right—Dr. Maudie M. Davis, Dale Ward.

| M.B. “Bo” Biggs                 |   | Monroe Enzor III                            |   | Alan W. Thompson               |
|-------------------------------------------|--------|---------------------------------------------|--------|--------------------------------|
| K.M. Biggs, Inc.                          |   | Broker,                                     |   | Thompson, Price, Scott,        |
|                                      |   | Coldwell Banker Sloane Realty               |   | Adams & Co., P.A.          |
|                                      |   |                                        |   |                           |
| Dr. Maudie M. Davis                       |   | James G. Graham                             |   | Dale Ward                      |
| Principal,                                |   | President and Chief Executive Officer       |   | J.D. Wright Roofing Co., Inc.  |
| South Columbus High School                |   | Waccamaw Bank and Waccamaw Bankshares, Inc. |   |                           |
|                                      |   |                                        |   |                           |
| E. Autry Dawsey, Sr.                      |   | James E. Hill, Jr.                          |   | J. Densil Worthington          |
| Premiere Enterprisesof Whiteville, L.L.C. |   | Hill & High, L.L.P.                     |   | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| A Dedication to Autry Dawsey                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| Photo                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| The Board of Directors, Officers and employees of   Waccamaw Bankshares, Inc. and Waccamaw Bank would like to express our   overwhelming gratitude and thanks to Autry Dawsey for his service over the   past ten years. As an original investor and member of the Board of Directors,   Mr. Dawsey’s contributions have been a major force behind our successes. We   are pleased to dedicate this report to Mr. Dawsey. We look forward to his   continued friendship, advice and counsel as a Director Emeriti. |

6

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EXECUTIVE Management Team

| Photo                                                                                                                                                 |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|
| Executive Management Team:                                                                                                                            |
| Back left to right—David A. Godwin, James G. Graham,   Richard C. Norris.                                                                        |
| Front left to right—Kim T. Hutchens, Freda H. Gore.                                                                                              |
| Headed by President and CEO, Jim Graham, Waccamaw   Bank’s Executive Management Team guides and directs the bank’s path. Members   include: |

| James G. Graham                                      |
|------------------------------------------------------|
| President and                                        |
| Chief Executive Officer                              |
|                                                 |
| Freda H. Gore                                        |
| Senior Vice President and   Chief Operations Officer |
|                                                 |
| David A. Godwin                                      |
| Senior Vice President   and Chief Financial Officer  |
|                                                 |
| Richard C. Norris                                    |
| Senior Vice President   and Chief Credit Officer     |
|                                                 |
| Kim T. Hutchens                                      |
| Senior Vice President and                            |
| Chief Administrative Officer                         |

A Decade of Growth

Our first decade has been a whirlwind of excitement, new experiences and expansion. We have shown steady annual growth in both capital assets, bricks and mortar and valued employees. The timeline that follows in these pages is evidence of our dedication to Growing Coastal Carolina Strong.

| Timeline |
|----------|
| 1997     |
|     | 8.28 | Waccamaw Bank receives approval from |
|     |   | NC Banking Commission |
|     | 9.02 | First Waccamaw Bank office in Whiteville, NC |
|     | 9.08 | Tabor City, NC office opens |
|     | 9.22 | First Chadbourn, NC office opens |
|     | 12.31 | Assets total $20,530,222 ($531,000) profits |

7

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| Opening New Doors                                                  |
|--------------------------------------------------------------------|
|                                                               |
| Photo                                                              |
| Heath Springs Office                                               |
| From left to right: Jane Blackmon, Mark Bridges,   Dwight Bridges, |
| Danny Edwards                                                      |

Our bank and its employees are committed not only to strengthening and developing our bank’s resources but to enhancing life in the communities we serve. Our people are involved in virtually every civic, community and non-profit organization in these areas: health, education, community development and cultural enrichment. Growing Coastal Carolina Strong is a total commitment of our time, talents and resources. 

| Photo                                                                                                 |
|-------------------------------------------------------------------------------------------------------|
|                                                                                                  |
| Photo                                                                                                 |
| Conway Staff (above)                                                                                  |
| From left to right: Tracey Love, Robin Crawford,   Richard Causey,                                    |
| Jennifer Richardson, Cindy Harrelson and Lynn Dyson.                                                  |
|                                                                                                  |
| Photo                                                                                                 |
| Southport staff (above)                                                                               |
| From left to right: Katy Culberson, Kim Felts, Russ   Thompson,                                       |
| Pam McGorry, Katrina Batchelor and Cassie Huffman.                                                    |
|                                                                                                  |
| Southport Office (left)                                                                               |
| The design of our new office in Southport is the   prototype for new construction as we move forward. |

| Timeline |
|----------|
| 1998     |
|     | 12.31 | Assets total $40,484,998 ($988,000) profits |
|     |   |   |
| 1999     |
|     | 1.01 | James G. Graham hired as President, CEO |
|     | 2.05 | Chadbourn, NC office moves to 633 N. Brown Street |
|     | 5.17 | Tabor City, NC office relocates to 105 Hickman Road |
|     | 12.31 | Assets total $57,340,000, an increase of 42%;   $392,000 profits |

8

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OFFICE LOCATIONS

| Conway                       |   | Shallotte                      |   | Whiteville                      |
|------------------------------|--------|--------------------------------|--------|---------------------------------|
| 1230 16th Avenue             |   | 4949 Main Street               |   | 110 North J.K. Powell Boulevard |
| Conway, SC 29526        |   | Shallotte, NC 28470       |   | Whiteville, NC 28472       |
| (843) 488-9222               |   | (910) 754-8499                 |   | (910) 641-0044                  |
|                         |   |                           |   |                            |
| Chadbourn                    |   | Southport 1                    |   | Wilmington                      |
| 111 Strawberry Boulevard     |   | 701 North Howe Street          |   | 29 South Kerr Avenue            |
| Chadbourn, NC 28431     |   | Towngate Crossing Suite 3      |   | Wilmington, NC 28403       |
| (910) 654-1005               |   | Southport, NC 28461       |   | (910) 763-4010                  |
|                         |   | (910) 457-6999                 |   |                            |
|                         |   |                           |   |                            |
| Elizabethtown                |   |                           |   |                            |
| 306 South Poplar Street      |   | Southport 2                    |   | Little River*                   |
| Elizabethtown, NC 28337 |   | 4945 Southport-Supply Road, SE |   | 1180 Highway 17                 |
| (910) 862-3450               |   | Southport, NC 28461            |   | Little River, SC 29566          |
|                         |   | (910) 457-5635                 |   |                            |
|                         |   |                           |   |                            |
| Heath Springs                |   |                           |   | Sunset Commons*                 |
| 202 North Main Street        |   | Tabor City                     |   | 925-5 Seaside Rd., SW           |
| Heath Springs, SC 29058      |   | 105 Hickman Road               |   | Ocean Isle Beach, NC 28469      |
| (803) 273-2015               |   | Tabor City, NC 28463      |   | (910) 579-1756                  |
|                         |   | (910) 653-3202                 |   |                            |
|                         |   |                           |   |                            |
| Holden Beach                 |   |                           |   | *Under construction             |
| 3178 Holden Beach Road, SW   |   |                           |   |                            |
| Holden Beach, NC 28462  |   |                           |   |                            |
| (910) 842-7760               |   |                           |   |                            |

| Timeline |
|----------|
| 2000     |
|     | 1.31 | Bank assets reach milestone of $100 million. Stock   split declared (6-5) |
|     | 3.22 | Shallotte, NC office opens |
|     | 4.28 | Chadbourn, NC office moves to 111 Strawberry   Boulevard |
|     | 11.20 | Holden Beach, NC office opens |
|     | 12.31 | Assets total $101,442,144, an increase of 77%;   $652,654 profits; an increase of 66% |
|     |   |   |
| 2001     |   |
|     | 4.30 | New Corporate office opens at 110 North J.K. Powell   Boulevard |
|     | 6.30 | Waccamaw Bankshares created |
|     | 6.30 | Stock split (6-5) |
|     | 12.31 | Assets total $132,000,000, an increase of 30%;   $1,024,354 profits; an increase of 54% |

9

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| Strong Leadership Combines Fresh,                                                                                                                                                                                                                                                                                                                                                                                       |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                    |
| Photo                                                                                                                                                                                                                                                                                                                                                                                                                   |
| AREA EXECUTIVES                                                                                                                                                                                                                                                                                                                                                                                                         |
| Back left to right—Jonathan Krieps-Vice President,   New Hanover County; Geoff Hopkins-Vice President, Bladen and Columbus   Counties. Front left to right—Richard Causey-Vice President, Horry County and   South Carolina; Dianne McRainey-Vice President, Southern Brunswick County;   Russ Thompson-Vice President, Northern Brunswick County.                                                            |
|                                                                                                                                                                                                                                                                                                                                                                                                                    |
| Photo                                                                                                                                                                                                                                                                                                                                                                                                                   |
| NEW OFFICERS                                                                                                                                                                                                                                                                                                                                                                                                            |
| Back left to right—Lori Church-Controller; Craig   Brock-Internal Auditor; Kim Felts-Assistant Vice President, Manager,   Southport; Anthony Henry-Assistant Vice President, Credit Officer; Lynn   Dyson-Assistant Vice President, Commercial Banking Officer. Front left to   right—Susan Limbaugh-Assistant Vice President, Manager-Wilmington; Derek   Ezzell-Vice President, Commercial Banking Officer. |

Shareholder and customer satisfaction is not just our employees’ goal; it is a daily exercise in fulfillment of the Statement of Mission printed in this report. A key element in this exercise is our bank’s leadership. 

In 2006 we were able to recognize many of our employees for the contributions they have provided to our bank and fellow employees. Additionally, our recruiting efforts were successful in adding new talents to our leadership team. Identifying, recognizing and promoting employees is a measure of our company’s overall achievements. We are proud to give due recognition to our staff who were promoted in 2006 and those who joined our team this year.

A reorganization of our bank’s leadership resulted in the development of a team of Area Executives (pictured above left). The Area Executives will provide overall leadership to specific geographic locations of our bank’s footprint. This team has over 80 years of collective banking experience. 

Additionally, our bank is extremely proud of the results provided by our Mortgage and Investment Services group in 2006. With the promotion of Kim Neisler as Vice President of our Mortgage Services group, record profits were achieved. Likewise, John Hensley of our Financial Investment Services put together a year unlike anything we ever imagined. For his efforts, John was recognized by Capital Investments as the top salesperson for 2006. We congratulate John for his hard work and successes!

| Timeline |
|----------|
| 2002     |
|     | 2.05 | Chadbourn, NC office moves to 633 North Brown Street |
|     | 12.31 | Assets total $161,315,000; $1,550,000 profits |
|     |   |   |
| 2003     |
|     | 3.24 | Waccamaw Bankshares listed on NASDAQ SmallCap   Markets |
|     | 8.15 | Stock split (6-5) |
|     | 12.31 | Assets total $193,206,943, an increase of 20%;   $2,006,783 profits, an increase of 29% |

10

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| New Talent with Proven Experience                                                                                                                                                                                                                                                    |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                 |
| Photo                                                                                                                                                                                                                                                                                |
| PROMOTIONS                                                                                                                                                                                                                                                                           |
| Back left to right—Jennifer Noble-Area Operations   Officer; Michelle Brown-Assistant Vice President, Whiteville Manager; Janet   Smith-Assistant Vice President, Credit Review. Seated—George Benton-Assistant   Vice President, Credit Department Manager. Not Pictured: |
| Kim Neisler-Vice President, Manager of Waccamaw   Mortgage Services.                                                                                                                                                                                                                 |
|                                                                                                                                                                                                                                                                                 |
| Photo                                                                                                                                                                                                                                                                                |
| MORTGAGE DEPARTMENT AND INVESTMENT SERVICES                                                                                                                                                                                                                                          |
| Back left to right—Kim Neisler-Vice President,   Manager of Waccamaw Mortgage Services; John Hensley-Vice President,   Investments; Carolyn Stringer. Front left to right—Pat Garrell, Robert Bell,   Mortgage Services.                                                   |

| Timeline |
|----------|
| 2004     |
|     | 5.14 | Stock split (6-5) |
|     | 6.15 | Waccamaw Bankshares listed in North Carolina’s Top   100 Companies |
|     | 7.12 | Wilmington, NC office opens |
|     | 9.30 | Stock split (2-1) |
|     | 12.31 | Assets total $258,164,000, an increase of 33.6%;   $2,414,319 profits, an increase of 20.3% |
|     |   |   |
| 2005     |
|     | 7.28 | Business North Carolina names Waccamaw Bankshares in   Top 75 Public NC Companies |
|     | 7.27 | Southport, NC office opens |
|     | 12.29 | Elizabethtown, NC office opens |
|     | 12.31 | Assets total $322,790,000, an increase of 25%;   $3,035,000 profits, an increase of 25.7% |

11

----

| **Bank Employees**                |                     |                 |                     |
|-----------------------------------|--------------------------|----------------------|--------------------------|
| **Main Office**                   | Amy Hardin               | Pamela M. Thornton   | Megan Bryant             |
|                              | Columbus County          | Teller               | Brunswick County         |
| Geoffrey R. Hopkins               | Summer Teller            |                 | Summer Teller            |
| Vice President                    |                     | Rita Gore            |                     |
| Area Executive                    | **Tabor City Office**    | Teller               | **Holden Beach Office**  |
|                              |                     |                 |                     |
| Michelle Ward                     | Ned Hughes               | Sinda Arruda         | Rob Fircetz              |
| Administrative Assistant          | Vice President           | Teller               | Vice President           |
|                              | City Executive           |                 | Branch Manager           |
| April Wilson                      |                     |                 |                     |
| Administrative Assistant          | Gayle N. Watson          | Kimberly Graham      |                     |
|                              | Assistant Vice President | Teller               | Melissa A. King          |
| Michelle Brown                    | Branch Manager           |                 | Loan Officer             |
| Assistant Vice President          |                     | **Shallotte Office** | Customer Service         |
| Branch Manager                    | Jennifer Russ            | Dianne F. McRainey   | Representative           |
|                              | Customer Service         | Vice President       |                     |
| Amy Howell                        | Representative           | Area Executive       | Elizabeth A. Evans       |
| Retail Banking Officer            | Teller Supervisor        |                 | Teller Supervisor        |
|                              |                     | Vernon L. Parker     |                     |
| Kathy Brown                       | Michelle Dudney          | Vice President       | Cynthia P. Elliott       |
| Loan Administrative               | Customer Service         | Branch Manager       | Teller                   |
| Assistant                         | Representative           |                 |                     |
|                              | Teller                   | Linwood Johnston     | **Wilmington**           |
| Kelly Bass                        |                     | Loan Administrative  | **Office**               |
| Customer Service   Representative | M. Pearl Lewis           | Assistant            | Jonathan Krieps          |
|                              | Teller                   |                 | Vice President           |
| Tori Wilson                       |                     | Judy Seaboldt        | Area Executive           |
| Customer Service   Representative | Sandy Strickland         | Loan Administrative  |                     |
|                              | Teller                   | Assistant            | Susan Limbaugh           |
| Altanese McCellon                 |                     |                 | Assistant Vice President |
| Teller                            | **Chadbourn Office**     | Sonja Milligan       | Branch Manager           |
|                              | Mark Madden              | Loan Administrative  |                     |
| Amanda Anderson                   | Assistant Vice President | Assistant            | Susie Smythe             |
| Teller                            | Branch Manager           |                 | Loan Administrative      |
|                              |                     | Barbara Evans        | Assistant                |
| Tiffany Insley                    | Lou Ellen Williamson     | Customer Service     |                     |
| Teller                            | Loan Officer             | Representative       | Wesley Reaves            |
|                              |                     |                 | Loan Assistant           |
| Dori Baugh                        | Lori Williams            | Tiffany Johnson      |                     |
| Teller                            | Customer Service         | Head Teller          | Matthew Morgan           |
|                              | Representative           |                 | Customer Service         |
| Selena McNair                     |                     | Penny McKeithan      | Representative           |
| Roving Teller                     | Tammie Collins           | Teller Supervisor    |                     |
|                              | Customer Service         |                 | Karen Haag               |
|                              | Representative           | Mindy Hall           | Head Teller              |
|                              |                     | Teller               |                     |
|                              | Wanda F. Rozier          |                 | Joanna Krohn             |
|                              | Teller Supervisor        | Letha Yow            | Teller                   |
|                              |                     | Teller               |                     |

| Timeline |                                                              |   |   |
|----------|-------------------------------------------------------------------|--------|--------|
| 2006     |                                                              |   |   |
| 2.21     | Training and Operations   Center opens in downtown Whiteville, NC |   | 5.01   | Heath Springs, SC office   opens   (9th Waccamaw office) |
| 3.23     | Ribbon cutting ceremony for   new Training and Operations Center  |   | 8.18   | Conway, SC office opens   (10th Waccamaw office) |
| 4.12     | All Day Banking is   implemented bankwide                         |   | 12.28  | Southport-Supply, NC office   opens   (11th Waccamaw office) |
| 4.28     | Acquisition of Bank of   Heath Springs, SC finalized.             |   | 12.31  | Assets total $399,581,293,   an increase of 23.8%; $3,652,016 profits, an increase of 20% |

12

----

| **Bank Employees continued**      |   |                     |   |                        |   |                           |
|-----------------------------------|--------|--------------------------|--------|-----------------------------|--------|--------------------------------|
| **Southport**                     |   | Nettie Horton            |   | Robert Bell                 |   | Deanna Nichols                 |
| **Howe Street**                   |   | Teller                   |   | Columbus County             |   | Training Officer               |
| **Office**                        |   |                     |   | Mortgage Banker             |   |                           |
| Grace Wong-Heck                   |   | **Heath Springs**        |   |                        |   | Jennifer Noble                 |
| Loan Administrative   Assistant   |   | **Office**               |   | Pat Garrell                 |   | Area Operations Officer        |
| Customer Service   Representative |   | Mark Bridges             |   | Brunswick County            |   |                           |
|                              |   | Vice President           |   | Mortgage Banker             |   | Kathy Welch                    |
| Jessie Osborne                    |   | City Executive           |   |                        |   | Assistant Operations   Officer |
| Customer Service                  |   |                     |   | Carolyn Stringer            |   |                           |
| Representative                    |   | Jane Blackmon            |   | Loan Processor              |   | Emily Bullard                  |
| Teller                            |   | Vice President           |   |                        |   | Operations Assistant           |
|                              |   | Loan Officer             |   | **Credit**                  |   |                           |
| Kim Tulino                        |   |                     |   | **Administration**          |   | Barbara Lanier                 |
| Teller                            |   | Dwight Bridges           |   | Anthony Henry               |   | Operations Assistant           |
|                              |   | Vice President           |   | Assistant Vice President    |   |                           |
| **Southport**                     |   |                     |   | Credit Officer              |   | **Accounting**                 |
| **Supply Road**                   |   | Danny Edwards            |   |                        |   | Lori Church                    |
| **Office**                        |   | Teller                   |   | Janet Smith                 |   | Controller                     |
|                              |   |                     |   | Assistant Vice President    |   |                           |
| Russ Thompson                     |   | Conway Office            |   | Credit Review               |   | Judyth Richardson              |
| Vice President                    |   | Richard Causey           |   |                        |   | Staff Accountant               |
| Area Executive                    |   | Vice President           |   | George Benton               |   |                           |
|                              |   | Area Executive           |   | Assistant Vice President    |   | Cheryl Lewis                   |
| Kim Felts                         |   |                     |   | Credit Department Manager   |   | Accounting Assistant           |
| Assistant Vice President          |   | Lynn Dyson               |   |                        |   |                           |
| Branch Manager                    |   | Assistant Vice President |   | Judy Harritan               |   | **Imaging**                    |
|                              |   | Commercial Loan Officer  |   | Administrative Assistant    |   | **Department**                 |
| Cassie Huffman                    |   |                     |   |                        |   | Carol McDevitt                 |
| Customer Service                  |   | Robin Crawford           |   | Ella Scarborough            |   | Supervisor                     |
| Representative                    |   | Loan Administrative      |   | Loan Assistant              |   |                           |
|                              |   | Assistant                |   |                        |   | Maria Butler                   |
| Katy Culberson                    |   |                     |   | Ann Jernigan                |   | Imaging Clerk                  |
| Teller                            |   | Cindy Harrelson          |   | Loan Assistant              |   |                           |
|                              |   | Branch Manager           |   |                        |   | Jennifer Floyd                 |
| Katrina Batchelor                 |   | Customer Service         |   | Roy Thompson                |   | Imaging Clerk                  |
| Teller                            |   | Representative           |   | Loan Assistant              |   |                           |
|                              |   |                     |   |                        |   | Hilda W. Branch                |
| Pam McGorry                       |   | Jennifer Richardson      |   | Lena Cartrette              |   | Receptionist                   |
| Teller                            |   | Teller Supervisor        |   | Loan Assistant              |   |                           |
|                              |   |                     |   |                        |   | **Waccamaw**                   |
| **Elizabethtown**                 |   | Tracey Love              |   | Amanda Williams             |   | **Financial**                  |
| **Office**                        |   | Teller                   |   | Loan Assistant              |   | **Services, Inc**.             |
|                              |   |                     |   |                        |   | John Hensley                   |
| Hayes Petteway                    |   | **Sunset Commons**       |   | Sherry Walton               |   | Vice President                 |
| Vice President                    |   | **Office**               |   | Loan Assistant              |   | Investments/Insurance          |
|                              |   | Derek Ezzell             |   |                        |   | Advisor                        |
| City Executive                    |   | Vice President           |   | Gary Vereen                 |   |                           |
|                              |   | Commercial Loan Officer  |   | Loan Assistant              |   | Audit                          |
| Debbie Earl                       |   |                     |   |                        |   | Craig Brock                    |
| Customer Service                  |   | **Mortgage**             |   | **Operations**              |   | Internal Auditor               |
| Representative                    |   | **Lending**              |   | Gracie B. McClary           |   |                           |
| Teller                            |   | Kim Neisler              |   | Vice President              |   | Human Resources                |
|                              |   | Mortgage Services Manger |   | Compliance Officer          |   | Mary Duncan                    |
| Amanda Ray                        |   |                     |   |                        |   | Personnel Director             |
| Customer Service                  |   |                     |   | Mike Lewis                  |   |                           |
| Representative                    |   |                     |   | Assistant Vice President    |   |                           |
| Teller                            |   |                     |   | Security/Operations Officer |   |                           |

13

----

**Consolidated Balance Sheets*********December 31, 2006, and 2005***

|                                                                                                                                                          |   | **2006** |               | **2005** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|--------------------|----------|--------|
|                                                                                                                                                          |   |          |                    |     |        |  |   |
| **Assets**                                                                                                                                                    |   |     |               |     |   |   |   |
| Cash and due from banks                                                                                                                                       |   | $        | 9,183,383          |     | $      | 6,954,425 |   |
| Interest-bearing deposits   with banks                                                                                                                        |   |     | 790,360            |     |   | 707,708 |   |
|                                                                                                                                                          |   |          |                    |     |        |  |   |
| Total   cash and cash equivalents                                                                                                                             |   |     | 9,973,743          |     |   | 7,662,133 |   |
| Federal funds sold                                                                                                                                            |   |     | 2,598,000          |     |   | 8,281,000 |   |
| Investment securities,   available for sale                                                                                                                   |   |     | 50,529,163         |     |   | 33,208,250 |   |
| Restricted equity   securities                                                                                                                                |   |     | 2,457,206          |     |   | 2,005,906 |   |
| Loans, net of allowance for   loan losses of $4,885,992  in 2006 and   $3,939,002 in 2005                                                                |   |     | 312,253,190        |     |   | 257,574,925 |   |
| Property and equipment, net                                                                                                                                   |   |     | 6,671,773          |     |   | 3,380,179 |   |
| Goodwill                                                                                                                                                      |   |     | 2,665,602          |     |   | —   |   |
| Intangible assets, net                                                                                                                                        |   |     | 930,555            |     |   | 877,736 |   |
| Accrued income                                                                                                                                                |   |     | 2,627,020          |     |   | 1,604,477 |   |
| Bank owned life insurance                                                                                                                                     |   |     | 5,419,130          |     |   | 5,208,929 |   |
| Other assets                                                                                                                                                  |   |     | 3,455,911          |     |   | 2,988,464 |   |
|                                                                                                                                                          |   |          |                    |     |        |  |   |
| Total   assets                                                                                                                                                |   | $        | 399,581,293        |     | $      | 322,791,999 |   |
|                                                                                                                                                          |   |          |                    |     |        |  |   |
| **Liabilities and Stockholders’ Equity**                                                                                                                 |   |     |               |     |   |   |   |
| ***Liabilities***                                                                                                                                             |   |     |               |     |   |   |   |
| Noninterest-bearing   deposits                                                                                                                                |   | $        | 49,163,297         |     | $      | 25,348,916 |   |
| Interest-bearing deposits                                                                                                                                     |   |     | 278,188,470        |     |   | 245,686,552 |   |
|                                                                                                                                                          |   |          |                    |     |        |  |   |
| Total   deposits                                                                                                                                              |   |     | 327,351,767        |     |   | 271,035,468 |   |
| Securities sold under   agreements to repurchase                                                                                                              |   |     | 5,410,000          |     |   | 2,736,000 |   |
| Short-term borrowings                                                                                                                                         |   |     | —   |     |   | 10,000,000 |   |
| Long-term debt                                                                                                                                                |   |     | 23,500,000         |     |   | 6,500,000 |   |
| Guaranteed preferred   beneficial interest in the company’s junior subordinated debentures                                                               |   |     | 8,248,000          |     |   | 8,248,000 |   |
| Accrued interest payable                                                                                                                                      |   |     | 1,412,300          |     |   | 1,065,996 |   |
| Other liabilities                                                                                                                                             |   |     | 1,956,596          |     |   | 707,891 |   |
|                                                                                                                                                          |   |          |                    |     |        |  |   |
| Total   liabilities                                                                                                                                           |   |     | 367,878,663        |     |   | 300,293,355 |   |
|                                                                                                                                                          |   |          |                    |     |        |  |   |
| Commitments and   contingencies                                                                                                                               |   |     | —   |     |   | —   |   |
| ***Stockholders’ equity***                                                                                                                               |   |     |               |     |   |   |   |
| Preferred   stock, Series A, non-cumulative, non-voting, no par value; 1,000,000 shares   authorized; 59,192 issued in 2006;    none outstanding in 2005 |   |     | 993,112            |     |   | —   |   |
| Common   stock, no par; 25,000,000 shares authorized; 4,837,666 shares issued in 2006;   4,564,587 shares issued in 2005                                      |   |     | 17,338,231         |     |   | 13,256,961 |   |
| Retained   earnings                                                                                                                                           |   |     | 13,216,891         |     |   | 9,564,875 |   |
| Accumulated   other comprehensive (loss) income                                                                                                               |   |     | 154,396            |     |   | (323,192 | ) |
|                                                                                                                                                          |   |          |                    |     |        |  |   |
| Total   stockholders’ equity                                                                                                                             |   |     | 31,702,630         |     |   | 22,498,644 |   |
|                                                                                                                                                          |   |          |                    |     |        |  |   |
| Total   liabilities and stockholders’ equity                                                                                                             |   | $        | 399,581,293        |     | $      | 322,791,999 |   |
|                                                                                                                                                          |   |          |                    |     |        |  |   |

14

----

**Consolidated Statements of Income*Years ended December 31, 2006, 2005, and 2004***

|                                                                         |   | **2006** |               | **2005** |   | **2004**           |   |
|------------------------------------------------------------------------------|--------|----------|--------------------|----------|--------|--------------------|--------|
|                                                                         |   |          |                    |     |        |                    |   |  |  |   |
| ***Interest income***                                                        |   |     |               |     |   |               |   |   |   |   |
| Loans   and fees on loans                                                    |   | $        | 22,584,611         |     | $      | 16,330,154         |   | $ | 10,137,520 |   |
| Investment   securities, taxable                                             |   |     | 2,195,843          |     |   | 1,338,903          |   |   | 1,170,722 |   |
| Investment   securities, nontaxable                                          |   |     | 330,656            |     |   | 95,806             |   |   | 100,430 |   |
| Federal   funds sold                                                         |   |     | 226,152            |     |   | 436,147            |   |   | 33,007 |   |
| Deposits   with banks                                                        |   |     | 42,205             |     |   | 26,949             |   |   | 8,797 |   |
|                                                                         |   |          |                    |     |        |                    |   |  |  |   |
| Total   interest income                                                      |   |     | 25,379,467         |     |   | 18,227,959         |   |   | 11,450,476 |   |
|                                                                         |   |          |                    |     |        |                    |   |  |  |   |
| ***Interest expense***                                                       |   |     |               |     |   |               |   |   |   |   |
| Deposits                                                                     |   |     | 9,488,101          |     |   | 6,313,174          |   |   | 3,004,161 |   |
| Federal   funds purchased and securities sold under agreements to repurchase |   |     | 225,725            |     |   | 76,247             |   |   | 40,978 |   |
| Other   borrowed funds                                                       |   |     | 1,512,314          |     |   | 1,146,161          |   |   | 720,841 |   |
|                                                                         |   |          |                    |     |        |                    |   |  |  |   |
| Total   interest expense                                                     |   |     | 11,226,140         |     |   | 7,535,582          |   |   | 3,765,980 |   |
|                                                                         |   |          |                    |     |        |                    |   |  |  |   |
| Net   interest income                                                        |   |     | 14,153,327         |     |   | 10,692,377         |   |   | 7,684,496 |   |
| ***Provision for loan losses***                                              |   |     | 1,450,000          |     |   | 1,370,000          |   |   | 819,500 |   |
|                                                                         |   |          |                    |     |        |                    |   |  |  |   |
| Net   interest income after provision for loan losses                        |   |     | 12,703,327         |     |   | 9,322,377          |   |   | 6,864,996 |   |
|                                                                         |   |          |                    |     |        |                    |   |  |  |   |
| ***Noninterest income***                                                     |   |     |               |     |   |               |   |   |   |   |
| Service   charges on deposit accounts                                        |   |     | 1,100,378          |     |   | 1,094,649          |   |   | 991,701 |   |
| Mortgage   origination income                                                |   |     | 373,726            |     |   | 270,321            |   |   | 195,679 |   |
| Income   from mortgage banking investee                                      |   |     | —   |     |   | —   |   |   | 296,633 |   |
| Income   from financial services                                             |   |     | 289,958            |     |   | 87,084             |   |   | 85,217 |   |
| Earnings   on bank owned life insurance                                      |   |     | 239,998            |     |   | 193,639            |   |   | 227,160 |   |
| Net   realized (losses) gains on sale or maturity of investment securities   |   |     | (890               | )        |   | (1,062             | )      |   | 14,388 |   |
| Net   realized gains on sale of interest in mortgage banking investee        |   |     | 44,094             |     |   | 36,848             |   |   | 134,025 |   |
| Other   operating income                                                     |   |     | 533,906            |     |   | 587,267            |   |   | 500,523 |   |
|                                                                         |   |          |                    |     |        |                    |   |  |  |   |
| Total   noninterest income                                                   |   |     | 2,581,170          |     |   | 2,268,746          |   |   | 2,445,326 |   |
|                                                                         |   |          |                    |     |        |                    |   |  |  |   |
| ***Noninterest expense***                                                    |   |     |               |     |   |               |   |   |   |   |
| Salaries   and employee benefits                                             |   |     | 5,274,052          |     |   | 3,733,723          |   |   | 3,003,019 |   |
| Occupancy   and equipment                                                    |   |     | 1,105,461          |     |   | 805,095            |   |   | 692,298 |   |
| Data   processing                                                            |   |     | 809,187            |     |   | 629,080            |   |   | 431,415 |   |
| Amortization   expense                                                       |   |     | 272,712            |     |   | 252,712            |   |   | 252,036 |   |
| Foreclosed   assets expense, net                                             |   |     | —   |     |   | —   |   |   | 35,060 |   |
| Other   expense                                                              |   |     | 1,960,683          |     |   | 1,545,972          |   |   | 1,273,294 |   |
|                                                                         |   |          |                    |     |        |                    |   |  |  |   |
| Total   noninterest expense                                                  |   |     | 9,422,095          |     |   | 6,966,582          |   |   | 5,687,122 |   |
|                                                                         |   |          |                    |     |        |                    |   |  |  |   |
| Income   before income taxes                                                 |   |     | 5,862,402          |     |   | 4,624,541          |   |   | 3,623,200 |   |
| ***Income tax expense***                                                     |   |     | 2,210,386          |     |   | 1,589,168          |   |   | 1,208,881 |   |
|                                                                         |   |          |                    |     |        |                    |   |  |  |   |
| Net   income                                                                 |   | $        | 3,652,016          |     | $      | 3,035,373          |   | $ | 2,414,319 |   |
|                                                                         |   |          |                    |     |        |                    |   |  |  |   |
| ***Basic earnings per share***                                               |   | $        | .78                |     | $      | .67                |   | $ | .54 |   |
|                                                                         |   |          |                    |     |        |                    |   |  |  |   |
| ***Diluted earnings per share***                                             |   | $        | .76                |     | $      | .64                |   | $ | .52 |   |
|                                                                         |   |          |                    |     |        |                    |   |  |  |   |
| ***Weighted average shares outstanding***                                    |   |     | 4,661,706          |     |   | 4,543,386          |   |   | 4,507,523 |   |
|                                                                         |   |          |                    |     |        |                    |   |  |  |   |
| ***Weighted average dilutive shares outstanding***                           |   |     | 4,836,576          |     |   | 4,766,013          |   |   | 4,595,501 |   |
|                                                                         |   |          |                    |     |        |                    |   |  |  |   |

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

15

----

**Consolidated Statements of Changes in Stockholders' Equity*Years ended December 31, 2006, 2005 and 2004***

|                                                                                                                     |   | **Preferred   Stock** |               | **Common   Stock** |   | **Retained   Earnings** |   | **Accumulated   Other   Comprehensive   Income (Loss)** |               | **Total** |   |
|--------------------------------------------------------------------------------------------------------------------------|--------|-----------------------|--------------------|--------------------|--------|-------------------------|--------|---------------------------------------------------------|--------------------|-----------|--------|
|                                                                                                                     |   |                       |                    |               |        |                         |   |                                                         |                    |      |        |  |   |  |  |   |
| ***December 31, 2003***                                                                                                  |   | $                     | —   |               | $      | 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                                                                                                 |   |                  | —   |               |   | 127,100                 |   |                                                    | —   |      |   | —   |   |   | 127,100 |   |
| Exercise of stock options                                                                                                |   |                  | —   |               |   | 161,901                 |   |                                                    | —   |      |   | —   |   |   | 161,901 |   |
| Excess tax benefits from   stock-based compensation                                                                      |   |                  | —   |               |   | 116,729                 |   |                                                    | —   |      |   | —   |   |   | 116,729 |   |
| Redemption of fractional   shares                                                                                        |   |                  | —   |               |   | (23,448                 | )      |                                                    | —   |      |   | —   |   |   | (23,448 | ) |
|                                                                                                                     |   |                       |                    |               |        |                         |   |                                                         |                    |      |        |  |   |  |  |   |
| ***December 31, 2004***                                                                                                  |   |                  | —   |               |   | 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                                                                                                |   |                  | —   |               |   | 114,349                 |   |                                                    | —   |      |   | —   |   |   | 114,349 |   |
|                                                                                                                     |   |                       |                    |               |        |                         |   |                                                         |                    |      |        |  |   |  |  |   |
| ***December 31, 2005***                                                                                                  |   |                  | —   |               |   | 13,256,961              |   |                                                    | 9,564,875          |      |   | (323,192 | ) |   | 22,498,644 |   |
| ***Comprehensive income***                                                                                               |   |                  |               |               |   |                    |   |                                                    |               |      |   |   |   |   |   |   |
| Net income                                                                                                               |   |                  | —   |               |   | —        |   |                                                    | 3,652,016          |      |   | —   |   |   | 3,652,016 |   |
| Net change in unrealized   appreciation on investment securities available for sale, net of income taxes   of $245,728   |   |                  | —   |               |   | —        |   |                                                    | —   |      |   | 477,001 |   |   | 477,001 |   |
| Reclassification   adjustment, net of income taxes of $303                                                               |   |                  | —   |               |   | —        |   |                                                    | —   |      |   | 587 |   |   | 587 |   |
|                                                                                                                     |   |                  |               |               |   |                    |   |                                                    |               |      |   |   |   |  |  |   |
| ***Total comprehensive income***                                                                                         |   |                  |               |               |   |                    |   |                                                    |               |      |   |   |   |   | 4,129,604 |   |
| Issuance of common stock                                                                                                 |   |                  | —   |               |   | 3,582,019               |   |                                                    | —   |      |   | —   |   |   | 3,582,019 |   |
| Issuance of preferred stock                                                                                              |   |                  | 1,006,264          |               |   | —        |   |                                                    | —   |      |   | —   |   |   | 1,006,264 |   |
| Stock based compensation                                                                                                 |   |                  | —   |               |   | 88,063                  |   |                                                    | —   |      |   | —   |   |   | 88,063 |   |
| Exercise of stock options                                                                                                |   |                  | —   |               |   | 255,654                 |   |                                                    | —   |      |   | —   |   |   | 255,654 |   |
| Excess tax benefits from   stock-based compensation                                                                      |   |                  | —   |               |   | 201,151                 |   |                                                    | —   |      |   | —   |   |   | 201,151 |   |
| Stock issuance costs                                                                                                     |   |                  | (13,152            | )                  |   | (45,617                 | )      |                                                    | —   |      |   | —   |   |   | (58,769 | ) |
|                                                                                                                     |   |                       |                    |               |        |                         |   |                                                         |                    |      |        |  |   |  |  |   |
| ***December 31, 2006***                                                                                                  |   | $                     | 993,112            |               | $      | 17,338,231              |   | $                                                       | 13,216,891         |      | $      | 154,396 |   | $ | 31,702,630 |   |

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

16

----

**Consolidated Statements of Cash Flows*For the years ended December 31, 2006, 2005 and 2004***

|                                                                        |   | **2006** |               | **2005** |   | **2004**           |   |
|-----------------------------------------------------------------------------|--------|----------|--------------------|----------|--------|--------------------|--------|
|                                                                        |   |          |                    |     |        |                    |   |  |  |   |
| ***Cash flows from operating activities***                                  |   |     |               |     |   |               |   |   |   |   |
| Net   income                                                                |   | $        | 3,652,016          |     | $      | 3,035,373          |   | $ | 2,414,319 |   |
| Adjustments   to reconcile net income to net cash provided by operations:   |   |     |               |     |   |               |   |   |   |   |
| Depreciation   and amortization                                             |   |     | 630,247            |     |   | 522,383            |   |   | 492,479 |   |
| Stock-based   compensation                                                  |   |     | 88,063             |     |   | —   |   |   | —   |   |
| Provision   for loan losses                                                 |   |     | 1,450,000          |     |   | 1,370,000          |   |   | 819,500 |   |
| Accretion   of discount on securities, net of amortization of premiums      |   |     | 72,027             |     |   | 87,726             |   |   | 72,515 |   |
| (Gain)loss   on sale of investment securities                               |   |     | 890                |     |   | 1,062              |   |   | (14,388 | ) |
| Gain   on sale of investment in mortgage banking investee                   |   |     | (44,094            | )        |   | (36,848            | )      |   | (134,025 | ) |
| Income   from bank owned life insurance                                     |   |     | (239,998           | )        |   | (193,639           | )      |   | (227,160 | ) |
| Deferred   taxes                                                            |   |     | (307,088           | )        |   | (456,679           | )      |   | (147,704 | ) |
| Benefit   of non-qualified stock option exercise                            |   |     | 201,151            |     |   | —   |   |   | 116,729 |   |
| Changes   in assets and liabilities:                                        |   |     |               |     |   |               |   |   |   |   |
| Accrued   income                                                            |   |     | (984,604           | )        |   | (467,118           | )      |   | (264,650 | ) |
| Other   assets                                                              |   |     | (552,167           | )        |   | (857,207           | )      |   | (216,683 | ) |
| Accrued   interest payable                                                  |   |     | 331,924            |     |   | 471,007            |   |   | 68,113 |   |
| Other   liabilities                                                         |   |     | 1,278,502          |     |   | 446,690            |   |   | (378,864 | ) |
|                                                                        |   |          |                    |     |        |                    |   |  |  |   |
| Net   cash provided by operating activities                                 |   |     | 5,576,869          |     |   | 3,922,750          |   |   | 2,600,181 |   |
|                                                                        |   |          |                    |     |        |                    |   |  |  |   |
| ***Cash flows from investing activities***                                  |   |     |               |     |   |               |   |   |   |   |
| Net   (increase) decrease in federal funds sold                             |   |     | 5,683,000          |     |   | (3,752,000         | )      |   | 5,587,000 |   |
| Net   increase (decrease) in securities sold under agreements to repurchase |   |     | 2,674,000          |     |   | (532,000           | )      |   | (386,000 | ) |
| Purchases   of investment securities                                        |   |     | (15,946,980        | )        |   | (14,430,495        | )      |   | (14,725,560 | ) |
| Maturities   of investment securities                                       |   |     | 5,877,244          |     |   | 7,058,846          |   |   | 7,715,390 |   |
| Net   increase in loans                                                     |   |     | (51,516,853        | )        |   | (52,310,314        | )      |   | (65,143,092 | ) |
| Proceeds   from sales of investment securities                              |   |     | 1,155,000          |     |   | 1,468,057          |   |   | 1,117,880 |   |
| Purchases   of property and equipment                                       |   |     | (3,359,954         | )        |   | (367,814           | )      |   | (410,799 | ) |
| Proceeds   from sale of other real estate                                   |   |     | 82,475             |     |   | 371,193            |   |   | 23,252 |   |
| Acquisition   of The Bank of Heath Springs                                  |   |     | (1,627,132         | )        |   | —   |   |   | —   |   |
|                                                                        |   |          |                    |     |        |                    |   |  |  |   |
| Net   cash used in investing activities                                     |   |     | (56,979,200        | )        |   | (62,494,527        | )      |   | (66,221,929 | ) |
|                                                                        |   |          |                    |     |        |                    |   |  |  |   |
| ***Cash flows from financing activities***                                  |   |     |               |     |   |               |   |   |   |   |
| Net   increase in noninterest-bearing deposits                              |   |     | 19,792,936         |     |   | 6,283,014          |   |   | 2,696,402 |   |
| Net   increase in interest-bearing deposits                                 |   |     | 22,135,837         |     |   | 57,110,760         |   |   | 50,149,363 |   |
| Net   proceeds from short-term borrowings                                   |   |     | (10,000,000        | )        |   | —   |   |   | —   |   |
| Net   proceeds from long-term debt                                          |   |     | 17,000,000         |     |   | (2,000,000         | )      |   | 10,000,000 |   |
| Proceeds   from issuance of common stock                                    |   |     | 3,837,673          |     |   | 114,349            |   |   | 161,901 |   |
| Proceeds   from issuance of preferred stock                                 |   |     | 1,006,264          |     |   | —   |   |   | —   |   |
| Stock   issuance costs and redemption of fractional shares                  |   |     | (58,769            | )        |   | —   |   |   | (23,448 | ) |
|                                                                        |   |          |                    |     |        |                    |   |  |  |   |
| Net   cash provided by financing activities                                 |   |     | 53,713,941         |     |   | 61,508,123         |   |   | 62,984,218 |   |
|                                                                        |   |          |                    |     |        |                    |   |  |  |   |
| Increase   (decrease) in cash and cash equivalents                          |   |     | 2,311,610          |     |   | 2,936,346          |   |   | (637,530 | ) |
| ***Cash and cash equivalents, beginning***                                  |   |     | 7,662,133          |     |   | 4,725,787          |   |   | 5,363,317 |   |
|                                                                        |   |          |                    |     |        |                    |   |  |  |   |
| ***Cash and cash equivalents, ending***                                     |   | $        | 9,973,743          |     | $      | 7,662,133          |   | $ | 4,725,787 |   |
|                                                                        |   |          |                    |     |        |                    |   |  |  |   |
| ***Supplemental disclosure of cash flow information***                      |   |     |               |     |   |               |   |   |   |   |
| Interest   paid                                                             |   | $        | 10,879,836         |     | $      | 7,064,575          |   | $ | 3,697,867 |   |
|                                                                        |   |          |                    |     |        |                    |   |  |  |   |
| Taxes   paid                                                                |   | $        | 2,505,414          |     | $      | 2,068,880          |   | $ | 1,614,361 |   |
|                                                                        |   |          |                    |     |        |                    |   |  |  |   |
| ***Supplemental disclosure of noncash   activities***                       |   |     |               |     |   |               |   |   |   |   |
| Stock received for equity in mortgage banking   investee                    |   | $        | —   |     | $      | —   |   | $ | 131,378 |   |
|                                                                        |   |          |                    |     |        |                    |   |  |  |   |
| Real estate acquired in settlement of loans                                 |   | $        | 68,146             |     | $      | 31,411             |   | $ | —   |   |
|                                                                        |   |          |                    |     |        |                    |   |  |  |   |

17

----

**Consolidated Statements of Cash Flows*For the years ended December 31, 2006, 2005 and 2004***

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

|                                                   |   | **2006** |               | **2005** |   | **2004**           |   |
|--------------------------------------------------------|--------|----------|--------------------|----------|--------|--------------------|--------|
|                                                   |   |          |                    |     |        |                    |   |  |  |   |
| ***Acquisition of The Bank of Heath Springs***         |   |     |               |     |   |               |   |   |   |   |
| *Assets acquired*                                      |   |     |               |     |   |               |   |   |   |   |
| Investment securities                                  |   | $        | 8,206,775          |     | $      | —   |   | $ | —   |   |
| Loans, net of allowance   for loan losses $45,942      |   |     | 4,516,371          |     |   | —   |   |   | —   |   |
| Property and equipment,   net                          |   |     | 302,351            |     |   | —   |   |   | —   |   |
| Other assets                                           |   |     | 37,939             |     |   | —   |   |   | —   |   |
| Goodwill                                               |   |     | 2,665,602          |     |   | —   |   |   | —   |   |
| Core deposit intangible                                |   |     | 300,000            |     |   | —   |   |   | —   |   |
|                                                   |   |          |                    |     |        |                    |   |  |  |   |
|                                                   |   |     | 16,029,038         |     |   | —   |   |   | —   |   |
|                                                   |   |          |                    |     |        |                    |   |  |  |   |
| *Liabilities assumed*                                  |   |     |               |     |   |               |   |   |   |   |
| Deposits                                               |   |     | 14,387,526         |     |   | —   |   |   | —   |   |
| Other liabilities                                      |   |     | 14,380             |     |   | —   |   |   | —   |   |
|                                                   |   |          |                    |     |        |                    |   |  |  |   |
|                                                   |   |     | 14,401,906         |     |   | —   |   |   | —   |   |
|                                                   |   |          |                    |     |        |                    |   |  |  |   |
| Net noncash assets   acquired                          |   | $        | 1,627,132          |     | $      | —   |   | $ | —   |   |
|                                                   |   |          |                    |     |        |                    |   |  |  |   |
| ***Payment for net assets acquired***                  |   |     |               |     |   |               |   |   |   |   |
| Cash paid at closing                                   |   | $        | 8,000,000          |     | $      | —   |   | $ | —   |   |
| Less cash acquired at   closing                        |   |     | 6,372,868          |     |   | —   |   |   | —   |   |
|                                                   |   |          |                    |     |        |                    |   |  |  |   |
| Net cash paid                                          |   |     | 1,627,132          |     |   | —   |   |   | —   |   |
| Notes issued to   stockholders of acquired corporation |   |     | —   |     |   | —   |   |   | —   |   |
| Stock issued to   stockholders of acquired corporation |   |     | —   |     |   | —   |   |   | —   |   |
|                                                   |   |          |                    |     |        |                    |   |  |  |   |
|                                                   |   | $        | 1,627,132          |     | $      | —   |   | $ | —   |   |
|                                                   |   |          |                    |     |        |                    |   |  |  |   |

18

----

**Notes to Consolidated Financial Statements**

**Note 1.  Organization and Summary of Significant Accounting Policies**

***Organization***

Waccamaw Bank (Bank) was organized and incorporated under the laws of the State of North Carolina on August 28, 1997 and commenced operations on September 2, 1997.  The Bank currently serves Columbus, Brunswick, Bladen and New Hanover counties in North Carolina and Lancaster and Horry counties in South Carolina and surrounding areas through eleven full service banking branches.  As a state chartered bank which is a member of the Federal Reserve, the Bank is subject to regulation by the State of North Carolina Banking Commission and the Federal Reserve.

During 2001, Waccamaw Bankshares, Inc. (Company), a financial holding company chartered in North Carolina was formed.  On June 30, 2001, Waccamaw Bankshares, Inc. acquired all the outstanding shares of Waccamaw Bank in a tax-free exchange.  Waccamaw Financial Services, Inc. is a wholly owned subsidiary of Waccamaw Bank, the primary business activity of which is investment and insurance services.

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

**Critical Accounting Policies**

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

***Principles of Consolidation***

Our consolidated financial statements include the accounts of the Company and 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.

19

----

**Notes to Consolidated Financial Statements**

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

***Use of Estimates, continued***

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

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

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

***Cash and Cash Equivalents***

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

***Interest-Bearing Deposits with Banks***

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

***Trading Securities***

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

***Securities***

Debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and recorded at amortized cost.  Securities not classified as held to maturity or trading, including equity securities with readily determinable fair values, are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income.

Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities.  Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses.  In determining whether other-than-temporary impairment exists, management considers many factors including (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.  Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

***Loans***

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

20

----

**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 on the cash-basis or cost-recovery method, as appropriate.  When facts and circumstances indicate the borrower has regained the ability to meet required payments, the loan is returned to accrual status.  Past due status of loans is determined based on contractual terms.

***Allowance for Loan Losses***

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

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

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

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.  Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.  Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.  Impairment is measured ona 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.

21

----

**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   |   |
| Automobile              |   |      | 5      |   |
| Furniture and equipment |   |      | 3-10   |   |
| Banking house           |   |      | 10-40  |   |

***Goodwill***

Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired.  Goodwill is assessed at least annually for impairment.  No impairment charges were necessary for the years presented.  

***Intangible Assets***

Intangible assets consist primarily of purchased core deposit intangible assets and are accounted for in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 112, *Goodwill and Other Intangible Assets*.  The Company evaluates the remaining useful life of each intangible asset that is being amortized to determine whether events and circumstances warrant a revision to the remaining period of amortization.  Intangible assets are currently being amortized over estimated useful lives of 10 years.

***Foreclosed Assets***

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

***Transfers of Financial Assets***

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

22

----

**Notes to Consolidated Financial Statements**

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

***Stock Compensation Plans***

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004), *Share-Based Payment.*SFAS No. 123(R) requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. SFAS No. 123(R) covers a wide range of share-based compensation arrangements including stock options, re-stricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. SFAS No. 123(R) is a replacement of SFAS No. 123, *Accounting for Stock-Based Compensation,*and supersedes Accounting Principles Board (“APB”) Opinion No. 25, *Accounting for Stock Issued to Employees,*and its related interpretive guidance. The effect of the Statement will be to require entities to measure the cost of employee services received in exchange forstock options based on the grant-date fair value of the award, and to recognize the cost over the period the employee is required to provide services for the award. SFAS No. 123(R) permits entities to use any option-pricing model that meets the fair value objective in the Statement.

The Company elected to adopt SFAS No. 123(R) on January 1, 2006 under the modified prospective method. Compensation cost has been measured using the fair value of an award on the grant date and is recognized over the service period, which is usually the vesting period. Compensation cost related to the non-vested portion of awards outstanding as of that date was based on the grant-date fair value of those awards as calculated under the original provisions of SFAS No. 123; that is, the Company was not required to re-measure the grant-date fair value estimate of the unvested portion of awards granted prior to the effective date of SFAS No. 123(R).

The Company had applied APB 25 and related Interpretations in accounting for the stock option plan prior to January 1, 2006.  Under APB 25, stock options issued under the Company’s stock option plan have no intrinsic value at the grant date, and therefore, no compensation cost is recognized for them.

***Advertising Expense***

The Company expenses advertising costs as they are incurred.  Advertising expense for the years ended December 31, 2006, 2005, and 2004 was approximately $308,000, $187,000 and $161,000, 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.

***Comprehensive Income***

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

23

----

**Notes to Consolidated Financial Statements**

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

***Basic Earnings per Share***

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

***Diluted Earnings per Share***

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

***Financial Instruments***

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

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

***Fair Value of Financial Instruments***

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

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

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

*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 investment 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.

24

----

**Notes to Consolidated Financial Statements**

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

***Fair Value of Financial Instruments, continued***

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

*Bank owned life insurance*:  The carrying amount of bank owned life insurance, net of accumulated earnings, reflects fair value.

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

*Short-term borrowings and securities sold under agreements to repurchase:*  The carrying amounts of short-term borrowings approximate their fair values.

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

***Reclassification***

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

***Recent Accounting Pronouncements***

The following is a summary of recent authoritative pronouncements that could impact the accounting, reporting, and/or disclosure of financial information by the Company.

In February 2006, the FASB issued SFAS No. 155, *Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140*.  This Statement amends SFAS No. 133, *Accounting for Derivative Instruments and Hedging Activities*, and SFAS No. 140, *Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities*. This Statement resolves issues addressed in SFAS No. 133 Implementation Issue No. Dl, *Application of Statement 133 to Beneficial Interests in Securitized Financial Assets*. SFAS No. 155 permits fair value re-measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest only-strips and principal-only strips are not subject to the requirements of SFAS No. 133, establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestandingderivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and amends SFAS No. 140 to eliminate the prohibition on a qualifying special purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006.  The Company adopted SFAS No. 155 on January 1, 2007 with no material impact on its financial position, results of operations and cash flows.

25

----

**Notes to Consolidated Financial Statements**

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

***Recent Accounting Pronouncements, continued***

In March 2006, the FASB issued SFAS No. 156, *Accounting for Servicing of Financial Assets—an amendment of FASB Statement No. 140*.  This Statement amends SFAS No. 140, *Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities*, with respect to the accounting for separately recognized servicing assets and servicing liabilities. SFAS No. 156 requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract; requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable; permits an entity to choose its subsequent measurement methods for each class of separately recognized servicing assets and servicing liabilities; at its initial adoption, permits a one-time reclassification of available-for-sale securities to trading securities byentities with recognized servicing rights, without calling into question the treatment of other available-for-sale securities under SFAS No. 115, provided that the available-for-sale securities are identified in some manner as offsetting the entity’s exposure to changes in fair value of servicing assets or servicing liabilities that a servicer elects to subsequently measure at fair value; and requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities. An entity should adopt SFAS No. 156 as of the beginning of its first fiscal year that begins after September 15, 2006.  The adoption of SFAS No. 156 will have no material impact on financial position, results of operations or cash flows.

In July 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), *Accounting for Uncertainty in Income Taxes*. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprises’ financial statements in accordance with FASB Statement No. 109, *Accounting for Income Taxes*. FIN 48 prescribes a recognition threshold and measurement attributable for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures and transitions. FIN 48 is effective for fiscal years beginning after December 15, 2006.  The Company adopted FIN 48 on January 1, 2007 which will have no affect on its financial position, results of operations and cash flows.

In September 2006, the FASB issued SFAS No. 157, *Fair Value Measurements*. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This standard does not require any new fair value measurements, but rather eliminates inconsistencies found in various prior pronouncements. SFAS No. 157 is effective for the Company on January 1, 2008 and is not expected to have a significant impact on the Company’s financial statements.

In September 2006, the FASB issued SFAS No. 158, *Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans*, which amends SFAS No. 87 and SFASNo. 106 to require recognition of the overfunded or underfunded status of pension and other postretirement benefit plans on the balance sheet. Under SFAS No. 158, gains and losses, prior service costs and credits, and any remaining transition amounts under SFAS No. 87 and SFAS No. 106 that have not yet been recognized through net periodic benefit cost will be recognized in accumulated other comprehensive income, net of tax effects, until they are amortized as a component of net periodic cost. The measurement date — the date at which the benefit obligation and plan assets are measured — is required to be the company’s fiscal year end. SFAS No. 158 is effective for publicly-held companies for fiscal years ending after December 15, 2006, except for the measurement dateprovisions, which are effective for fiscal years ending after December 15, 2008.   The statement will have no affect on financial statements.

26

----

**Notes to Consolidated Financial Statements**

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

***Recent Accounting Pronouncements, continued***

In September, 2006, the FASB ratified the consensuses reached by the FASB’s Emerging Issues Task Force (“EITF”) relating to EITF 06-4 *Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements*. EITF 06-4 states that an employer accounting for endorsement split-dollar life insurance arrangements that provide a benefit to an employee that extends to postretirement periods should recognize a liability for future benefits in accordance with SFAS No. 106, *Employers’ Accounting for Postretirement Benefits Other Than Pensions*, or Accounting Principles Board (“APB”) Opinion No. 12, “Omnibus Opinion—1967”. EITF 06-4 is effective for fiscal years beginning after December 15, 2007.  Entities should recognize the effects of applying this issue through either (a) a change in accounting principle through a cumulative-effect adjustment to retainedearnings or to other components of equity or net assets in the statement of financial position as of the beginning of the year of adoption or (b) a change in accounting principle through retrospective application to all prior periods. The Company is currently analyzing the effect of the adoption of EITF 06-4 on its financial position, results of operations and cash flows.

In September 2006, the FASB ratified the consensus reached related to EITF 06-5, *Accounting for Purchases of Life Insurance—Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance*.  EITF 06-5 states that a policyholder should consider any additional amounts included in the contractual terms of the insurance policy other than the cash surrender value in determining the amount that could be realized under the insurance contract. EITF 06-5 also states that a policyholder should determine the amount that could be realized under the life insurance contract assuming the surrender of an individual-life by individual-life policy (or certificate by certificate in a group policy). EITF 06-5 is effective for fiscal years beginning after December 15, 2006. The Company adopted EITF 06-5 on January 1, 2007 with no effecton its financial position, results of operations andcash flows.

In September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) 108.  SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a potential current year misstatement. Prior to SAB 108, companies might evaluate the materiality of financial statement misstatements using either the income statement or balance sheet approach, with the income statement approach focusing on new misstatements added in the current year, and the balance sheet approach focusing on the cumulative amount of misstatement present in a company’s balance sheet. Misstatements that would be material under one approach could be viewed as immaterial under another approach, and not be corrected. SAB 108 now requires that companies view financial statement misstatements as material if they are material according to either the income statement or balance sheet approach. The Company hasadopted SAB 108 with no impact on the reported results of operations or financial conditions.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

27

----

**Notes to Consolidated Financial Statements**

**Note 2.  Business Combinations**

On April 28, 2006, the Company acquired The Bank of Heath Springs, paying $8,000,000 in exchange for all the outstanding shares of common stock of The Bank of Heath Springs. In conjunction with the acquisition, The Bank of Heath Springs was merged with and into the Company’s subsidiary, Waccamaw Bank.

The acquisition was accounted for as a purchase transaction and accordingly the results of operations attributable to the acquired company is included in our consolidated financial statements only from the date of acquisition.  The excess of purchase price over fair value of net tangible and identified intangible assets acquired will be evaluated annually for impairment and written down as those values become impaired.  Identified intangible assets will be amortized over their expected useful life.  The acquisition is summarized as follows:

|                                                                                                          |   | **The   Bank of   Heath Springs** |        |
|---------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|-------------|
|                                                                                                          |   |                                   |        |
| Purchase price                                                                                                |   | $                                 | 8,000,000   |   |
|                                                                                                          |   |                                   |             |   |
| Loans, net                                                                                                    |   |                              | 4,516,371   |   |
| Investment securities                                                                                         |   |                              | 8,206,775   |   |
| Cash                                                                                                          |   |                              | 6,372,868   |   |
| Identified intangible   assets                                                                                |   |                              | 300,000     |   |
| Other assets                                                                                                  |   |                              | 340,290     |   |
| Deposits                                                                                                      |   |                              | (14,387,526 | ) |
| Other liabilities                                                                                             |   |                              | (14,380     | ) |
|                                                                                                          |   |                                   |             |   |
| Net tangible and identified intangible assets acquired (at fair   market value)                               |   |                              | 5,334,398   |   |
|                                                                                                          |   |                                   |             |   |
| Excess of purchase price over net tangible and identified intangible   assets acquired (at fair market value) |   | $                                 | 2,665,602   |   |
|                                                                                                          |   |                                   |             |   |

**Note 3.  Restrictions on Cash**

To comply with banking regulation, the Bank is required to maintain certain average cash reserve balances. The daily average cash reserve requirement was approximately $2,967,000 and $1,030,000 for the period including December 31, 2006 and 2005, respectively.

**Note 4.  Investment Securities**

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

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

28

----

**Notes to Consolidated Financial Statements**

**Note 4.  Securities, continued**

|                       |   | **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 |   |
|                       |   |                      |            |                   |        |                         |   |                  |         |   |  |  |   |
|                       |   | $                    | 33,690,215 |                   | $      | 428,696                 |   | $                | 910,661 |   | $ | 33,208,250 |   |
|                       |   |                      |            |                   |        |                         |   |                  |         |   |  |  |   |

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 $18,187,501 and $11,291,803 at December 31, 2006 and 2005, 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, 2006, 2005 and 2004 are as follows:

|            |   | **2006** |               | **2005** |   | **2004**           |   |
|-----------------|--------|----------|--------------------|----------|--------|--------------------|--------|
|            |   |          |                    |     |        |                    |   |  |  |   |
| Realized gains  |   | $        | —   |     | $      | —   |   | $ | 15,230 |   |
| Realized losses |   |     | (890               | )        |   | (1,062             | )      |   | (842 | ) |
|            |   |          |                    |     |        |                    |   |  |  |   |
|            |   | $        | (890)              |     | $      | (1,062             | )      | $ | 14,388 |   |
|            |   |          |                    |     |        |                    |   |  |  |   |

The scheduled contractual maturities of securities (all available for sale) at December 31, 2006 are as follows:

|                            |   | **Amortized   Cost** |       | **Fair   Value** |   |
|---------------------------------|--------|----------------------|------------|------------------|--------|
|                            |   |                      |            |             |        |  |   |
| Due in one year or less         |   | $                    | 4,278,518  |             | $      | 4,502,144 |   |
| Due in one through five   years |   |                 | 8,668,184  |             |   | 8,572,271 |   |
| Due in five through ten   years |   |                 | 2,846,179  |             |   | 2,790,994 |   |
| Due after ten years             |   |                 | 34,502,348 |             |   | 34,663,754 |   |
|                            |   |                      |            |             |        |  |   |
|                            |   | $                    | 50,295,229 |             | $      | 50,529,163 |   |
|                            |   |                      |            |             |        |  |   |

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, 2006 and December 31, 2005.

|                                  |   | **Less   Than 12 Months** |      | **12   Months or More** |   | **Total**        |   |
|---------------------------------------|--------|---------------------------|-----------|-------------------------|--------|------------------|--------|
|                                  |   |                           |      |                         |   |                  |   |
|                                  |   | **Fair   Value**          |      | **Unrealized   Losses** |   | **Fair   Value** |   | **Unrealized   Losses** |   | **Fair   Value** |   | **Unrealized   Losses** |   |
|                                  |   |                           |           |                    |        |                  |   |  |  |   |  |  |   |  |  |   |  |  |   |
| ***December 31, 2006***               |   |                      |      |                    |   |             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Government sponsored   enterprises    |   | $                         | 2,959,872 |                    | $      | (1,892           | )      | $ | —   |   | $ | —   |   | $ | 2,959,872 |   | $ | (1,892 | ) |
| Mortgage backed securities            |   |                      | 1,174,969 |                    |   | (1,637           | )      |   | 8,721,318 |   |   | (121,743 | ) |   | 9,896,287 |   |   | (123,380 | ) |
| Corporate securities                  |   |                      | 2,000,000 |                    |   | (5,319           | )      |   | 7,321,050 |   |   | (185,330 | ) |   | 9,321,050 |   |   | (190,649 | ) |
| Municipal securities                  |   |                      | 3,707,348 |                    |   | (16,238          | )      |   | 1,015,865 |   |   | (20,832 | ) |   | 4,723,213 |   |   | (37,070 | ) |
|                                  |   |                           |           |                    |        |                  |   |  |  |   |  |  |   |  |  |   |  |  |   |
| Total temporarily impaired securities |   | $                         | 9,842,189 |                    | $      | (25,086          | )      | $ | 17,058,233 |   | $ | (327,905 | ) | $ | 26,900,422 |   | $ | (352,991 | ) |
|                                  |   |                           |           |                    |        |                  |   |  |  |   |  |  |   |  |  |   |  |  |   |

29

----

**Notes to Consolidated Financial Statements**

**Note 4.  Securities, continued**

|                                  |   | **Less   Than 12 Months** |       | **12   Months or More** |   | **Total**           |   |
|---------------------------------------|--------|---------------------------|------------|-------------------------|--------|---------------------|--------|
|                                  |   |                           |       |                         |   |                     |   |
|                                  |   | **Fair   Value**          |       | **Unrealized   Losses** |   | **Fair      Value** |   | **Unrealized   Losses** |   | **Fair   Value** |   | **Unrealized   Losses** |   |
|                                  |   |                           |            |                    |        |                     |   |  |  |   |  |  |   |  |  |   |  |  |   |
| ***December 31, 2005***               |   |                      |       |                    |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mortgage backed securities            |   | $                         | 9,010,162  |                    | $      | (90,010             | )      | $ | 4,900,246 |   | $ | (118,211 | ) | $ | 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 | ) |
|                                  |   |                           |            |                    |        |                     |   |  |  |   |  |  |   |  |  |   |  |  |   |
| Total temporarily impaired securities |   | $                         | 13,000,045 |                    | $      | (228,798            | )      | $ | 9,108,713 |   | $ | (681,863 | ) | $ | 22,108,758 |   | $ | (910,661 | ) |
|                                  |   |                           |            |                    |        |                     |   |  |  |   |  |  |   |  |  |   |  |  |   |

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 5.  Loans Receivable**

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

|                               |   | **2006**           |    | **2005** |   |
|------------------------------------|--------|--------------------|---------|----------|--------|
|                               |   |                    |         |     |        |  |   |
|                               |   | **In   thousands** |    |
| Commercial                         |   | $                  | 48,858  |     | $      | 29,036 |   |
| Real estate:                       |   |               |    |     |   |   |   |
| Construction and land development  |   |               | 109,036 |     |   | 83,575 |   |
| Residential, 1-4 families          |   |               | 64,475  |     |   | 62,796 |   |
| Residential, 5 or more families    |   |               | 3,650   |     |   | 4,495 |   |
| Farmland                           |   |               | 2,412   |     |   | 2,545 |   |
| Nonfarm, non-residential           |   |               | 73,529  |     |   | 67,199 |   |
| Agricultural                       |   |               | 675     |     |   | 388 |   |
| Consumer                           |   |               | 13,172  |     |   | 10,544 |   |
| Other                              |   |               | 1,783   |     |   | 1,327 |   |
|                               |   |                    |         |     |        |  |   |
|                               |   |               | 317,590 |     |   | 261,905 |   |
| Deferred loan fees, net of   costs |   |               | (451    | )        |   | (391 | ) |
| Allowance for loan losses          |   |               | (4,886  | )        |   | (3,939 | ) |
|                               |   |                    |         |     |        |  |   |
|                               |   | $                  | 312,253 |     | $      | 257,575 |   |
|                               |   |                    |         |     |        |  |   |

Approximately $21,000,000 in 1-4 family residential loans and $19,000,000 in commercial real estate loans were pledged as collateral securing Federal Home Loan Bank advances included in long-term debt at December 31, 2006.

**Note 6.  Allowance for Loan Losses**

Changes in the allowance for loan losses are as follows:

|                                         |   | **2006** |      | **2005** |   | **2004**           |   |
|----------------------------------------------|--------|----------|-----------|----------|--------|--------------------|--------|
|                                         |   |          |           |     |        |                    |   |  |  |   |
| ***Balance, beginning***                     |   | $        | 3,939,002 |     | $      | 2,791,008          |   | $ | 2,218,053 |   |
| Provision charged to   expense               |   |     | 1,450,000 |     |   | 1,370,000          |   |   | 819,500 |   |
| Allowance acquired in   purchase transaction |   |     | 45,942    |     |   | —   |   |   | —   |   |
| Recoveries of amounts   charged off          |   |     | 36,247    |     |   | 47,685             |   |   | 26,673 |   |
| Amounts charged off                          |   |     | (585,199  | )        |   | (269,691           | )      |   | (273,218 | ) |
|                                         |   |          |           |     |        |                    |   |  |  |   |
| ***Balance, ending***                        |   | $        | 4,885,992 |     | $      | 3,939,002          |   | $ | 2,791,008 |   |
|                                         |   |          |           |     |        |                    |   |  |  |   |

30

----

**Notes to Consolidated Financial Statements**

**Note 6.  Allowance for Loan Losses, continued**

|                                                                   |   | **2006** |               | **2005** |   |
|------------------------------------------------------------------------|--------|----------|--------------------|----------|--------|
|                                                                   |   |          |                    |     |        |  |   |
| Impaired loans without a   valuation allowance                         |   | $        | 1,135,984          |     | $      | 1,795,417 |   |
| Impaired loans with a   valuation allowance                            |   |     | —   |     |   | —   |   |
|                                                                   |   |          |                    |     |        |  |   |
| Total impaired loans                                                   |   | $        | 1,135,984          |     | $      | 1,795,417 |   |
|                                                                   |   |          |                    |     |        |  |   |
| Valuation allowance related   to impaired loans                        |   | $        | —   |     | $      | —   |   |
|                                                                   |   |          |                    |     |        |  |   |
| Total nonaccrual loans                                                 |   | $        | 1,181,000          |     | $      | 1,711,000 |   |
|                                                                   |   |          |                    |     |        |  |   |
| Total loans past due ninety   days or more and still accruing interest |   | $        | 340,000            |     | $      | 250,000 |   |
|                                                                   |   |          |                    |     |        |  |   |

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:

|                                                           |   | **2006** |      | **2005** |   | **2004**  |   |
|----------------------------------------------------------------|--------|----------|-----------|----------|--------|-----------|--------|
|                                                           |   |          |           |     |        |           |   |  |  |   |
| Average investment in   impaired loans                         |   | $        | 1,016,932 |     | $      | 1,172,568 |   | $ | 1,536,732 |   |
|                                                           |   |          |           |     |        |           |   |  |  |   |
| Interest income recognized   on impaired loans                 |   | $        | 236,913   |     | $      | 134,546   |   | $ | 325,089 |   |
|                                                           |   |          |           |     |        |           |   |  |  |   |
| Interest income recognized   on a cash basis on impaired loans |   | $        | 40,384    |     | $      | 98,622    |   | $ | 325,089 |   |
|                                                           |   |          |           |     |        |           |   |  |  |   |

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

**Note 7.  Property and Equipment**

***Components of Property and Equipment***

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

|                            |   | **2006** |      | **2005** |   |
|---------------------------------|--------|----------|-----------|----------|--------|
|                            |   |          |           |     |        |  |   |
| Land                            |   | $        | 1,308,698 |     | $      | 325,444 |   |
| Buildings                       |   |     | 3,735,432 |     |   | 2,157,442 |   |
| Construction in progress        |   |     | 22,660    |     |   | —   |   |
| Leasehold improvements          |   |     | 766,810   |     |   | 556,992 |   |
| Automobiles                     |   |     | 24,018    |     |   | —   |   |
| Furniture and equipment         |   |     | 2,564,232 |     |   | 1,720,149 |   |
|                            |   |          |           |     |        |  |   |
|                            |   |     | 8,421,850 |     |   | 4,760,027 |   |
| Less accumulated   depreciation |   |     | 1,750,077 |     |   | 1,379,848 |   |
|                            |   |          |           |     |        |  |   |
|                            |   | $        | 6,671,773 |     | $      | 3,380,179 |   |
|                            |   |          |           |     |        |  |   |

Depreciation expense reported in net income was approximately $383,000, $295,000, and $265,000 for the years ended December 31, 2006, 2005 and 2004, respectively.

31

----

**Notes to Consolidated Financial Statements**

**Note 7.  Property and Equipment, continued**

***Leases***

The Bank leases several banking facilities and its operations center under agreements accounted for as operating leases.  Rent expense was approximately $260,000, $178,000, and $130,000 in 2006, 2005, and 2004, respectively.  Future minimum lease payments under non-cancelable commitments are as follows.

| 2007       |   | $      | 262,075 |   |
|------------|--------|--------|---------|--------|
| 2008       |   |   | 255,243 |   |
| 2009       |   |   | 208,664 |   |
| 2010       |   |   | 118,835 |   |
| 2011       |   |   | 35,880  |   |
| Thereafter |   |   | 16,800  |   |
|       |   |        |         |   |
|       |   | $      | 897,497 |   |
|       |   |        |         |   |

**Note 8.  Intangible Assets**

The book value of purchased intangible assets at December 31, 2006 and 2005 was $930,555 and $877,736, respectively.  Details are as follows:

|                                                                           |   | **As   of December 31, 2006** |      | **As   of December 31, 2005**  |   |
|--------------------------------------------------------------------------------|--------|-------------------------------|-----------|--------------------------------|--------|
|                                                                           |   |                               |      |                                |   |
|                                                                           |   | **Gross   Carrying   Amount** |      | **Accumulated   Amortization** |   | **Gross   Carrying   Amount** |   | **Accumulated   Amortization** |   |
|                                                                           |   |                               |           |                           |        |  |   |  |  |   |  |  |   |
| Amortized intangible assets                                                    |   |                          |      |                           |   |   |   |   |   |   |   |   |   |
| Deposit premium                                                                |   | $                             | 2,439,919 |                           | $      | 1,576,030 |   | $ | 2,139,919 |   | $ | 1,348,850 |   |
| Other                                                                          |   |                          | 200,000   |                           |   | 133,334 |   |   | 200,000 |   |   | 113,333 |   |
|                                                                           |   |                               |           |                           |        |  |   |  |  |   |  |  |   |
| Total                                                                          |   | $                             | 2,639,919 |                           | $      | 1,709,364 |   | $ | 2,339,919 |   | $ | 1,462,183 |   |
|                                                                           |   |                               |           |                           |        |  |   |  |  |   |  |  |   |
| Unamortized intangible   assets Goodwill from The Bank of Heath Springs merger |   | $                             | 2,665,602 |                           | $      | n/a |   | $ | —   |   | $ | n/a |   |
|                                                                           |   |                               |           |                           |        |  |   |  |  |   |  |  |   |

Amortization expense is calculated on a straight-line basis over a period of ten years and was approximately $247,000 in 2006 and 227,000 in 2005 and 2004.  Management expects amortization expense to be approximately $257,000 in each of the next three years.

**Note 9.  Deposits**

The aggregate amount of time deposits in denominations of $100,000 or more at December 31, 2006 and 2005 was approximately $101,499,000 and $84,827,000, respectively.  At December 31, 2006, the scheduled maturities of time deposits (in thousands) are as follows:

| Three months or less    |   | $      | 39,264  |   |
|-------------------------|--------|--------|---------|--------|
| Four months to one year |   |   | 118,761 |   |
| Two to three years      |   |   | 21,328  |   |
| Over three years        |   |   | 3,992   |   |
|                    |   |        |         |   |
|                    |   | $      | 183,345 |   |
|                    |   |        |         |   |

32

----

**Notes to Consolidated Financial Statements**

**Note 10.  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:

|                                                     |   | **2006** |      | **2005** |   |
|----------------------------------------------------------|--------|----------|-----------|----------|--------|
|                                                     |   |          |           |     |        |  |   |
| Outstanding balance at   December 31                     |   | $        | 5,410,000 |     | $      | 2,736,000 |   |
|                                                     |   |          |           |     |        |  |   |
| Year-end weighted average   rate                         |   |     | 4.59      | %        |   | 3.13 | % |
|                                                     |   |          |           |     |        |  |   |
| Daily average outstanding   during the period            |   | $        | 5,142,348 |     | $      | 3,618,334 |   |
|                                                     |   |          |           |     |        |  |   |
| Average rate for the year                                |   |     | 4.39      | %        |   | 2.11 | % |
|                                                     |   |          |           |     |        |  |   |
| Maximum outstanding at any   month-end during the period |   | $        | 6,644,000 |     | $      | 5,394,000 |   |
|                                                     |   |          |           |     |        |  |   |

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. 

***Unused lines of credit***

The Bank has established credit facilities to provide additional liquidity if and as needed.  These consist of unsecured lines of credit with correspondent banks for $8,500,000 and a secured line of credit with a correspondent bank for $40,000,000.  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, 2006 and 2005 there were no amounts outstanding under these credit facilities.

***Short-term borrowings***

There were no short-term borrowings at December 31, 2006 and three variable rate FHLB advances of $2,000,000, $3,000,000 and $5,000,000 at December 31, 2005.  

***Long-term debt***

At December 31, 2006 and 2005, $23,500,000 and $6,500,000, respectively were outstanding under Federal Home Loan Bank advances.  Approximately $38,000,000 in 1-4 family residential loans, $27,000,000 in commercial real estate loans  and  FHLB stock of  $1,058,000 were pledged as collateral for the FHLB advances at December 31, 2006.

| **Maturity   Date** |   | **Advance** |       | **Rate** |   |                 |   |   |
|---------------------|--------|-------------|------------|----------|--------|----------------------|--------|--------|
|                     |   |             |       |          |   |                 |   |   |
| 05/28/08            |   | $           | 2,000,000  |     |   | 3 Month LIBOR - .04% |   |   |   |   |
| 10/20/08            |   |        | 5,000,000  |     |   | 1 Month LIBOR +.01%  |   |   |   |   |
| 02/10/10            |   |        | 2,500,000  |     |   | Fixed at 5.85%       |   |   | Convertible quarterly |   |
| 04/22/19            |   |        | 5,000,000  |     |   | 3 Month LIBOR - .50% |   |   | Convertible 4/22/09 |   |
| 12/02/13            |   |        | 5,000,000  |     |   | 3 Month LIBOR - .50% |   |   |   |   |
| 09/29/15            |   |        | 4,000,000  |     |   | Fixed at 4.06%       |   |   | Convertible 9/29/09 |   |
|                |   |             |            |     |   |                 |   |   |   |   |
|                |   | $           | 23,500,000 |     |   |                 |   |   |   |   |
|                |   |             |            |     |   |                 |   |   |   |   |

33

----

**Notes to Consolidated Financial Statements**

**Note 11.  Fair Value of Financial Instruments**

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

|                                                                         |   | **December   31, 2006** |               | **December   31, 2005** |   |
|------------------------------------------------------------------------------|--------|-------------------------|--------------------|-------------------------|--------|
|                                                                         |   |                         |               |                         |   |
|                                                                         |   | **Carrying   Amount**   |               | **Fair   Value**        |   | **Carrying   Amount** |   | **Fair   Value** |   |
|                                                                         |   |                         |                    |                    |        |  |   |  |  |   |  |  |   |
| ***Financial Assets***                                                       |   |                    |               |                    |   |   |   |   |   |   |   |   |   |
| Cash and due from banks                                                      |   | $                       | 9,183              |                    | $      | 9,183 |   | $ | 6,954 |   | $ | 6,954 |   |
| Interest-bearing deposits with banks                                         |   |                    | 790                |                    |   | 790 |   |   | 708 |   |   | 708 |   |
| Federal funds sold                                                           |   |                    | 2,598              |                    |   | 2,598 |   |   | 8,281 |   |   | 8,281 |   |
| Investment securities                                                        |   |                    | 50,529             |                    |   | 50,529 |   |   | 33,208 |   |   | 33,208 |   |
| Restricted equity securities                                                 |   |                    | 2,457              |                    |   | 2,457 |   |   | 2,006 |   |   | 2,006 |   |
| Loans, net of allowance for loan losses                                      |   |                    | 312,253            |                    |   | 316,540 |   |   | 257,575 |   |   | 256,445 |   |
| ***Financial Liabilities***                                                  |   |                    |               |                    |   |   |   |   |   |   |   |   |   |
| Deposits                                                                     |   |                    | 327,352            |                    |   | 327,724 |   |   | 271,035 |   |   | 271,719 |   |
| Securities sold under agreements to repurchase and federal funds   purchased |   |                    | 5,410              |                    |   | 5,410 |   |   | 2,736 |   |   | 2,736 |   |
| Short-term borrowings                                                        |   |                    | —   |                    |   | —   |   |   | 10,000 |   |   | 10,000 |   |
| Long-term debt                                                               |   |                    | 23,500             |                    |   | 23,509 |   |   | 6,500 |   |   | 6,493 |   |
| Junior subordinated debentures                                               |   |                    | 8,248              |                    |   | 8,000 |   |   | 8,248 |   |   | 7,999 |   |

**Note 12.  Earnings per Share**

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

|                                                   |   | **2006** |      | **2005** |   | **2004**           |   |
|--------------------------------------------------------|--------|----------|-----------|----------|--------|--------------------|--------|
|                                                   |   |          |           |     |        |                    |   |  |  |   |
| Net income (income   available to common shareholders) |   | $        | 3,652,016 |     | $      | 3,035,373          |   | $ | 2,414,319 |   |
|                                                   |   |          |           |     |        |                    |   |  |  |   |
| Weighted average common   shares outstanding           |   |     | 4,661,706 |     |   | 4,543,386          |   |   | 4,507,523 |   |
| *Effect of   dilutive securities, options*             |   |     | 115,678   |     |   | 222,627            |   |   | 87,978 |   |
| *Effect of   dilutive securities, preferred stock*     |   |     | 59,192    |     |   | —   |   |   | —   |   |
|                                                   |   |          |           |     |        |                    |   |  |  |   |
| Weighted average common   shares outstanding, diluted  |   |     | 4,836,576 |     |   | 4,766,013          |   |   | 4,595,501 |   |
|                                                   |   |          |           |     |        |                    |   |  |  |   |
| Basic earnings per share                               |   | $        | .78       |     | $      | .67                |   | $ | .54 |   |
|                                                   |   |          |           |     |        |                    |   |  |  |   |
| Diluted earnings per share                             |   | $        | .76       |     | $      | .64                |   | $ | .52 |   |
|                                                   |   |          |           |     |        |                    |   |  |  |   |

At December 31, 2006, 269,899 warrants were outstanding with a $24.00 per share exercise price.  These warrants may be used to purchase one share of the Company’s common stock at any time until September 30, 2009.  Exercise of these warrants and 224,500 options are not assumed in computing 2006 diluted earnings per share as their exercise price was below market value at December 31, 2006.

| **Note 13.** | **Guaranteed   Preferred Beneficial Interests in the Company’s Junior Subordinated   Debentures** |
|--------------|--------------------------------------------------------------------------------------------------------|

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

34

----

**Notes to Consolidated Financial Statements**

| **Note 13.** | **Guaranteed   Preferred Beneficial Interests in the Company’s Junior Subordinated   Debentures, continued** |
|--------------|-------------------------------------------------------------------------------------------------------------------|

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

In 2004, the Company adopted FIN 46(R), Consolidation of Variable Interest Entities (as amended), which resulted in the assets and liabilities, as well as the related income and expenses of the Trust being excluded from our consolidated financial statements.  However, the subordinated debentures issued by the Company and purchased by the Trust remain on our balance sheet.  In addition, the related interest expense continues to be included on our income statement.

| **Note 14.** | **Benefit Plans** |
|--------------|-------------------|

***Defined Contribution Plan***

The Bank maintains a profit sharing plan pursuant to Section 401(k) of the Internal Revenue Code.  The plan covers substantially all employees at least 21 years of age who have completed at least one month of service.  Participants may contribute a percentage of compensation, subject to a maximum allowed under the Code.  The bank contributes up to 3% of an employee’s compensation who have completed at least twelve months of service which vests over a five-year period.  The Bank’s aggregate contribution was $48,750, $42,603 and $32,713 for the years ended December 31, 2006, 2005 and 2004, respectively.

***Stock Option Plans***

The Company’s Board of Directors has adopted both the *1998 Incentive Stock Option Plan* (Incentive Plan) and the *1998 Nonstatutory Stock Option Plan* (Nonstatutory Plan).  Under each plan up to 458,258 shares may be issued for a total of 916,516 shares (adjusted for stock dividends).  Options granted under both plans expire no more than 10 years from date of grant. Option exercise price under both plans must be set by the Board of Directors at the date of grant and cannot be less than 100% of fair market value of the related stock at the date of the grant.  Under both plans, vesting is determined by the specific option agreements.  It is the Company’s policy to issue new shares to satisfy option exercises.

As described in Note 1, effective January 1, 2006, the Company adopted SFAS No. 123(R) using the modified prospective application.  Under this application, the Company is required to record compensation expense for all rewards granted after the date of adoption and for the unvested portion of previously granted awards that remain outstanding at the date of adoption.  Compensation cost charged to income was approximately $88,000 for the year ended December 31, 2006.  No income tax benefit was recognized from share-based compensation.

Prior to the adoption of SFAS No. 123(R), the Company used the intrinsic value method as prescribed by APB No. 25 and thus recognized no compensation expense for options granted with exercise prices equal to the fair market value of the Company’s common stock on the date of grant.

35

----

**Notes to Consolidated Financial Statements**

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

***Stock Option Plans, continued***

Prior to the adoption of SFAS No. 123(R), the Company used the intrinsic value method as prescribed by APB No. 25 and thus recognized no compensation expense for options granted with exercise prices equal to the fair market value of the Company’s common stock on the date of grant.

The weighted average fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants for the year ended December 31, 2006: expected volatility of 9.1%; risk-free interest rate of 6.25%; and expected lives of 10 years. The weighted average fair value of stock options granted during the 2006 was $9.28.

Cash received from option exercises under the plans for the year ended December 31, 2006 was $255,656.  The total intrinsic value of options exercised during year ended December 31, 2006 was $773,746.

Activity under the plans during the years ended December 31, 2006 and 2005 (adjusted for stock splits) is summarized below:

|                            |   | **Incentive   Plan**      |               | **Non   statutory Plan** |   |
|---------------------------------|--------|---------------------------|--------------------|--------------------------|--------|
|                            |   |                           |               |                          |   |
|                            |   | **Available   for Grant** |               | **Granted**              |   | **Available   for Grant** |   | **Granted** |   |
|                            |   |                           |                    |                     |        |  |   |  |  |   |  |  |   |
| ***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 |   |
| Forfeited                       |   |                      | 34,900             |                     |   | (34,900 | ) |   | —   |   |   | —   |   |
| Granted                         |   |                      | (7,500             | )                        |   | 7,500 |   |   | —   |   |   | —   |   |
| Exercised                       |   |                      | —   |                     |   | (39,148 | ) |   | —   |   |   | (23,224 | ) |
|                            |   |                           |                    |                     |        |  |   |  |  |   |  |  |   |
| ***Balance December 31, 2006*** |   |                      | 78,252             |                     |   | 251,676 |   |   | 74,452 |   |   | 178,624 |   |
|                            |   |                           |                    |                     |        |  |   |  |  |   |  |  |   |

A summary of option activity under the plans as of and changes during the year ended December 31, 2006 is presented below: 

|                               |   | **Options   Outstanding** |    | **Weighted   Average Exercise Price** |   | **Average   Remaining Contractual Term** |   | **Aggregate   Intrinsic Value** |      |
|------------------------------------|--------|---------------------------|---------|---------------------------------------|--------|------------------------------------------|--------|---------------------------------|-----------|
|                               |   |                           |         |                                  |        |                                          |   |                                 |           |   |  |  |   |
| Outstanding at December 31,   2005 |   |                      | 520,072 |                                  | $      | 10.60                                    |   |                            |      |   |   |   |   |
| Granted                            |   |                      | 7,500   |                                  | $      | 16.85                                    |   |                            |      |   |   |   |   |
| Forfeited                          |   |                      | (34,900 | )                                     | $      | 14.72                                    |   |                            |      |   |   |   |   |
| Exercised                          |   |                      | (62,372 | )                                     | $      | 4.10                                     |   |                            |      |   |   |   |   |
|                               |   |                           |         |                                  |   |                                     |   |                            |      |   |   |   |   |
| Outstanding at December 31,   2006 |   |                      | 430,300 |                                  | $      | 11.32                                    |   |                            | 6.5 years |   | $ | 2,173,014 |   |
|                               |   |                           |         |                                  |   |                                     |   |                                 |           |   |  |  |   |
| Exercisable at December 31,   2006 |   |                      | 384,201 |                                  | $      | 10.70                                    |   |                            | 5.5 years |   | $ | 2,178,420 |   |
|                               |   |                           |         |                                  |   |                                     |   |                                 |           |   |  |  |   |

36

----

**Notes to Consolidated Financial Statements**

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

***Stock Option Plans, continued***

The total fair value of options vesting during 2006 was $88,063.  Total unrecognized compensation cost related to outstanding non-vested stock options will be recognized over the following periods:

| 2007   |   | $      | 81,152  |   |
|--------|--------|--------|---------|--------|
| 2008   |   |   | 80,632  |   |
| 2009   |   |   | 63,256  |   |
| 2010   |   |   | 21,451  |   |
| 2011   |   |   | 3,597   |   |
|   |   |        |         |   |
| Total  |   | $      | 250,088 |   |
|   |   |        |         |   |

The adoption of SFAS No. 123(R) and its fair value compensation cost recognition provisions had the following effect (increase/ (decrease)) on our financial statements:

|                                   |   | **2006** |    |
|----------------------------------------|--------|----------|---------|
|                                   |   |          |         |   |
| Cash flows from operating   activities |   | $        | 88,063  |   |
|                                   |   |          |         |   |
| Income before income taxes             |   | $        | (88,063 | ) |
|                                   |   |          |         |   |
| Net income                             |   | $        | (88,063 | ) |
|                                   |   |          |         |   |
| Net income per share -   basic         |   | $        | (.02    | ) |
|                                   |   |          |         |   |
| Net income per share -   diluted       |   | $        | (.02    | ) |
|                                   |   |          |         |   |

The following table illustrates the effect on net income if the Company had applied the fair value recognition provisions of SFAS No. 123 for the years ended December 31, 2005 and 2004:

|                                                                                                                                               |   | **2005** |      | **2004** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|-----------|----------|--------|
|                                                                                                                                               |   |          |           |     |        |  |   |
| ***Net income***                                                                                                                                   |   | $        | 3,035,373 |     | $      | 2,414,319 |   |
| Deduct:  Total   stock-based employee compensation expense determined under fair value based   method for all awards, net of tax effects |   |     | (794,072  | )        |   | (54,284 | ) |
|                                                                                                                                               |   |          |           |     |        |  |   |
| ***Proforma net income***                                                                                                                          |   | $        | 2,241,301 |     | $      | 2,360,035 |   |
|                                                                                                                                               |   |          |           |     |        |  |   |
| ***Earnings per share***                                                                                                                           |   |     |      |     |   |   |   |
| Basic                                                                                                                                              |   | $        | .67       |     | $      | .54 |   |
|                                                                                                                                               |   |          |           |     |        |  |   |
| Basic – proforma                                                                                                                              |   | $        | .49       |     | $      | .52 |   |
|                                                                                                                                               |   |          |           |     |        |  |   |
| Diluted                                                                                                                                            |   | $        | .64       |     | $      | .52 |   |
|                                                                                                                                               |   |          |           |     |        |  |   |
| Diluted – proforma                                                                                                                            |   | $        | .47       |     | $      | .51 |   |
|                                                                                                                                               |   |          |           |     |        |  |   |

**Note 15.  Income Taxes**

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

The components of income tax expense are as follows:

|                         |   | **2006** |      | **2005** |   | **2004**  |   |
|------------------------------|--------|----------|-----------|----------|--------|-----------|--------|
|                         |   |          |           |     |        |           |   |  |  |   |
| Current                      |   | $        | 2,517,474 |     | $      | 2,045,847 |   | $ | 1,356,585 |   |
| Deferred                     |   |     | (307,088  | )        |   | (456,679  | )      |   | (147,704 | ) |
|                         |   |          |           |     |        |           |   |  |  |   |
| Income tax expense (benefit) |   | $        | 2,210,386 |     | $      | 1,589,168 |   | $ | 1,208,881 |   |
|                         |   |          |           |     |        |           |   |  |  |   |

37

----

**Notes to Consolidated Financial Statements**

**Note 15.  Income Taxes, continued**

***Rate Reconciliation***

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

|                                               |   | **2006** |      | **2005** |   | **2004**  |   |
|----------------------------------------------------|--------|----------|-----------|----------|--------|-----------|--------|
|                                               |   |          |           |     |        |           |   |  |  |   |
| Tax at statutory federal   rate                    |   | $        | 1,993,217 |     | $      | 1,572,344 |   | $ | 1,231,888 |   |
| Tax exempt interest                                |   |     | (123,480  | )        |   | (38,040   | )      |   | (40,533 | ) |
| Tax exempt income from bank   owned life insurance |   |     | (81,599   | )        |   | (65,836   | )      |   | (77,234 | ) |
| State income tax, net of   federal benefit         |   |     | 276,276   |     |   | 218,173   |   |   | 137,359 |   |
| Other                                              |   |     | 145,972   |     |   | (97,473   | )      |   | (42,599 | ) |
|                                               |   |          |           |     |        |           |   |  |  |   |
| Income tax expense (benefit)                       |   | $        | 2,210,386 |     | $      | 1,589,168 |   | $ | 1,208,881 |   |
|                                               |   |          |           |     |        |           |   |  |  |   |

***Deferred Income Tax Analysis***

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

|                                             |   | **2006** |               | **2005** |   |
|--------------------------------------------------|--------|----------|--------------------|----------|--------|
|                                             |   |          |                    |     |        |  |   |
| Deferred tax assets                              |   |     |               |     |   |   |   |
| Allowance for loan losses                        |   | $        | 1,690,064          |     | $      | 1,359,364 |   |
| Pre-opening expenses                             |   |     | —   |     |   | 426 |   |
| Accrued expenses                                 |   |     | —   |     |   | 50,858 |   |
| Deposit premium amortization                     |   |     | 245,216            |     |   | 208,312 |   |
| Deferred loan fees                               |   |     | 173,763            |     |   | 150,788 |   |
| Allowance for other real estate owned            |   |     | —   |     |   | 13,494 |   |
| Unrealized loss on securities available for sale |   |     | —   |     |   | 158,773 |   |
|                                             |   |          |                    |     |        |  |   |
| Deferred tax assets                              |   |     | 2,109,043          |     |   | 1,942,015 |   |
|                                             |   |          |                    |     |        |  |   |
| Deferred tax liabilities                         |   |     |               |     |   |   |   |
| Depreciation                                     |   |     | (312,661           | )        |   | (328,280 | ) |
| Accretion of bond discount                       |   |     | (52,212            | )        |   | (17,880 | ) |
| Unrealized gain on securities available for sale |   |     | (79,538            | )        |   | —   |   |
|                                             |   |          |                    |     |        |  |   |
| Deferred tax liabilities                         |   |     | (444,411           | )        |   | (346,160 | ) |
|                                             |   |          |                    |     |        |  |   |
| Net deferred tax asset                           |   | $        | 1,664,632          |     | $      | 1,595,855 |   |
|                                             |   |          |                    |     |        |  |   |

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

**Note 16.  Commitments and Contingencies**

***Litigation***

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

38

----

**Notes to Consolidated Financial Statements**

**Note 16.  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:

|                           |   | **2006** |       | **2005** |   |
|--------------------------------|--------|----------|------------|----------|--------|
|                           |   |          |            |     |        |  |   |
| Commitments to extend   credit |   | $        | 68,610,000 |     | $      | 52,574,000 |   |
| Stand-by letters of credit     |   |     | 1,825,000  |     |   | 1,325,000 |   |
|                           |   |          |            |     |        |  |   |
|                           |   | $        | 70,435,000 |     | $      | 53,899,000 |   |
|                           |   |          |            |     |        |  |   |

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

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

***Concentrations of Credit Risk***

Substantially all of the Bank’s loans and commitments to extend credit have been granted to customers in the Bank’s market area and such customers are generally depositors of the Bank.  The concentrations of credit by type of loan are set forth in Note 5.  The distribution of commitments to extend credit approximates the distribution of loans outstanding. The Bank’s primary focus is toward commercial, consumer and small business transactions, and accordingly, it does not have a significant number of credits to any single borrower or group of related borrowers in excess of $3,500,000.

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

**Note 17.  Regulatory Restrictions**

***Dividends***

The Company’s dividend payments 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.

39

----

**Notes to Consolidated Financial Statements**

**Note 17.  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, 2006 and 2005, that the Company and the Bank met all capital adequacy requirements to which they are subject.

As of December 31, 2006 and 2005, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action.  To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the following table.  There are no conditions or events since the notification that management believes have changed the Bank’s category.

The Company’s and Bank’s actual capital amounts and ratios are also presented in the table (dollars in thousands).

|                                    |   | **Actual** |   | **Minimum Capital** |   | **Minimum To BeWell CapitalizedUnder PromptCorrective ActionProvisions** |   |
|-----------------------------------------|--------|------------|--------|---------------------|--------|--------------------------------------------------------------------------|--------|
|                                    |   |            |   |                     |   |                                                                          |   |
|                                    |   | **Amount** |   | **Ratio**           |   | **Amount**                                                               |   | **Ratio** |   | **Amount** |   | **Ratio** |   |
|                                    |   |            |        |                |        |                                                                          |   |  |  |   |  |  |   |  |  |   |  |  |   |
| ***December 31, 2006***                 |   |       |   |                |   |                                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total capital to risk- weighted assets  |   |       |   |                |   |                                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Consolidated                            |   | $          | 40,396 |                |   | 11.82                                                                    | %      | $ | 27,332 |   |   | 8.00 | % | $ | n/a |   |   | n/a |   |
| Bank                                    |   | $          | 39,082 |                |   | 11.41                                                                    | %      | $ | 27,399 |   |   | 8.00 | % | $ | 34,248 |   |   | 10.00 | % |
| Tier 1 capital to risk- weighted assets |   |       |   |                |   |                                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Consolidated                            |   | $          | 36,108 |                |   | 10.57                                                                    | %      | $ | 13,666 |   |   | 4.00 | % | $ | n/a |   |   | n/a |   |
| Bank                                    |   | $          | 34,796 |                |   | 10.16                                                                    | %      | $ | 13,699 |   |   | 4.00 | % | $ | 20,549 |   |   | 6.00 | % |
| Tier 1 capital to average assets        |   |       |   |                |   |                                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Consolidated                            |   | $          | 36,108 |                |   | 9.61                                                                     | %      | $ | 15,022 |   |   | 4.00 | % | $ | n/a |   |   | n/a |   |
| Bank                                    |   | $          | 34,796 |                |   | 9.30                                                                     | %      | $ | 14,974 |   |   | 4.00 | % | $ | 18,717 |   |   | 5.00 | % |

----

40

**Notes to Consolidated Financial Statements**

**Note 17.  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, 2005***                 |   |       |   |                           |   |                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total capital to risk- weighted assets  |   |       |   |                           |   |                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Consolidated                            |   | $          | 33,420 |                           |   | 12.36                                                                                | %      | $ | 21,629 |   |   | 8.00 | % | $ | n/a |   |   | n/a |   |
| Bank                                    |   | $          | 32,116 |                           |   | 11.94                                                                                | %      | $ | 21,509 |   |   | 8.00 | % | $ | 26,886 |   |   | 10.00 | % |
| Tier 1 capital to risk- weighted assets |   |       |   |                           |   |                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Consolidated                            |   | $          | 30,042 |                           |   | 11.11                                                                                | %      | $ | 10,813 |   |   | 4.00 | % | $ | n/a |   |   | n/a |   |
| Bank                                    |   | $          | 28,738 |                           |   | 10.69                                                                                | %      | $ | 10,755 |   |   | 4.00 | % | $ | 16,132 |   |   | 6.00 | % |
| Tier 1 capital to risk- weighted assets |   |       |   |                           |   |                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Consolidated                            |   | $          | 30,042 |                           |   | 9.37                                                                                 | %      | $ | 12,828 |   |   | 4.00 | % | $ | n/a |   |   | n/a |   |
| Bank                                    |   | $          | 28,738 |                           |   | 9.00                                                                                 | %      | $ | 12,777 |   |   | 4.00 | % | $ | 15,971 |   |   | 5.00 | % |

***Inter-company transactions***

Restrictions on loans by the Bank to the Company are imposed by Federal Reserve Act Sections 23A and 23B, and differ from legal lending limits on loans to external customers.  Generally, a bank may lend up to 10% of its capital and surplus to its parent or other affiliate, if the loan is secured and so long as certain safety and soundness requirements and market terms requirements are met.  If collateral is in the form of stocks, bonds, debentures or similar obligations, it must have a market value when the loan is made of at least 20% more than the amount of the loan, and if obligations of a state or political subdivision or agency thereof, it must have a market value of at least 10% more than the amount of the loan.  If such loans are secured by obligations of the United States or agencies thereof, or by notes, drafts, bills of exchange or bankers’ acceptances eligible for rediscount or purchase by a Federal Reserve Bank, requirements forcollateral 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 $2,500,000 at December 31, 2006.  No 23A transactions existed at December 31, 2006 or 2005.

41

----

**Notes to Consolidated Financial Statements**

**Note 18.  Transactions with Related Parties**

***Loans***

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

|                     |   |     |     |     |   |               |   |
|--------------------------|--------|----------|----------|----------|--------|--------------------|--------|
|                     |   | **2006** |     | **2005** |   |
|                     |   |          |          |     |        |                    |   |
| ***Balance, beginning*** |   | $        | 983,643  |     | $      | 1,183,661          |   |
| Change in relationships  |   |     | (249,352 | )        |   | —   |   |
| New loans and advances   |   |     | 423,127  |     |   | 330,153            |   |
| Repayments               |   |     | (406,611 | )        |   | (530,171           | )      |
|                     |   |          |          |     |        |                    |   |
| ***Balance, ending***    |   | $        | 750,807  |     | $      | 983,643            |   |
|                     |   |          |          |     |        |                    |   |

**Note 19.  Parent Company Financial Information**

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

***Balance Sheets December 31, 2006 and 2005***

|                                            |   | **2006** |               | **2005** |   |
|-------------------------------------------------|--------|----------|--------------------|----------|--------|
|                                            |   |          |                    |     |        |  |   |
| ***Assets***                                    |   |     |               |     |   |   |   |
| Cash and due from banks                         |   | $        | 128,735            |     | $      | 127,943 |   |
| Investment in subsidiary bank at equity         |   |     | 38,391,412         |     |   | 29,194,584 |   |
| Investment securities, available for sale       |   |     | 467,581            |     |   | 381,864 |   |
| Loans                                           |   |     | —   |     |   | 382,696 |   |
| Other assets                                    |   |     | 1,069,448          |     |   | 731,867 |   |
|                                            |   |          |                    |     |        |  |   |
| Total assets                                    |   | $        | 40,057,176         |     | $      | 30,818,954 |   |
|                                            |   |          |                    |     |        |  |   |
| ***Liabilities***                               |   |     |               |     |   |   |   |
| Long-term debt                                  |   | $        | —   |     | $      | —   |   |
| Junior subordinated debt                        |   |     | 8,248,000          |     |   | 8,248,000 |   |
| Other liabilities                               |   |     | 106,546            |     |   | 72,310 |   |
|                                            |   |          |                    |     |        |  |   |
| Total liabilities                               |   |     | 8,354,546          |     |   | 8,320,310 |   |
|                                            |   |          |                    |     |        |  |   |
| ***Stockholders’ equity***                 |   |     |               |     |   |   |   |
| Preferred stock                                 |   |     | 993,112            |     |   | —   |   |
| Common stock                                    |   |     | 17,338,231         |     |   | 13,256,961 |   |
| Retained earnings                               |   |     | 13,216,891         |     |   | 9,564,875 |   |
| Accumulated other comprehensive income (loss)   |   |     | 154,396            |     |   | (323,192 | ) |
|                                            |   |          |                    |     |        |  |   |
| Total stockholders’ equity                 |   |     | 31,702,630         |     |   | 22,498,644 |   |
|                                            |   |          |                    |     |        |  |   |
| Total liabilities and stockholders’ equity |   | $        | 40,057,176         |     | $      | 30,818,954 |   |
|                                            |   |          |                    |     |        |  |   |

42

----

**Notes to Consolidated Financial Statements**

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

***Statements of Operations Years ended December 31, 2006 and 2005***

|                                                                                |   | **2006** |               | **2005** |   |
|-------------------------------------------------------------------------------------|--------|----------|--------------------|----------|--------|
|                                                                                |   |          |                    |     |        |  |   |
| ***Income***                                                                        |   |     |               |     |   |   |   |
| Loans and fees on loans                                                             |   | $        | 17,698             |     | $      | 144,750 |   |
| Investment securities, taxable                                                      |   |     | 38,665             |     |   | 45,149 |   |
| Investment securities, non-taxable                                                  |   |     | 5,000              |     |   | 5,000 |   |
| Net realized gains on sale of investment in mortgage banking   subsidiary           |   |     | 44,094             |     |   | 36,848 |   |
|                                                                                |   |          |                    |     |        |  |   |
| Total income                                                                        |   |     | 105,457            |     |   | 231,747 |   |
| ***Expenses***                                                                      |   |     |               |     |   |   |   |
| Salaries and employee benefits                                                      |   |     | 88,063             |     |   | —   |   |
| Professional fees                                                                   |   |     | 490                |     |   | 7,108 |   |
| Franchise tax                                                                       |   |     | 33,478             |     |   | 20,229 |   |
| Interest expense                                                                    |   |     | 663,746            |     |   | 513,806 |   |
| Amortization expense                                                                |   |     | 25,531             |     |   | 25,531 |   |
| Other expenses                                                                      |   |     | 18,535             |     |   | 39,507 |   |
|                                                                                |   |          |                    |     |        |  |   |
| Total expenses                                                                      |   |     | 829,843            |     |   | 606,181 |   |
|                                                                                |   |          |                    |     |        |  |   |
| Income (loss) before tax expense and equity in undistributed income   of subsidiary |   |     | (724,386           | )        |   | (374,434 | ) |
|                                                                                |   |          |                    |     |        |  |   |
| ***Federal income tax (expense) benefit***                                          |   |     | 129,093            |     |   | 193,939 |   |
| ***State income tax (expense)***                                                    |   |     | —   |     |   | 39,992 |   |
|                                                                                |   |          |                    |     |        |  |   |
| ***Total income tax (expense) benefit***                                            |   |     | 129,093            |     |   | 233,931 |   |
|                                                                                |   |          |                    |     |        |  |   |
| Income before equity in undistributed income of subsidiary                          |   |     | (595,293           | )        |   | (140,503 | ) |
| ***Equity in undistributed income of subsidiary***                                  |   |     | 4,247,309          |     |   | 3,175,876 |   |
|                                                                                |   |          |                    |     |        |  |   |
| Net income                                                                          |   | $        | 3,652,016          |     | $      | 3,035,373 |   |
|                                                                                |   |          |                    |     |        |  |   |

43

----

**Notes to Consolidated Financial Statements**

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

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

|                                                                 |   | **2006** |               | **2005** |   |
|----------------------------------------------------------------------|--------|----------|--------------------|----------|--------|
|                                                                 |   |          |                    |     |        |  |   |
| ***Cash flows from operating activities***                           |   |     |               |     |   |   |   |
| Net income                                                           |   | $        | 3,652,016          |     | $      | 3,035,373 |   |
| Adjustments:                                                         |   |     |               |     |   |   |   |
| Amortization                                                         |   |     | 24,000             |     |   | 24,000 |   |
| Stock-based compensation                                             |   |     | 88,063             |     |   | —   |   |
| Benefit of non-qualified stock option exercise                       |   |     | 82,038             |     |   | —   |   |
| Accretion of discount on securities, net of amortization of premiums |   |     | 1,531              |     |   | 1,530 |   |
| Deferred taxes                                                       |   |     | 427                |     |   | 42,418 |   |
| Increase in equity in undistributed income of subsidiary             |   |     | (4,247,309         | )        |   | (3,175,876 | ) |
| (Increase) decrease in other assets                                  |   |     | (362,008           | )        |   | (197,664 | ) |
| Increase (decrease) in other liabilities                             |   |     | 4,571              |     |   | (14,255 | ) |
|                                                                 |   |          |                    |     |        |  |   |
| Net cash provided (used) by operating activities                     |   |     | (756,671           | )        |   | (318,576 | ) |
|                                                                 |   |          |                    |     |        |  |   |
| ***Cash flows from investing activities***                           |   |     |               |     |   |   |   |
| Investment in subsidiary                                             |   |     | (4,529,514         | )        |   | —   |   |
| Issuance of long-term debt to subsidiary                             |   |     | —   |     |   | (4,000,000 | ) |
| Sales of investment securities                                       |   |     | —   |     |   | 1,000,000 |   |
| Net decrease (increase) in loans                                     |   |     | 382,696            |     |   | 3,163,545 |   |
|                                                                 |   |          |                    |     |        |  |   |
| Net cash provided (used) by   investing activities                   |   |     | (4,146,818         | )        |   | 163,545 |   |
|                                                                 |   |          |                    |     |        |  |   |
| ***Cash flows from financing activities***                           |   |     |               |     |   |   |   |
| Issuance of common stock                                             |   |     | 4,904,281          |     |   | 114,349 |   |
|                                                                 |   |          |                    |     |        |  |   |
| Net cash provided (used) by financing activities                     |   |     | 4,904,281          |     |   | 114,349 |   |
|                                                                 |   |          |                    |     |        |  |   |
| Increase (decrease) in cash and due from banks                       |   |     | 792                |     |   | (40,682 | ) |
| ***Cash and cash equivalents, beginning***                           |   |     | 127,943            |     |   | 168,625 |   |
|                                                                 |   |          |                    |     |        |  |   |
| ***Cash and cash equivalents, ending***                              |   | $        | 128,735            |     | $      | 127,943 |   |
|                                                                 |   |          |                    |     |        |  |   |

44

----

**Notes to Consolidated Financial Statements**

**Note 20.  Quarterly Data**

|                                                   |   | **Years   Ended December 31,** |   |
|--------------------------------------------------------|--------|--------------------------------|--------|
|                                                   |   |                                |   |
|                                                   |   | **2006**                       |   | **2005** |   |
|                                                   |   |                                |   |  |   |
|                                                   |   | **Fourth   Quarter**           |   | **Third   Quarter** |   | **Second   Quarter** |   | **First   Quarter** |   | **Fourth   Quarter** |   | **Third   Quarter** |   | **Second   Quarter** |   | **First   Quarter** |   |
|                                                   |   |                                |        |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |
| Interest income                                        |   | $                              | 7,031  |   | $ | 6,718 |   | $ | 6,116 |   | $ | 5,514 |   | $ | 5,233 |   | $ | 4,926 |   | $ | 4,310 |   | $ | 3,758 |   |
| Interest expense                                       |   |                           | (3,246 | ) |   | (2,943 | ) |   | (2,625 | ) |   | (2,412 | ) |   | (2,273 | ) |   | (2,008 | ) |   | (1,781 | ) |   | (1,473 | ) |
|                                                   |   |                                |        |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |
| Net interest income                                    |   |                           | 3,785  |   |   | 3,775 |   |   | 3,491 |   |   | 3,102 |   |   | 2,960 |   |   | 2,918 |   |   | 2,529 |   |   | 2,285 |   |
| Provision for loan losses                              |   |                           | (360   | ) |   | (470 | ) |   | (515 | ) |   | (105 | ) |   | (190 | ) |   | (700 | ) |   | (255 | ) |   | (225 | ) |
|                                                   |   |                                |        |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |
| Net interest income, after   provision for loan losses |   |                           | 3,425  |   |   | 3,305 |   |   | 2,976 |   |   | 2,997 |   |   | 2,770 |   |   | 2,218 |   |   | 2,274 |   |   | 2,060 |   |
| Non interest income                                    |   |                           | 654    |   |   | 677 |   |   | 602 |   |   | 648 |   |   | 576 |   |   | 590 |   |   | 568 |   |   | 534 |   |
| Non interest expenses                                  |   |                           | (2,539 | ) |   | (2,550 | ) |   | (2,210 | ) |   | (2,123 | ) |   | (1,920 | ) |   | (1,781 | ) |   | (1,696 | ) |   | (1,569 | ) |
|                                                   |   |                                |        |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |
| Income before income taxes                             |   |                           | 1,540  |   |   | 1,432 |   |   | 1,368 |   |   | 1,522 |   |   | 1,426 |   |   | 1,027 |   |   | 1,146 |   |   | 1,025 |   |
| Income tax expense                                     |   |                           | (549   | ) |   | (504 | ) |   | (480 | ) |   | (677 | ) |   | (519 | ) |   | (282 | ) |   | (419 | ) |   | (369 | ) |
|                                                   |   |                                |        |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |
| Net income                                             |   | $                              | 991    |   | $ | 928 |   | $ | 888 |   | $ | 845 |   | $ | 907 |   | $ | 745 |   | $ | 727 |   | $ | 656 |   |
|                                                   |   |                                |        |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |
| Earnings per common share:                             |   |                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic earnings per share                               |   | $                              | .21    |   | $ | .20 |   | $ | .19 |   | $ | .18 |   | $ | .21 |   | $ | .16 |   | $ | .16 |   | $ | .14 |   |
|                                                   |   |                                |        |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |
| Diluted earnings per share                             |   | $                              | .19    |   | $ | .20 |   | $ | .19 |   | $ | .18 |   | $ | .19 |   | $ | .16 |   | $ | .15 |   | $ | .14 |   |
|                                                   |   |                                |        |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |

45

----

**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, 2006 and 2005 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, 2006.  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, 2006 and 2005, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.

Galax, Virginia February 27, 2007

46

----

**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, 2006 and 2005 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 June 30, 2001.

The Company’s total assets were $399.6 million at December 31, 2006 as compared to $322.8 million at December 31, 2005. Total deposits at December 31, 2006 increased 20.8% to $327.4 million.  Total deposits were $271.0 million at December 31, 2005. The Bank used these resources primarily to fund new loans and purchase investment securities. The Bank’s net loans increased to $312.3 million at the end of 2006, an increase of $54.7 million over the 2005 amount of $257.6 million. Investment securities were $50.5 million and $33.2 million at December 31, 2006 and 2005, respectively.

In April 2006, the Company acquired The Bank of Heath Springs in Lancaster County, South Carolina.  Through this merger, the Bank was able to enter the South Carolina market.  The Bank also opened offices in Conway, South Carolina and in Southport, North Carolina during 2006.

The Company also completed a unit offering and a private offering during the year which provided an additional $4.5 million in capital.

**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, 2006 contain a summary of its significant accounting policies.  Management believes the Company’s policies with respect to the methodology for the determination of the allowance for loan losses and asset impairment judgments, such as the recoverability of intangible assets, involve a higher degree of complexity and require management to make difficult and subjective judgments that often require assumptions or estimates about highly uncertain matters.  Accordingly, the Company considers the policies related to those areas to be critical.

The allowance for loan losses is an estimate of the losses that may be sustained in the Company’s loan portfolio.  The allowance is based on two basic principles of accounting: **(i)** Statement of Financial Accounting Standards (“SFAS”) No. 5, *Accounting for Contingencies*, which requires that losses be accrued when they are probable of occurring and estimable, and **(ii)** SFAS No. 114, *Accounting by Creditors for Impairment of a Loan*, which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market, and the loan balance.

47

----

**Management’s Discussion and Analysis**

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

Accounting for intangible assets is as prescribed by SFAS No. 142, *Goodwill and Other Intangible Assets*.  The Company accounts for recognized intangible assets based on their estimated useful lives.  Intangible assets with finite useful lives are amortized while intangible assets with an indefinite useful life are not amortized.  Currently, the Company’s recognized intangible assets consist primarily of purchased core deposit intangible assets, having estimated useful lives of 10 years, and are being amortized.  The useful life is the period over which the assets are expected to contribute directly or indirectly to future cash flows.  Estimated useful lives of intangible assets are based on an analysis of pertinent factors, including (as applicable):

|   | • | the expected use of the   asset;                                                                                                                               |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | • | the expected useful life   of another asset or group of assets to which the useful life of the   intangible asset may relate;                                  |
|   | • | any legal, regulatory, or   contractual provisions that may limit the useful life;                                                                             |
|   | • | any legal, regulatory, or   contractual provisions that enable renewal and extension of the asset’s legal   or contractual life without substantial cost; |
|   | • | the effects of   obsolescence, demand, competition, and other economic factors; and                                                                            |
|   | • | the level of maintenance   expenditures required to obtain the expected future cash flows from the   asset.                                                    |

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

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

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

Intangible assets that are not subject to amortization are reviewed for impairment in accordance with SFAS No. 121 and tested annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired.  The impairment test consists of a comparison of the fair value of the intangible asset with its carrying amount.  If the carrying amount of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.  After an impairment loss is recognized, the adjusted carrying amount of the intangible asset becomes its new accounting basis.  Subsequent reversal of a previously recognized impairment loss is not allowed. Based on the aforementioned testing, the Company has determined that its recorded intangible assets are not impaired.

48

----

**Management’s Discussion and Analysis**

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

|                                            |   | **Periods   Ended December 31,** |    |
|-------------------------------------------------|--------|----------------------------------|---------|
|                                            |   |                                  |    |
|                                            |   | **2006**                         |    | **2005** |   | **2004** |   |
|                                            |   |                                  |    |  |   |  |   |
|                                            |   | **Average   Balance**            |    | **Interest   Income/   Expenses** |   | **Yield/   Cost** |   | **Average   Balance** |   | **Interest   Income/   Expenses** |   | **Yield/   Cost** |   | **Average   Balances** |   | **Interest   Income/   Expenses** |   | **Yield/   Cost** |   |
|                                            |   |                                  |         |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |
| **Interest-earning   assets:**                  |   |                             |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Investment securities                           |   | $                                | 46,561  |   | $ | 2,526 |   |   | 5.43 | % | $ | 31,257 |   | $ | 1,435 |   |   | 4.59 | % | $ | 29,068 |   | $ | 1,270 |   |   | 4.37 | % |
| Federal funds sold                              |   |                             | 4,630   |   |   | 226 |   |   | 4.88 | % |   | 13,595 |   |   | 436 |   |   | 3.21 | % |   | 2,543 |   |   | 33 |   |   | 1.30 | % |
| Deposits with banks                             |   |                             | 897     |   |   | 42 |   |   | 4.68 | % |   | 889 |   |   | 27 |   |   | 3.03 | % |   | 614 |   |   | 9 |   |   | 1.47 | % |
| Loans, net1,2                                   |   |                             | 279,625 |   |   | 22,585 |   |   | 8.08 | % |   | 238,579 |   |   | 16,330 |   |   | 6.84 | % |   | 168,757 |   |   | 10,138 |   |   | 6.01 | % |
|                                            |   |                                  |         |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |
| Total interest-earning assets                   |   |                             | 331,713 |   |   | 25,379 |   |   |   |   |   | 284,320 |   |   | 18,228 |   |   |   |   |   | 200,982 |   |   | 11,450 |   |   |   |   |
|                                            |   |                                  |         |   |  |  |   |   |   |   |  |  |   |  |  |   |   |   |   |  |  |   |  |  |   |   |   |   |
| Yield on average interest- earning assets       |   |                             |    |   |   |   |   |   | 7.65 | % |   |   |   |   |   |   |   | 6.41 | % |   |   |   |   |   |   |   | 5.70 | % |
| **Noninterest-earning   assets:**               |   |                             |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash                                            |   |                             | 6,687   |   |   |   |   |   |   |   |   | 5,704 |   |   |   |   |   |   |   |   | 4,545 |   |   |   |   |   |   |   |
| Premises and equipment                          |   |                             | 5,395   |   |   |   |   |   |   |   |   | 3,397 |   |   |   |   |   |   |   |   | 3,211 |   |   |   |   |   |   |   |
| Interest receivable and other                   |   |                             | 12,880  |   |   |   |   |   |   |   |   | 8,960 |   |   |   |   |   |   |   |   | 8,297 |   |   |   |   |   |   |   |
|                                            |   |                                  |         |   |   |   |   |   |   |   |  |  |   |   |   |   |   |   |   |  |  |   |   |   |   |   |   |   |
| Total noninterest-earning assets                |   |                             | 24,962  |   |   |   |   |   |   |   |   | 18,061 |   |   |   |   |   |   |   |   | 16,053 |   |   |   |   |   |   |   |
|                                            |   |                                  |         |   |   |   |   |   |   |   |  |  |   |   |   |   |   |   |   |  |  |   |   |   |   |   |   |   |
| Total assets                                    |   | $                                | 356,675 |   |   |   |   |   |   |   | $ | 302,381 |   |   |   |   |   |   |   | $ | 217,035 |   |   |   |   |   |   |   |
|                                            |   |                                  |         |   |   |   |   |   |   |   |  |  |   |   |   |   |   |   |   |  |  |   |   |   |   |   |   |   |
| **Interest-bearing   liabilities:**             |   |                             |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                 |   | $                                | 27,404  |   |   | 206 |   |   | .75 | % | $ | 17,803 |   |   | 130 |   |   | .73 | % | $ | 14,177 |   |   | 72 |   |   | .51 | % |
| Savings deposits                                |   |                             | 69,129  |   |   | 2,093 |   |   | 3.03 | % |   | 52,562 |   |   | 1,091 |   |   | 2.08 | % |   | 31,308 |   |   | 378 |   |   | 1.21 | % |
| Time deposits                                   |   |                             | 168,532 |   |   | 7,189 |   |   | 4.27 | % |   | 158,227 |   |   | 5,093 |   |   | 3.22 | % |   | 104,973 |   |   | 2,554 |   |   | 2.43 | % |
| Short-term borrowings                           |   |                             | 5,142   |   |   | 226 |   |   | 4.40 | % |   | 3,618 |   |   | 76 |   |   | 2.11 | % |   | 6,976 |   |   | 41 |   |   | .59 | % |
| Long-term debt                                  |   |                             | 25,389  |   |   | 1,512 |   |   | 5.96 | % |   | 24,282 |   |   | 1,146 |   |   | 4.72 | % |   | 22,262 |   |   | 721 |   |   | 3.24 | % |
|                                            |   |                                  |         |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |
| Total interest-bearing liabilities              |   |                             | 295,596 |   |   | 11,226 |   |   |   |   |   | 256,492 |   |   | 7,536 |   |   |   |   |   | 179,696 |   |   | 3,766 |   |   |   |   |
|                                            |   |                                  |         |   |  |  |   |   |   |   |  |  |   |  |  |   |   |   |   |  |  |   |  |  |   |   |   |   |
| Cost of average interest- bearing liabilities   |   |                             |    |   |   |   |   |   | 3.80 | % |   |   |   |   |   |   |   | 2.94 | % |   |   |   |   |   |   |   | 2.10 | % |
| **Noninterest-bearing   liabilities:**          |   |                             |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                 |   |                             | 33,259  |   |   |   |   |   |   |   |   | 24,402 |   |   |   |   |   |   |   |   | 18,704 |   |   |   |   |   |   |   |
| Interest payable and other                      |   |                             | 1,875   |   |   |   |   |   |   |   |   | 1,233 |   |   |   |   |   |   |   |   | 694 |   |   |   |   |   |   |   |
|                                            |   |                                  |         |   |   |   |   |   |   |   |  |  |   |   |   |   |   |   |   |  |  |   |   |   |   |   |   |   |
| Total noninterest- bearing liabilities          |   |                             | 35,134  |   |   |   |   |   |   |   |   | 25,635 |   |   |   |   |   |   |   |   | 19,398 |   |   |   |   |   |   |   |
|                                            |   |                                  |         |   |   |   |   |   |   |   |  |  |   |   |   |   |   |   |   |  |  |   |   |   |   |   |   |   |
| Total liabilities                               |   |                             | 330,730 |   |   |   |   |   |   |   |   | 282,127 |   |   |   |   |   |   |   |   | 199,094 |   |   |   |   |   |   |   |
| **Stockholders’   equity**                 |   |                             | 25,945  |   |   |   |   |   |   |   |   | 20,254 |   |   |   |   |   |   |   |   | 17,941 |   |   |   |   |   |   |   |
|                                            |   |                                  |         |   |   |   |   |   |   |   |  |  |   |   |   |   |   |   |   |  |  |   |   |   |   |   |   |   |
| Total liabilities and stockholders’ equity |   | $                                | 356,675 |   |   |   |   |   |   |   | $ | 302,381 |   |   |   |   |   |   |   | $ | 217,035 |   |   |   |   |   |   |   |
|                                            |   |                                  |         |   |   |   |   |   |   |   |  |  |   |   |   |   |   |   |   |  |  |   |   |   |   |   |   |   |
| **Net   interest income**                       |   |                             |    |   | $ | 14,153 |   |   |   |   |   |   |   | $ | 10,692 |   |   |   |   |   |   |   | $ | 7,684 |   |   |   |   |
|                                            |   |                             |    |   |  |  |   |   |   |   |   |   |   |  |  |   |   |   |   |   |   |   |  |  |   |   |   |   |
| **Net yield   on interest-earning assets**      |   |                             |    |   |   |   |   |   | 4.27 | % |   |   |   |   |   |   |   | 3.76 | % |   |   |   |   |   |   |   | 3.82 | % |
|                                            |   |                             |    |   |   |   |   |  |  |   |   |   |   |   |   |   |  |  |   |   |   |   |   |   |   |  |  |   |