UNITED
STATES

SECURITIES
AND EXCHANGE COMMISSION

WASHINGTON,
D.C. 20549



FORM
10-K





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





For the fiscal
year ended December 31, 2010



OR



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



For the transition
period from _______ to _______.



COMMISSION FILE NUMBER 001-33046



WACCAMAW BANKSHARES, INC.

(Exact name of registrant as specified
in its charter)



|NORTH CAROLINA                  |  | 52-2329563         
|------------------------------- |  | -------------------
|(State or Other Jurisdiction of |  | (I.R.S. Employer   
|Incorporation or Organization)  |  | Identification No.)



|110 nORTH j. k. pOWELL
    bOULEVARD     |  |           
|---------------------------------------- |  | ----------
|WHITEVILLE, North Carolina               |  | 28472     
|(Address of Principal Executive Offices) |  | (Zip Code)



Registrant’s telephone number,
including area code: (910) 641-0044



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



None



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



COMMON
STOCK, NO PAR VALUE








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



Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ̈YesxNo



Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

 ̈YesxNo



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

 ̈Yes£No



Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-Kx



Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act. (Check one):



|Large accelerated filer  ̈                                                     |  | Accelerated filer  ̈        
|----------------------------------------------------------------------------- |  | ---------------------------
|                                                                              |  |                            
|Non-accelerated filer (Do not check if
        a smaller reporting company)  ̈ |  | Smaller reporting company x



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

 ̈YesxNo



The aggregate market value of the voting
and non-voting common equity held by non-affiliates of the Registrant, based on the closing sales price of the Registrant’s
Common Stock reported on the NASDAQ Global Market on June 30, 2010 was $7,721,205. Solely for purposes of this calculation, the
term “affiliate” includes all directors and executive officers of the Registrant and all beneficial owners of more
than 5% of the Registrant’s voting securities.



As of February 27, 2012, the Registrant
had outstanding 7,466,224 shares of Common Stock.



Documents incorporated by reference:

None















PART
I



ITEM
1 – BUSINESS



Note Regarding Forward-Looking Statements



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



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



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



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



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



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



| | · | recent and future economic stimulus and recovery actions by the government;
| | - | ---------------------------------------------------------------------------



| | · | our ability to control operating costs and expenses;
| | - | ----------------------------------------------------



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



| | · | Asset/liability matching risks and liquidity risks;
| | - | ---------------------------------------------------



| | · | our ability to manage loan delinquency rates;
| | - | ---------------------------------------------



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



| | · | costs and effects of litigation;
| | - | --------------------------------



| | · | increased competitive pressures in the banking industry;
| | - | --------------------------------------------------------



| | · | changes in consumer spending, borrowing and savings habits;
| | - | -----------------------------------------------------------



| | · | legislative or regulatory changes that adversely affect our business;
| | - | ---------------------------------------------------------------------



| | · | adverse changes in the securities markets;
| | - | ------------------------------------------



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





1







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



| | · | changes in our borrowers’ performance on loans;
| | - | -----------------------------------------------



| | · | Changes in critical accounting policies and judgments;
| | - | ------------------------------------------------------



| | · | Changes in the equity and debt securities markets;
| | - | --------------------------------------------------



| | · | Fluctuations of our stock price;
| | - | --------------------------------



| | · | Success and timing of our business strategies;
| | - | ----------------------------------------------



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



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



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



General



Waccamaw Bankshares, Inc. (the “Company”)
was formed during 2001 as a bank holding company chartered in the State of North Carolina. On July 1, 2001, the Company acquired
all the outstanding shares of Waccamaw Bank (the “Bank”) in a tax-free reorganization. To date, the only business activities
of the Company consist of the activities of the Bank.



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



Regulatory Actions



Effective June 14, 2010, the Company
and the Bank entered into a Written Agreement (the “Agreement”) with the Federal Reserve Bank of Richmond (the “Reserve
Bank”) and the North Carolina Commissioner of Banks (the “Commissioner”).



The Agreement is a formal corrective
action pursuant to which the Bank has agreed to address specific issues set forth below, through the adoption and implementation
of procedures, plans and policies designed to enhance the safety and soundness of the Bank.



Among other things, the Agreement requires the Bank to:



| | • | Retain an independent consultant acceptable to the Reserve Bank and the Commissioner to conduct a review of the effectiveness
of the Bank’s corporate governance, board and management structure, to assess staffing needs and to prepare a written report
of findings and recommendations;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Formulate a plan to strengthen board oversight of the management and operations of the Bank;
| | - | --------------------------------------------------------------------------------------------



2







| | • | Formulate and implement a plan to strengthen credit risk management practices;
| | - | ------------------------------------------------------------------------------



| | • | Formulate a plan for the ongoing review and grading of the Bank’s loan portfolio by a qualified independent party or
by qualified staff that is independent of the Bank’s lending function;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Develop a plan to maintain sufficient capital at the Company, on a consolidated basis;
| | - | --------------------------------------------------------------------------------------



| | • | Not pay cash dividends without the prior written consent of the Reserve Bank and the Commissioner; and
| | - | ------------------------------------------------------------------------------------------------------



| | • | Not renew or accept any new brokered deposits.
| | - | ----------------------------------------------



The Company must furnish periodic progress
reports to the Reserve Bank and the Commissioner regarding its compliance with the Agreement. The Agreement will remain in effect
until modified or terminated by the Reserve Bank and the Commissioner.





Effective November 29, 2011, the Company and
the Bank entered into a Prompt Corrective Action Directive (the “Directive”) with the Board of Governors of the Federal
Reserve System (the “Board of Governors”).



The Directive is a formal corrective action
in which the Board of Governors has determined that, as of October 30, 2011, Waccamaw Bank is critically undercapitalized, as defined
in section 208.43(b)(5) of Regulation H of the Board of Governors.



Among other things, the Directive requires the Bank no later than
January 6, 2012 to:



| | • | Increase the Bank’s equity through the sale of shares or contributions to surplus in an amount
sufficient to make the Bank adequately capitalized as defined in section 208.43(b)(2) of Regulation H of the Board of Governors;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Enter into and close a contract to be acquired by a depository institution holding company or combine with another insured
depository institution, closing under which contract is conditioned only on the receipt of necessary regulatory approvals, the
continued accuracy of customary representations and warranties and the performance of customary pre-closing covenants;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Take other necessary measures to make the Bank adequately capitalized;
| | - | ----------------------------------------------------------------------



| | • | Restrict the making of any capital distributions, including, but not limited to, the payment of dividends;
| | - | ----------------------------------------------------------------------------------------------------------



| | • | Restrict the payment of bonuses to senior executive officers and increases in compensation of such officers; and
| | - | ----------------------------------------------------------------------------------------------------------------



| | • | Restrict certain activities, including, but not limited to, making any material change in accounting methods and engaging in
any covered transaction, as defined in section 23A of the Federal Reserve Act, without the prior written approval of the FDIC.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Due
to the recent favorable ruling by the Federal Reserve Board of Governors allowing a portion of the preferred stock to be
regulatory capital, the Bank’s capital status at September 30, 2011, changed from critically undercapitalized to
significantly undercapitalized. Although the Directive has not been terminated, the Company continues to take measures to
make the Bank adequately capitalized through the sale of branches and selling stock through a private stock
offering.





3







Market
Area



The Company’s primary service
area is Columbus, Brunswick, Bladen and New Hanover Counties of North Carolina and Lancaster and Horry Counties of South Carolina.
The principal business of the Company is to provide individual and commercial banking services in its main service
area. These services include demand and time deposits as well as commercial, installment, mortgage and other consumer lending services
that are traditionally available from community banks.



Columbus County is located in the southeastern
portion of North Carolina near the South Carolina border. Whiteville, the largest city in the county, is approximately 45 miles
west of Wilmington, North Carolina, 150 miles southeast of Charlotte, North Carolina, and 45 miles north of Myrtle Beach, South
Carolina. These cities all have national or regional airports.



Brunswick County is a
coastal county adjacent to Columbus County to the southeast and also borders South Carolina. Shallotte, the largest city in
the county, is approximately 35 miles southwest of Wilmington and 35 miles northeast of Myrtle Beach.



New Hanover County is a coastal county
and adjacent to Brunswick County to the north. Wilmington, the largest city in the county, has a diversified economy which includes
shipping, manufacturing, medical and retail industries.



Bladen County is rural county
adjacent to Columbus County to the north. Elizabethtown, the largest city in the county, is approximately 50 miles northwest
of Wilmington and 80 miles northwest of Myrtle Beach.



Lancaster County is a rural
county located near the central region of South Carolina near the North Carolina border and approximately 40 miles south of
Charlotte, North Carolina and fifty miles north of Columbia. These cities all have national or regional airports.



Horry County is located in the northeastern
portion of South Carolina near the North Carolina border. Myrtle Beach, the largest city in the county, has a diversified economy
which includes tourism, manufacturing, medical and retail industries.





The principal components of the economy in
our market area are manufacturing, agriculture and tourism. The coastal markets are real estate driven, as demand for property
along the coastal regions will continue to grow as the economy improves. Manufacturing employment is concentrated in the wood products
and textile industries. The primary agriculture products are tobacco and hogs.





Competition



The primary business activity of the
Company is commercial banking. This activity is conducted by the Bank which is the subsidiary of the Company.



4







Banking is a highly
competitive industry. The principal areas and methods of competition in the banking industry are the services that are
offered, the pricing of those services, the convenience and availability of the services and the degree of expertise and
personal manner with which those services are offered. The Bank encounters strong competition from other commercial banks
operating in the Bank’s market area, including several of the largest North Carolina banks. At June 30, 2010 (the
most current data provided by the FDIC Deposit Market Share Report prior to December 31, 2010), there were 14 offices of 6 other
commercial banks operating in Columbus County, 44 offices of 12 other commercial banks operating in Brunswick County, 78
offices of 20 other commercial banks operating in New Hanover County, 7 offices of 5 other commercial banks operating in
Bladen County, 11 offices of 6 other commercial banks operating in Lancaster County and 130 offices of 25 other commercial
banks operating in Horry County.



In the conduct of certain aspects of its business, the Bank also competes with credit
unions, money market mutual funds, and other non-bank financial institutions, some of which are not subject to the same
degree of regulation as the Bank. Many of these competitors have substantially greater resources and lending abilities than
the Company and offer certain services, such as investment banking, trust and international banking services that the Company
cannot or will not provide.



Supervision
and Regulation



The Company and the Bank
are subject to state and federal banking laws and regulations. These impose specific requirements and restrictions and
provide for general regulatory oversight with respect to virtually all aspects of operations. These laws and regulations
are generally intended to protect depositors, not stockholders. To the extent that the following summary describes statutory
or regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory
provisions. Any change in applicable laws or regulations may have a material effect on the business and prospects of the
Company. Beginning with the enactment of the Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") and following with the Federal Deposit Insurance Corporation Improvement Act ("FDICIA") in
1991, the Gramm-Leach-Bliley Act in 1999, and the Dodd-Frank Act in 2010, numerous additional regulatory requirements have
been placed on the banking industry in the past several years, and additional changes have been proposed. The operations of
the Company and the Bank may be affected by legislative changes and the policies of various regulatory authorities. The
Company is unable to predict the nature or the extent of the effect on its business and results of operations that fiscal or
monetary policies, economic control, or new federal or state legislation may have in the future.



Federal Bank Holding Company Regulation
(Financial Holding Company Regulations)



The Company is a bank holding company
within the meaning of the Gramm-Leach-Bliley Act of 1999 (the "GLB Act"). Under the GLB Act, which became effective on
March 11, 2000, the types of activities in which a bank holding company may engage were significantly expanded. Subject to various
limitations, the GLB Act generally permits a bank holding company to elect to become a "financial holding company." A
financial holding company may affiliate with securities firms and insurance companies and engage in other activities that are "financial
in nature." Among the activities that are deemed "financial in nature" are, in addition to traditional lending activities,
securities underwriting, dealing in or making a market in securities, sponsoring mutual funds and investment companies, insurance
underwriting and agency activities, certain merchant banking activities and activities that the Federal Reserve considers to be
closely related to banking.



A bank holding company may become a
financial holding company under the GLB Act if each of its subsidiary banks is "well capitalized" under the Federal Deposit
Insurance Corporation Improvement Act prompt corrective action provisions, is well managed and has at least a satisfactory rating
under the Community Reinvestment Act. In addition, the bank holding company must file a declaration with the Federal Reserve if
it falls out of compliance with these requirements and may be required to cease engaging in some of its activities.



Under the GLB Act, the Federal Reserve
serves as the primary "umbrella" regulator of financial holding companies, with supervisory authority over each parent
company and limited authority over its subsidiaries. Expanded financial activities of financial holding companies generally will
be regulated according to the type of such financial activity, banking activities by banking regulators, securities activities
by securities regulators and insurance activities by insurance regulators. The GLB Act also imposes additional restrictions and
heightened disclosure requirements regarding information collected by financial institutions. The Company is not a financial holding
company.



5







The Company is subject to the Bank Holding
Company Act (the "BHCA"). Under the BHCA, the Company is subject to periodic examination by the Federal Reserve and is
required to file periodic reports of its operations and such other information as the Federal Reserve may require.



“Investments, Control, and
Activities.” With certain limited exceptions, the BHCA requires every holding company to obtain the prior approval of
the Federal Reserve before (i) acquiring substantially all the assets of any bank, (ii) acquiring direct or indirect ownership
or control of any voting shares of any bank if after such an acquisition it would own or control more than 5% of the voting shares
of such bank (unless it already owns or controls the majority of such shares), or (iii) merging or consolidating with another holding
company.



In addition, and subject to certain
exceptions, the BHCA and the Change in Bank Control Act, together with regulations thereunder, require Federal Reserve approval
(or, depending on the circumstances, no notice of disapproval) prior to any person or company acquiring "control" of
a holding company, such as the Company. Control is conclusively presumed to exist if an individual or company acquires 25% or more
of any class of voting securities of the holding company. In the case of the Company, under Federal Reserve regulations there will
be a rebuttable presumption of control if a person acquires at least 10% of the outstanding shares of any class of voting securities.



“Source of Strength; Cross-Guarantee.”
In accordance with Federal Reserve policy, the Company is expected to act as a source of financial strength to the Bank and to
commit resources to support the Bank in circumstances in which the Company might not otherwise do so. Under the BHCA, the Federal
Reserve may require a holding company to terminate any activity or relinquish control of a nonbank subsidiary (other than a nonbank
subsidiary of a bank) upon the Federal Reserve's determination that such activity or control constitutes a serious risk to the
financial soundness or stability of any subsidiary depository institution of the bank holding company. Further, federal bank regulatory
authorities have additional discretion to require a holding company to divest itself of any bank or nonbank subsidiary if the agency
determines that divestiture may aid the depository institution's financial condition. The Bank may be required to indemnify, or
cross-guarantee, the FDIC against losses it incurs with respect to any other bank which the Company controls, which in effect makes
the Company's equity investments in healthy bank subsidiaries available to the FDIC to assist any failing or failed bank subsidiary
of the Company. The Bank is the only bank currently controlled by the Company.



The Bank



The Company is the holding company
for the Bank, which is a North Carolina banking corporation. The Bank is subject to examination and supervision by the
Federal Reserve and the North Carolina Commissioner of Banks (the “Commissioner”). The Federal Reserve monitors
the Bank’s compliance with federal statutes,  including the Community Reinvestment Act of 1977 and the Depository
Institution Management Interlocks Act. The Federal Reserve has broad enforcement authority to prevent the continuance or
development of unsafe and unsound banking practices, including the issuance of cease and desist orders and the removal of
officers and directors. The Federal Reserve must approve the establishment of branch offices, conversions, and mergers,
assumptions of deposit liabilities between insured and uninsured institutions, and the acquisition or establishment of
certain subsidiary corporations. The Federal Reserve can prevent capital or surplus diminution in such transactions where the
deposit accounts of the resulting, continuing or assuring bank are federally insured.



The Bank is subject to capital requirements
and limits on activities established by the Federal Reserve. Under the capital regulations, the Bank generally is required to maintain
Tier 1 risk-based capital, in such terms as defined therein, of 4.0% and total risk-based capital of 8.0%. In addition, the Bank
is required to provide a minimum leverage ratio of Tier 1 capital to adjusted average quarterly assets (leverage ratio) equal to
3.0%, plus an additional cushion of one to two percent if the Bank has less than the highest regulatory rating. The Bank is not
permitted to engage in any activity not permitted for a national bank unless (i) it is in compliance with its capital requirements
and (ii) the FDIC determines that the activity would not pose a risk to the deposit insurance fund. With certain exceptions, the
Bank also is not permitted to acquire equity investments of a type, or in an amount, not permitted for a national bank.



6







Federal banking law requires the federal
banking agencies to take “prompt corrective action” in respect of insured depository institutions that do not meet
minimum capital requirements. There are five tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,”
“significantly undercapitalized” and “critically undercapitalized,” as defined by regulations promulgated
by the FDIC and the other federal depository institution regulatory agencies. A depository institution is well capitalized if it
significantly exceeds the minimum level required by regulation for each relevant capital measure, adequately capitalized if it
meets each such measure, undercapitalized if it fails to meet any such measure, significantly undercapitalized if it is below such
measures, and critically undercapitalized if it fails to meet any critical capital level set forth in the regulations. A depository institution may be deemed to be in a capitalization category that is lower than is indicated by its
actual capital position if it receives an unsatisfactory examination rating.



Dodd-Frank Act



On July 21, 2010, the Dodd-Frank
Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law.  The
Dodd-Frank Act has resulted in dramatic changes across the financial regulatory system, some of which become effective
immediately and some of which will not become effective until various future dates.  Implementation of the
Dodd-Frank Act will require many new rules to be made by various federal regulatory agencies over the next several
years.  Uncertainty remains until final rulemaking is complete as to the ultimate impact of the Dodd-Frank Act,
which could have a material adverse impact either on the financial services industry as a whole or on Waccamaw Bank’s
business, results of operations, and financial condition.  Provisions in the legislation that affect deposit
insurance assessments, payment of interest on demand deposits, and interchange fees could increase the costs associated with
deposits and place limitations on certain revenues those deposits may generate.  The Dodd-Frank Act includes
provisions that, among other things, will:



| | · | Centralize responsibility for consumer
financial protection by creating a new agency, the Bureau of Consumer Financial Protection, responsible for implementing, examining,
and enforcing compliance with federal consumer financial laws.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Create the Financial Stability Oversight
Council that will recommend to the Federal Reserve increasingly strict rules for capital, leverage, liquidity, risk management
and other requirements as companies grow in size and complexity.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Provide mortgage reform provisions regarding
a customer’s ability to repay, restricting variable-rate lending by requiring that the ability to repay variable-rate loans
be determined by using the maximum rate that will apply during the first five years of a variable-rate loan term, and making more
loans subject to provisions for higher cost loans, new disclosures, and certain other revisions.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Change the assessment base for federal
deposit insurance from the amount of insured deposits to consolidated assets less tangible capital, eliminate the ceiling on the
size of the Deposit Insurance Fund (“DIF”), and increase the floor on the size of the DIF, which generally will require
an increase in the level of assessments for institutions with assets in excess of $10 billion.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Make permanent the $250,000 limit for
federal deposit insurance and provide unlimited federal deposit insurance until January 1, 2013 for noninterest-bearing demand
transaction accounts at all insured depository institutions.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Implement corporate governance revisions,
including with regard to executive compensation, which apply to all public companies, not just financial institutions.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Repeal the federal prohibitions on the
payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transactional and
other accounts.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Amend the Electronic Fund Transfer Act
(“EFTA”) to, among other things, give the Federal Reserve the authority to establish rules regarding interchange fees
charged for electronic debit transactions by payment card issuers having assets over $10 billion and to enforce a new statutory
requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Transfer regulatory and rulemaking authority
over federal savings banks from the Office of Thrift Supervision (“OTS”) to the Office of the Comptroller of the Currency
effective July 21, 2011, and abolish the OTS effective October 19, 2011. In addition, the Board of Governors of the Federal Reserve
System will supervise and regulate all savings and loan holding companies that were formerly regulated by the OTS.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



7







Insurance of Deposit Accounts.
The Bank’s deposits are insured up to limits set by the Deposit Insurance Fund (the “DIF”) of the FDIC. The DIF
was formed on March 31, 2006, upon the merger of the Bank Insurance Fund and the Savings Insurance Fund in accordance with the
Federal Deposit Insurance Reform Act of 2005 (the “Reform Act”). The Reform Act established a range of 1.15% to 1.50%
within which the FDIC may set the Designated Reserve Ratio (the “reserve ratio”). The Dodd-Frank
Act gave the FDIC greater discretion to manage the DIF, raised the minimum DIF reserve ratio to 1.35%, and removed the upper limit
of 1.50%. In October 2010, the FDIC adopted a restoration plan to ensure that the DIF reserve ratio reaches 1.35% by September
30, 2020, as required by the Dodd-Frank Act. The FDIC also proposed a comprehensive, long-range plan for management of the DIF.
As part of this comprehensive plan, the FDIC has adopted a final rule to set the reserve ratio at 2.0%.



On October 3, 2008, the
Emergency Economic Stabilization Act of 2008 was enacted and temporarily raised the standard limit of FDIC deposit insurance
coverage from $100,000 to $250,000 per depositor. On May 20, 2009, the Helping Families Save Their Homes Act extended the
temporary increase in the standard maximum deposit insurance amount (SMDIA) to per depositor through December 31, 2013. On
July 21, 2010, the Dodd-Frank Act permanently increased FDIC insurance coverage to $250,000 per depositor.



The FDIC imposes a
risk-based deposit insurance premium assessment on member institutions in order to maintain the DIF. This assessment system
was amended by the Reform Act and further amended by the Dodd-Frank Act. Under this system, as amended, the assessment rates
for an insured depository institution vary according to the level of risk incurred in its activities. To arrive at an
assessment rate for a banking institution, the FDIC places it in one of four risk categories determined by reference to its
capital levels and supervisory ratings. In addition, in the case of those institutions in the lowest risk category, the FDIC
further determines its assessment rate based on certain specified financial ratios or, if applicable, its long-term debt
ratings. The assessment rate schedule can change from time to time, at the discretion of the FDIC, subject to certain limits.
The Dodd-Frank Act changed the methodology for calculating deposit insurance assessments from the amount of an insured
institution’s domestic deposits to its total assets minus tangible capital. On February 7, 2011, the FDIC issued a new
regulation implementing these revisions to the assessment system. The regulation became effective on April 1, 2011.



On October 14, 2008, the FDIC announced
the Temporary Liquidity Guarantee Program (the “TLGP”) to strengthen confidence and encourage liquidity in the banking
system. The TLGP consists of two components: a temporary guarantee of newly-issued senior unsecured debt named the Debt Guarantee
Program, and a temporary unlimited guarantee of funds in noninterest-bearing transaction accounts at FDIC insured institutions
named the Transaction Account Guarantee Program (“TAG”). All newly-issued senior unsecured debt will be charged an
annual assessment of up to 100 basis points (depending on term) multiplied by the amount of debt issued and calculated through
the date of that debt or June 30, 2012, whichever is earlier. The Bank elected to opt out of the Debt Guarantee Program and elected
to participate in the TAG Program. On August 26, 2009, the FDIC adopted a final rule extending the TAG portion of the TLGP for
six months through June 30, 2010 and it was extended again through December 31, 2010. The Bank elected to continue to participate
in the TAG Program through December 31, 2010. On July 21, 2010, the Dodd-Frank Act extended unlimited FDIC insurance coverage to
noninterest-bearing transaction deposit accounts through December 31, 2012. It does not apply to accounts earning any level of
interest with the exception of Interest on Lawyers’ Trust Accounts (“IOLTA”) accounts. This unlimited FDIC insurance
coverage is applicable to all applicable deposits at any FDIC-insured financial institution. Therefore, there is no additional
FDIC insurance surcharge related to this coverage after December 31, 2010.



During 2009, the FDIC took several measures
aimed at replenishing the DIF. On May 22, 2009, the FDIC imposed a 5 basis point special assessment on each insured institution’s
assets minus Tier 1 capital as of June 30, 2009. On November 17, 2009, the FDIC voted to require insured institutions to prepay
their estimated quarterly risk-based assessments for the fourth quarter of 2009, as well as all of 2010, 2011, and 2012. For purposes
of determining the prepayment, the FDIC used an institution’s assessment rate in effect on September 30, 2009.



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



Insurance of deposits may be terminated
by the FDIC upon a finding that an insured institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.



8







Incentive Compensation Policies and
Restrictions.In July 2010, the federal banking agencies issued guidance which applies to all banking
organizations supervised by the agencies. Pursuant to the guidance, to be consistent with safety and soundness principles, a banking
organization’s incentive compensation arrangements should: (1) provide employees with incentives that appropriately
balance risk and reward; (2) be compatible with effective controls and risk management; and (3) be supported by strong
corporate governance including active and effective oversight by the banking organization’s board of directors. Monitoring
methods and processes used by a banking organization should be commensurate with the size and complexity of the organization and
its use of incentive compensation.



Federal Reserve Policies.The
earnings of the Bank are affected significantly by the policies of the Federal Reserve Board, a federal agency which regulates
the money supply in order to mitigate recessionary and inflationary pressures. Among the techniques used to implement these objectives
are open market transactions in United States government securities, changes in the rate paid by banks on bank borrowings, and
changes in the reserve requirement against bank deposits. These techniques are used in varying combinations to influence overall
growth and distribution of bank loans, investments, and deposits, and their use may also affect interest rates charged on loans
or paid on deposits.



The monetary
policies of the Federal Reserve Board have had a significant effect on the operating results of commercial banks in the past and
are expected to continue to do so in the future. In view of changing conditions in the national economy and money markets, as well
as the effect of actions by monetary and fiscal authorities, no prediction can be made as to possible future changes in interest
rates, deposit levels, loan demand or the business and earnings of the Bank.



State Regulation.The Bank is chartered by the State of
North Carolina and is subject to extensive supervision and regulation by the Commissioner. The Commissioner enforces state laws
that set specific requirements for bank capital, the payment of dividends, loans to officers and directors, record keeping, and
types and amounts of loans and investments made by commercial banks. Among other things, the approval of the Commissioner is generally
required before a North Carolina chartered commercial bank may establish branch offices. North Carolina banking law requires that
any merger, liquidation or sale of substantially all of the assets of the Bank must be approved by the Commissioner and the holders
of two-thirds of the Bank’s outstanding common stock. All of the outstanding common stock of Waccamaw Bank is owned by the
Company.



Pursuant to North Carolina banking laws,
no person may directly or indirectly purchase or acquire voting stock of the Bank which would result in the change of control of
the Bank unless the Commissioner has approved the acquisition. A person will be deemed to have acquired “control” of
the Bank if that person directly or indirectly (i) owns, controls or has power to vote 10% or more of the voting stock of the Bank,
or (ii) otherwise possesses the power to direct or cause the direction of the management and policy of the Bank.



In its lending activities, the Bank
is subject to North Carolina usury laws which generally limit or restrict the rates of interest, fees and charges and other terms
and conditions in connection with various types of loans.



North Carolina banking law requires
that bank holding companies register with the Commissioner. The Commissioner must also approve any acquisition of control of a
state-chartered bank by a bank holding company.



Interstate Banking.Federal law
allows the Federal Reserve Board to approve an application of an adequately capitalized and adequately managed bank holding company
to acquire control of, or acquire all or substantially all of the assets of, a bank located in a state other than the holding company’s
home state, without regard to whether the transaction is prohibited by the laws of any state.  The Federal Reserve Board
may not approve the acquisition of a bank that has not been in existence for a minimum of five years without regard for a longer
minimum period specified by the law of the host state.  The Federal Reserve Board is prohibited from approving an application
if the applicant (and its depository institution affiliates) controls or would control (i) more than 10% of the insured deposits
in the United States, or (ii) 30% or more of the deposits in the target bank’s home state or in any state in which the target
bank maintains a branch.  Federal law does not limit a state’s authority to restrict the percentage of total insured
deposits in the state which may be held or controlled by a bank or bank holding company to the extent such limitation does not
discriminate against out-of-state banks or bank holding companies.  Individual states may also waive the 30% state-wide
concentration limit.



9







The federal banking agencies are also
authorized to approve interstate merger transactions without regard to whether such transaction is prohibited by the law of any
state, unless the home state of one of the banks has adopted a law opting out of the interstate mergers.  Interstate
acquisitions of branches are permitted only if the law of the state in which the branch is located permits such acquisitions.  Interstate
mergers and branch acquisitions are subject to the nationwide and statewide insured deposit concentration amounts described above.
North Carolina has enacted legislation permitting interstate banking acquisitions.



The Dodd-Frank Act allows national and
state banks to establish branches in any state if that state would permit the establishment of the branch by a state bank chartered
in that state.



Material Customers



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



The majority of loans and commitments
to extend credit have been granted to customers in the Company’s market area. The majority of such customers are depositors.



Rights



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



Environmental Laws



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



Employees



The Bank presently has 131 full-time equivalent employees consisting of 121 full-time employees and 19 part-time employees.



ITEM 1A – RISK FACTORS



Smaller reporting companies such as
the Company are not required to provide the information required by this item.



ITEM 1B – UNRESOLVED STAFF
COMMENTS



Smaller reporting companies such as
the Company are not required to provide the information required by this item.



ITEM 2 - PROPERTIES



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



The Bank has two additional branches
in Columbus County located at 105 Hickman Road, Tabor City, North Carolina and 111 Strawberry Boulevard, Chadbourn, North Carolina.
The Tabor City Branch is located in a 3,800 square foot building that includes two drive-up lanes and an ATM. The property is leased
for $33,474 per year. The lease was assumed from the prior tenant and expires in 2013. The Bank has the option to extend the lease
for four additional five year terms.



10









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



The Bank has seven branches located
in Brunswick County, two in Shallotte, North Carolina, one in Holden Beach, North Carolina, two in Southport, North Carolina, one
in Ocean Isle, North Carolina and one in Oak Island, North Carolina. The Shallotte Main Street branch is housed in a 2,521 square
foot facility that includes three drive-up lanes and an ATM. The building is leased for a term of five years beginning on February
1, 2010. The Bank has the option to renew the lease for two additional terms of five years.



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



The Holden Beach branch is housed in
a 1,200 square foot facility that includes one drive-up lane and an ATM. The building is leased for a term of five years beginning
on October 10, 2005. The Bank has renewed the first option at five additional years and The Bank has the option to renew the lease
for three additional terms of five years.



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



The Southport Howe Street branch is housed in a 1,860 square
foot facility. The land and building are leased for a term of five years beginning on March 1, 2010. The Bank has the option to
renew the lease for four additional terms of five years.



The Southport Supply Road branch is
housed in a 3,858 square foot facility. The construction was completed in December 2006 at a cost of $1.2 million. The land is
leased for a term of five years beginning on March 1, 2010. The Bank has the option to renew the lease for four additional terms
of five years.



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



The Elizabethtown branch is housed in
a 2,016 square foot facility. The land is leased for a term of five years beginning on November 7, 2005. The Bank has extended
the lease for another 5 years beginning on November 14, 2010.



The Kerr Avenue branch in Wilmington
is housed in a 3,000 square foot facility that includes two drive-up lanes and an ATM. The building is leased for a term of five
years beginning on August 1, 2009. The Bank has a five year lease with the option to renew for four additional terms of five years.



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



The Conway 16th Avenue branch
is housed in a 1,350 square foot facility. The Bank has a five year lease beginning on September 1, 2006.



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



The Myrtle Beach branch is housed in
a 2,400 square foot facility and has three drive-up lanes and an ATM. The lease was assumed from BB&T and expires in 2010 with
the option to renew the lease for an additional term of five years. The Bank chose not to renew this lease and closed this branch
effective July 31, 2011.



The Little River branch is housed in
a 10,000 square foot facility and has three drive-up lanes and an ATM. The construction was completed in August 2008 at a cost
of $2.7 million and the land was purchased for $990,000.



11







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



ITEM 3 – LEGAL PROCEEDINGS



No legal proceedings are required
to be disclosed pursuant to this item as of December 31, 2010.



ITEM 4 –RESERVED



12







PART II



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



The Company’s articles of
incorporation authorize it to issue up to 50,000,000 shares of common stock, no par value, of which 7,466,224 shares were
issued and outstanding as of February 27, 2012 and up to 1,000,000 shares of preferred stock. The approximate number of
holders of the Company’s shares of common stock as of February 27, 2012 is 2,800. There were 550 shares issued and
outstanding of the Company’s Series A convertible preferred stock as of February 27, 2012 and 546,375 shares issued and
outstanding of the Company’s Series B convertible preferred stock as of February 27, 2012.



The payment of future
cash dividends will be determined by the Board of Directors and is dependent upon the receipt of dividends from the Bank. To
date, the Company has not paid any cash dividends. The Company does not intend to declare or pay dividends to
shareholders at any time in the foreseeable future.



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



Under the written agreement with the
Federal Reserve Bank of Richmond and the North Carolina Commissioner of Banks, the Company and the Bank are currently prohibited
from declaring or paying any dividends without the prior written approval of the Reserve Bank and the Commissioner.



Set forth below are the
approximate high and low (bid quotations/sales price), known to the management of the Bank, for each quarter during the
fiscal years ended 2009 and 2010. These quotations reflect inter-dealer prices, without retail mark-up, mark-down, or
commissions and may not represent actual transactions.



|               |  | 2010 |      |  | 2009 |  
|-------------- |  | ---- | ---- |  | ---- | -
|               |  | High |      |  | Low  |  
|               |  |      |      |  |      |  
|First Quarter  |  | $    | 3.40 |  |      | $
|Second Quarter |  |      | 5.00 |  |      |  
|Third Quarter  |  |      | 2.25 |  |      |  
|Fourth Quarter |  |      | 2.10 |  |      |  



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



13







On March 31, 2011, the Company
issued 546,375 shares of its fixed rate noncumulative perpetual preferred stock, series B (the “Series B Preferred Stock”),
to Monterey I Holdings, LLC. The Series B Preferred Stock was issued in exchange for 546,375 outstanding shares of the fixed rate
noncumulative perpetual preferred stock, series A, of the Company’s subsidiary, Waccamaw Bank (the “Bank”).
The shares of the Bank’s series A preferred stock were held by Monterey Holdings prior to the exchange and were originally
issued to Monterey Holdings by the Bank pursuant to a subscription offer agreement dated December 23, 2010, whereby Monterey
Holdings purchased 546,375 shares of the Bank’s series A preferred stock and a warrant covering 300,000 shares of the Company’s
common stock for an aggregate contract price of $16,392,266.



The warrants and the rights, privileges
and preferences of the Series B Preferred Stock are described in more detail below.



Preferred Stock.As described
in the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on March 17, 2011, the
shares of the Company’s Series B Preferred Stock are convertible by the holders thereof into shares of the Company’s
common stock on the basis of 1.5 shares of common stock for each share of Series B Preferred Stock so converted. Shares of the
Series B Preferred Stock are also convertible by the Company in the event that the holders of the Series B Preferred Stock are
afforded any voting powers provided by law that are not granted by the Company’s articles of incorporation. In this instance,
the Company may convert each share of Series B Preferred Stock into a share of the Company’s common stock on a one-for-one
basis. A form of the Company’s Series B Preferred Stock certificate is attached as exhibit 4.1 hereto and is incorporated
herein by reference.



Warrant.On
May 17, 2011, the Company issued a warrant to Monterey I Holdings, LLC. The warrant gives Monterey Holdings the right to
purchase 300,000 shares of the Company’s common stock at an exercise price equal to fifty percent of the
“market price” (as defined in the warrant) of the Company’s common stock on May 17, 2011, or
approximately $0.429 per share. The warrant was issued as part of a transaction whereby Monterey Holdings purchased 546,375
shares of the fixed rate noncumulative perpetual preferred stock, series A, of the Bank for an aggregate contract price of
$16,392,266. The warrant may be exercised, in whole or in part, from May 17, 2012, until May 17, 2021.



14









|                                    
|------------------------------------
|Management’s Discussion and Analysis
|                                    







ITEM 6 – SELECTED FINANCIAL
DATA



Smaller reporting companies such as the Company are not required
to provide the information required by this item.



ITEM 7 – MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



15









|                                    
|------------------------------------
|Management’s Discussion and Analysis
|                                    







MANAGEMENT’S DISCUSSION AND
ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF
OPERATION



The following presents management’s
discussion and analysis of the financial condition and results of operation of the Company as of December 31, 2010 and 2009 and
the years then ended. This discussion should be read in conjunction with the Company’s Financial Statements and the Notes
thereto.





Significant Transaction



On September 30, 2010, the Bank entered into
an agreement whereby the Bank would sell and Augusta Holdings, LLC (“Augusta”) would buy nonperforming real estate
loans for the contractual pay-off amount (par value) of $11.2 million. The carrying value of these loans was $7.3 million as the
carrying amounts had been reduced to reflect the fair value of the underlying collateral in measuring the impairment under the
requirements of ASC 310-10-35. During the negotiations of this transaction, the Bank agreed to purchase from Augusta a home equity
line of credit (HELOC) loan pool. The price of the pool was the amount of the aggregate principal balances (par value) of the loans
in the pool, $110.1 million. The pool met the Bank’s credit quality and performance criteria. Under
the terms of the HELOC pool purchase agreement, the Bank was able to exclude loans that did not meet the following criteria:



| | · | A current FICO score of a least 660 as of the date of the transaction.
| | - | ----------------------------------------------------------------------

| | · | Loans have not been past due more than 30 days in the twelve months preceding the closing of the
transaction.
| | - | -------------------------------------------------------------------------------------------------------------

| | · | The weighted average loan to value would not exceed 90 percent as of the time the loan was originated.
| | - | ------------------------------------------------------------------------------------------------------

Management performed detailed due diligence
procedures on approximately 20 percent of the pool and removed from the pool any loans that did not meet the criteria above. In
addition, as part of the transaction, as a credit enhancement, Augusta indemnified the Bank against credit losses in the pool for
a period of five years from the transaction date, up to a maximum amount of 10% of the pool or approximately $11.0 million. The
sale of the nonperforming assets and the purchase of the HELOC pool closed on December 22, 2010.



On December 23, 2010, the Bank entered into
an agreement to sell to Monterey I Holdings, LLC (Monterey) 546,375 shares of preferred stock for $16.4 million with a dividend
yield of 9%. The noncumulative perpetual preferred stock was issued at the bank level and was required to be converted to preferred
stock of the Company. The preferred stock may be converted to 819,564 shares of the Company’s common stock at the option
of the buyer. In addition, the Company issued warrants to allow Monterey to purchase up to 300,000 shares of the Company’s
common stock at 50% of the market value of the common stock on the date of exercise. The preferred stock contract settled on December
23, 2010.



Augusta and Monterey have elements of common
ownership and are considered related parties. They are not related parties with respect to the Company
or the Bank. Based on the relationship of the counterparties, timing, and other facts and circumstances surrounding the transactions,
management has concluded that the transactions should be considered one transaction for financial reporting purposes.



Management determined that since there was
significant noncash consideration transferred, the transactions should be properly recorded at fair value under the guidance at
ASC 845-10. Also in accordance with ASC 845-10, the fair value of the assets received shall be used to measure the cost if that
value is more clearly evident than the fair value of the asset surrendered. Management determined the fair value of a homogenous
HELOC pool meeting specific credit quality criteria prepared by a qualified valuation professional with prior experience valuing
similar loan pools is more clearly evident than the fair values of coastal residential real estate developments and other highly
volatile real estate that secures the non-performing loans and preferred shares in a market with very few comparable equity transactions.





Accordingly, the Bank retained an outside valuation
consulting firm to provide a valuation of the HELOC pool within the guidance at ASC 820-10. The Bank received the valuation on
October 5, 2011. The report indicated the fair value of the $110.1 million HELOC pool to be approximately $100.0 million. The valuation
was primarily based on discounted cash flows as projected based on the location of the underlying collateral and the current FICO
score of the borrower. Based on the valuation report, credit losses on the pool are projected to be $3.1 million over the life
of the pool.



16









|                                    
|------------------------------------
|Management’s Discussion and Analysis
|                                    







A summary of assets received and consideration
transferred at fair value and a description of how the item was valued is presented below (in thousands):





|Fair Value received                                          |  |   |          |  
|------------------------------------------------------------ |  | - | -------- | -
|HELOC pool, net of discount                                  |  | $ | 100,002  |  
|Credit enhancement                                           |  |   | -        |  
|Interest receivable                                          |  |   | 386      |  
|Total FV received                                            |  | $ | 100,388  |  
|                                                             |  |   |          |  
|Fair Value of consideration paid                             |  |   |          |  
|Non-performing loans                                         |  | $ | (7,309   | )
|Cash                                                         |  |   | (82,833  | )
|Warrants                                                     |  |   | (300     | )
|Preferred stock, net of discount                             |  |   | (9,604   | )
|Total FV received                                            |  | $ | (100,046 | )
|                                                             |  |   |          |  
|Back interest on non-performing loans recorded in operations |  | $ | 342      |  



Due to uncertainty related to this transaction, the company has been unable to finalize the financial statements for 2010 until now.



Also, the Company has been unable to
complete the filing of the 2010 Form 10-K or the March 31, June 30,  or September 30, 2011, Forms 10-Q pending the resolution
of this transaction. On June 24, 2011, the Company received notice of delisting by Nasdaq as a result of failure to timely
file the 2010 Form 10-K.



Regulatory Actions







Effective June 14, 2010, the Company
and the Bank entered into a Written Agreement (the “Agreement”) with the Federal Reserve Bank of Richmond (the “Reserve
Bank”) and the North Carolina Commissioner of Banks (the “Commissioner”).



The Agreement is a formal corrective
action pursuant to which the Bank has agreed to address specific issues set forth below, through the adoption and implementation
of procedures, plans and policies designed to enhance the safety and soundness of the Bank.



Among other things, the Agreement requires the Bank to:



| | • | Retain an independent consultant acceptable to the Reserve Bank and the Commissioner to conduct
a review of the effectiveness of the Bank’s corporate governance, board and management structure, to assess staffing needs
and to prepare a written report of findings and recommendations;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Formulate a plan to strengthen board oversight of the management and operations of the Bank;
| | - | --------------------------------------------------------------------------------------------



| | • | Formulate and implement a plan to strengthen credit risk management practices;
| | - | ------------------------------------------------------------------------------



| | • | Formulate a plan for the ongoing review and grading of the Bank’s loan portfolio by a qualified
independent party or by qualified staff that is independent of the Bank’s lending function;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Develop a plan to maintain sufficient capital at the Company, on a consolidated basis;
| | - | --------------------------------------------------------------------------------------



| | • | Not pay cash dividends without the prior written consent of the Reserve Bank and the
                                                                           Commissioner; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Not accept any new brokered deposits (contractual renewals or rollovers of existing brokered deposits
are permitted).
| | - | ---------------------------------------------------------------------------------------------------------------------



The Company must furnish periodic progress
reports to the Reserve Bank and the Commissioner regarding its compliance with the Agreement. The Agreement will remain in effect
until modified or terminated by the Reserve Bank and the Commissioner.



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





17











|                                    
|------------------------------------
|Management’s Discussion and Analysis
|                                    



Effective November 29, 2011, the Company and
the Bank entered into a Prompt Corrective Action Directive (the “Directive”) with the Board of Governors of the Federal
Reserve System (the “Board of Governors”).



The Directive is a formal corrective action
in which the Board of Governors has determined that, as of October 30, 2011, Waccamaw Bank is critically undercapitalized, as defined
in section 208.43(b)(5) of Regulation H of the Board of Governors.



Among other things, the Directive requires the Bank no later than
January 6, 2012 to:



| | • | Increase the Bank’s equity through the sale of shares or contributions to surplus in an amount sufficient to make the
Bank adequately capitalized as defined in section 208.43(b)(2) of Regulation H of the Board of Governors;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Enter into and close a contract to be acquired by a depository institution holding company or combine with another insured
depository institution, closing under which contract is conditioned only on the receipt of necessary regulatory approvals, the
continued accuracy of customary representations and warranties and the performance of customary pre-closing covenants;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Take other necessary measures to make the Bank adequately capitalized;
| | - | ----------------------------------------------------------------------



| | • | Restrict the making of any capital distributions, including, but not limited to, the payment of dividends;
| | - | ----------------------------------------------------------------------------------------------------------



| | • | Restrict the payment of bonuses to senior executive officers and increases in compensation of such officers; and
| | - | ----------------------------------------------------------------------------------------------------------------



| | • | Restrict certain activities, including, but not limited to, making any material change in accounting methods and engaging in
any covered transaction, as defined in section 23A of the Federal Reserve Act without the prior written approval of the FDIC.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Due
to the recent favorable ruling by the Federal Reserve Board of Governors allowing a portion of the preferred stock to be
regulatory capital, the Bank’s capital status at September 30, 2011, changed from critically undercapitalized to
significantly undercapitalized. Although the Directive has not been terminated, the Company continues to take measures to
make the Bank adequately capitalized through the sale of branches and selling stock through a private stock
offering.





Based on unaudited financial
information, as of December 31, 2011, the resulting bank regulatory capital ratios of total capital to risk weighted assets, Tier
1 capital to risk weighted assets and Tier 1 capital to average assets are 4.96%, 3.08% and 2.08%, respectively. Based on these
levels, the Bank is considered significantly undercapitalized.



Generally
accepted accounting principles require that in the event of changes about the likelihood of realization of a deferred tax asset
that results in the establishment of a deferred tax asset valuation allowance related to unrealized losses on available for sale
investment securities, that valuation allowance be established through operation even thought the original deferred tax asset was
established through other comprehensive income. The guidance on how to address this inconsistent treatment with respect to the
calculation of regulatory capital is not well defined. Accordingly, the capital amounts and ratios in the table above include an
adjustment related to establishment of such a deferred tax asset valuation. After this adjustment, regulatory capital as presented
is the same amount as would be reported had the related deferred tax asset has not been recorded. Management has discussed this
treatment with applicable bank regulators and management has not been informed that this treatment is incorrect. However, due to
the lack of clear guidance, it is possible the regulators could conclude this adjustment is not appropriate. If that were the case,
Tier 1 and total regulatory capital for December 31, 2011 would be reduced by $898,000 and the bank capital ratios would approximate
the following:



|                                       |  |  | 2011 |  
|-------------------------------------- |  |  | ---- | -
|                                       |  |  |      |  
|Total capital to risk weighted assets  |  |  | 1.93 | %
|Tier 1 capital to risk weighted assets |  |  | 2.85 | %
|Tier 1 capital to average assets       |  |  | 4.73 | %





18











|                                    
|------------------------------------
|Management’s Discussion and Analysis
|                                    





Going Concern Consideration



The consolidated financial statements have
been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal
course of business for the foreseeable future. These consolidated financial statements do not include any adjustments relating
to the recoverability or classification of assets or the amounts and classification of liabilities that may be necessary should
we be unable to continue as a going concern.



The substantial uncertainties
throughout the economy and U.S. banking industry coupled with current market conditions have adversely affected the
Company’s 2010 results and capital levels. The significant losses in 2010 and 2009, primarily related to credit losses
and the valuation allowance on deferred tax assets, reduced the Company’s capital levels. In order to become well
capitalized under federal banking agencies’ guidelines, management believes that the Company will need to raise
additional capital to recapitalize the organization and to absorb the potential future credit losses associated with the
disposition of its nonperforming assets. Accordingly, management is in the process of evaluating various alternatives to
increase tangible common equity and regulatory capital through the issuance of additional equity in public or private
offerings. Management is actively evaluating a number of capital sources, asset reductions, and other balance sheet
management strategies to ensure that the projected level of regulatory capital can support its balance sheet long-term.
Management is currently reducing and otherwise restructuring its balance sheet to improve capital ratios.



Current market conditions for banking institutions,
the overall uncertainty in financial markets, and depressed stock price are significant barriers to the success of any plan to
issue additional equity in public or private offerings.  An equity financing transaction would result in substantial dilution
to the Company's current shareholders and could adversely affect the market price of the Company's common stock.  There can
be no assurance as to whether these efforts will be successful, either on a short-term or long-term basis.  Should these
efforts be unsuccessful, due to existing regulatory restrictions on cash payments between the Bank and the holding company,
the Company may be unable to discharge its liabilities in the normal course of business. There can be no assurance that the Company
will be successful in any efforts to raise additional capital during 2012.



Both the parent company and the banking subsidiary
actively manage liquidity and cash flow needs. The Company has suspended all dividends to shareholders indefinitely. At December 31, 2010, the Company had $35 million of cash and cash equivalents.
The Company has no long-term debt maturing in 2011 and $15 million maturing in 2012.



Liquidity at the bank level is dependent upon
the deposit franchise which funds 81% of the Company’s assets (or 57% excluding brokered CDs). The FDIC’s temporary
changes to increase the amount of deposit insurance to $250,000 per deposit relationship and to provide unlimited deposit insurance
for certain transaction accounts have contributed to the stable deposit base. All banks that have elected to participate in the
Transaction Account Guarantee Program (“TAGP”) have the same FDIC insurance coverage. Potential loss of deposits would
be a primary funding need in a liquidity crisis. Deposit balances which are not covered by FDIC insurance total approximately $16.0
million currently, and would increase to approximately $22.5 million without the benefit of the FDIC’s TAGP, currently scheduled
to expire at December 31, 2013. Thus, the primary deposit-related liquidity risk relates to balances which are not insured. As
of December 31, 2011, the Company has liquid assets of approximately $128 million to address liquidity needs in a crisis scenario.
If a liquidity issue presents itself, deposit promotions would be expected to yield significant in-flows of cash, but could be
limited based on maximum interest rates that may be offered by banks that are not well capitalized.



In addition, certain borrowings, such as brokered
CDs and FHLB advances, are dependent on various credit eligibility criteria which may be impacted by changes in the Company’s
financial position and/or results of operations. Given the weakened economy and current market conditions, there is no assurance
that the Company will be able to obtain new borrowings or issue additional equity on terms that are satisfactory.



During 2011, the Company continued
to experience losses from operations primarily due to loan losses. Based on unaudited financial information, as of December 31,
2011 consolidated total assets are $561,120,907, equity is $(3,625,647), and net loss from operations is $18,725,248 for the year
ended December 31, 2011. The resulting bank regulatory capital ratios of total capital to risk weighted assets, Tier 1 capital
to risk weighted assets and Tier 1 capital to average assets are 4.96%, 3.08% and 2.08%, respectively. Based on these levels, the
Bank is considered significantly undercapitalized.



Generally
accepted accounting principles require that in the event of changes about the likelihood of realization of a deferred tax asset
that results in the establishment of a deferred tax asset valuation allowance related to unrealized losses on available for sale
investment securities, that valuation allowance be established through operation even thought the original deferred tax asset was
established through other comprehensive income. The guidance on how to address this inconsistent treatment with respect to the
calculation of regulatory capital is not well defined. Accordingly, the capital amounts and ratios in the table above include an
adjustment related to establishment of such a deferred tax asset valuation. After this adjustment, regulatory capital as presented
is the same amount as would be reported had the related deferred tax asset has not been recorded. Management has discussed this
treatment with applicable bank regulators and management has not been informed that this treatment is incorrect. However, due to
the lack of clear guidance, it is possible the regulators could conclude this adjustment is not appropriate. If that were the case,
Tier 1 and total regulatory capital for December 31, 2011 would be reduced by $898,000 and the bank capital ratios would approximate
the following:



|                                       |  |  | 2011 |  
|-------------------------------------- |  |  | ---- | -
|                                       |  |  |      |  
|Total capital to risk weighted assets  |  |  | 1.93 | %
|Tier 1 capital to risk weighted assets |  |  | 2.85 | %
|Tier 1 capital to average assets       |  |  | 4.73 | %



Based on current capital levels and continued
operating losses into 2012, management believes the Company will require additional capital to be able to remain viable at least
through December 31, 2012. Management has implemented various strategies including a private stock offering and selling branches
to provide this needed capital. In spite of management’s best efforts, there is no guarantee management will be successful
in raising the additional capital. Accordingly, there is substantial doubt about the Company’s ability to continue as a going
concern.





19















|                                    
|------------------------------------
|Management’s Discussion and Analysis
|                                    







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 and other sources of funding, including borrowings, to make commercial and consumer loans
as well as residential construction loans and permanent mortgage real estate loans and to make other permissible investments.
Revenues are derived principally from interest on loans and investments. Changes in the volume and mix of these assets
and liabilities, as well as changes in the yields earned and rates paid, determine changes in net interest income.
Waccamaw Bankshares, Inc. (the “Company”) was formed during 2001 and acquired all the outstanding shares of the
Bank on July 1, 2001.



The Company’s total assets
were $548.2 million at December 31, 2010 as compared to $533.2 million at December 31, 2009. Total deposits at December 31,
2010 increased 4.9% from December 31, 2009, to $454.9 million. Total deposits were $433.5 million at December 31, 2009. The
Bank’s net loans increased to $389.5 million at the end of 2010, an increase of $49.5 million over the 2009 amount of
$340.0 million. The $49.5 million increase in loans was in part due to the purchase of a pool of residential mortgage
home equity loans with a par value of $110 million, less discount of $10.1 million, or a fair value of $99.9 million.
Investment securities were $67.5 million and $87.8 million at December 31, 2010 and 2009, respectively.



The Bank’s nonperforming
loans increased significantly on a consecutive quarter basis in 2010 through lack of performance and the degradation of the
portfolio has continued into 2011 and 2012. Unless the economy improves significantly, these asset quality issues and related
costs are likely to continue to depress the Bank’s operating performance in 2011 and 2012. Continuing negative asset
quality issues in 2010, 2011 and into 2012, could erode regulatory capital further.



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 this Annual Report on Form 10-K
for the year ended December 31, 2010 contain a summary of  significant accounting policies. Management believes the
Company’s policies with respect to the methodology for the determination of the allowance for loan losses,investment impairment charges, goodwill impairment and asset impairment judgments, such as the recoverability of
intangible assets, each 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 theCompany’s loan portfolio. The allowance is based on two basic principles
of accounting: (i) Statement of Financial Accounting Standards ASC 420, Accounting for Contingencies, which
requires that losses be accrued when they are probable of occurring and estimable, and (ii) ASC 310-10, 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.



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.



20









|                                    
|------------------------------------
|Management’s Discussion and Analysis
|                                    







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, which 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 is 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.



FASB Accounting Standards Codification
Topic 820, Fair Value Measurements and Disclosures(ASC Topic 820) discusses non-monetary exchanges in relation to the swap
for the Company made for the sale non-performing loans and acquiring HELOC loans. Refer to Note 8 for additional accounting policies
regarding this transaction.



Net Interest Income



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



21













|                                    
|------------------------------------
|Management’s Discussion and Analysis
|                                    



Purchase Accounting



Loans



On September 30, 2010, the Bank entered into
an agreement whereby the Bank would sell and Augusta Holdings, LLC (“Augusta”) would buy nonperforming real estate
loans for the contractual pay-off amount (par value) of $11.2 million. The carrying value of these loans was $7.3 million as the
carrying amounts had been reduced to reflect the fair value of the underlying collateral in measuring the impairment under the
requirements of ASC 310-10-35. During the negotiations of this transaction, the Bank agreed to purchase from Augusta a home equity
line of credit (HELOC) loan pool. The price of the pool was the amount of the aggregate principal balances (par value) of the loans
in the pool, $110.1 million.



Preferred stock



On December 23, 2010, the Bank entered into
an agreement to sell to Monterey I Holdings, LLC (Monterey) 546,375 shares of preferred stock for $16.4 million with a dividend
yield of 9%. The noncumulative perpetual preferred stock was issued at the bank level and was required to be converted to preferred
stock of the Company. The preferred stock may be converted to 819,564 shares of the Company’s common stock at the option
of the buyer. In addition, the Company issued warrants to allow Monterey to purchase up to 300,000 shares of the Company’s
common stock at 50% of the market value of the common stock on the date of exercise. The preferred stock contract settled on December
23, 2010.



Augusta and Monterey have elements of common
ownership and are considered related parties.  They are not related parties with respect to the Company
or the Bank. Based on the relationship of the counterparties, timing, and other facts and circumstances surrounding the transactions,
management has concluded that the transactions should be considered one transaction for financial reporting purposes.



Management determined that since there
was significant noncash consideration transferred, the transactions should be properly recorded at fair value under the
guidance at ASC 845-10. Also in accordance with ASC 845-10, the fair value of the assets received shall be used to measure
the cost if that value is more clearly evident than the fair value of the asset surrendered. Management determined the fair
value of a homogenous HELOC pool meeting specific credit quality criteria prepared by a qualified valuation professional with
prior experience valuing similar loan pools is more clearly evident than the fair values of coastal residential real estate
developments and other highly volatile real estate that secures the non-performing loans and preferred shares in a market
with very few comparable equity transactions.



Accordingly, the Bank retained an outside valuation
consulting firm to provide a valuation of the HELOC pool within the guidance at ASC 820-10. The Bank received the valuation on
October 5, 2011. The report indicated the fair value of the $110.1 million HELOC pool to be approximately $100.0 million. The valuation
was primarily based on discounted cash flows as projected based on the location of the underlying collateral and the current FICO
score of the borrower. Based on the valuation report, credit losses on the pool are projected to be $3.1 million over the life
of the pool.



Fair Value of the Transaction



A summary of assets received and consideration
transferred at fair value and a description of how the item was valued is presented below (in thousands):



|Fair Value received                                          |  |   |          |  
|------------------------------------------------------------ |  | - | -------- | -
|HELOC pool, net of discount                                  |  | $ | 100,002  |  
|Credit enhancement                                           |  |   | -        |  
|Interest receivable                                          |  |   | 386      |  
|Total FV received                                            |  | $ | 100,388  |  
|                                                             |  |   |          |  
|Fair Value of consideration paid                             |  |   |          |  
|Non-performing loans                                         |  | $ | (7,309   | )
|Cash                                                         |  |   | (82,833  | )
|Warrants                                                     |  |   | (300     | )
|Preferred stock, net of discount                             |  |   | (9,604   | )
|Total FV received                                            |  | $ | (100,046 | )
|                                                             |  |   |          |  
|Back interest on non-performing loans recorded in operations |  | $ | 342      |  



22







|                                    
|------------------------------------
|Management’s Discussion and Analysis
|                                    



HELOC Pool - Fair value as determined by a valuation report prepared by an independent third party.



Credit Enhancement – The credit enhancement is unsecured and contractually not due to be settled until two years after the close of the transaction and then annually thereafter for the remaining three years. Due to concerns about the counterparty’s ability to honor the obligation of the credit enhancement, management has determined there is not sufficient evidence to support any value related to the credit enhancement. Accordingly, the credit enhancement has been determined to have no fair value. The Company also believes that the credit enhancement may be considered continuing involvement in the loans sold and may raise questions about whether or not a sale of these assets may recorded under generally accepted accounting principles. We will address this issue in the future by obtaining a legal opinion that addresses the isolation of the assets sold if we determine in the future that there is sufficient evidence to support a value related to the credit enhancement.



Interest Receivable – This is the interest receivable from the HELOC pool borrowers at the time if the transfer, valued at the actual amount of the accrual as of the date of closing.



Non-performing Loans – Fair value determined based on the value of the collateral underlying the individual loans as determined by recent outside appraisals.



Cash – This is the actual amount of net cash paid by the Bank for the pool.



Warrants – Valued based on management’s estimate.



Preferred stock – Fair value is based on the excess of the fair value of the assets received over the fair value of the assets and other instruments transferred to Augusta as part of the transaction.



HELOC Pool Discount



The HELOC pool value as determined by the valuation report resulted as discount to par of approximately $10.1 million. Based on the valuation report, management expects to have credit losses on the portfolio of $3.1 million. Accordingly, that amount of the discount will be used as a credit reserve to cover those losses. The reminder of the discount ($7 million) will be accreted into income over the expected life of the pool using the level yield method. Because the last transaction closed on December 23, 2010, no accretion was recorded during 2010. Management began accreting the discount during 2011.



23













|                                    
|------------------------------------
|Management’s Discussion and Analysis
|                                    









|                                                 |  | Net
    Interest     Income and Average Balances (dollars in thousands) |        
|------------------------------------------------ |  | ----------------------------------------------------------------------- | -------
|                                                 |  |                                                                         |        
|                                                 |  | Periods
    Ended December 31,                                          |        
|                                                 |  | 2010                                                                    |        
|                                                 |  |                                                                         |        
|                                                 |  | Average                                                                 |        
|                                                 |  | Balance                                                                 |        
|                                                 |  |                                                                         |        
|Interest-earning assets:                         |  |                                                                         |        
|Investment securities                            |  | $                                                                       | 93,619 
|Federal funds sold                               |  |                                                                         | 22,388 
|Deposits with banks                              |  |                                                                         | 62,236 
|Loans, net1,2                                    |  |                                                                         | 322,255
|Total
    interest-earning assets                |  |                                                                         | 500,498
|                                                 |  |                                                                         |        
|Yield on average interest-earning
    assets     |  |                                                                         |        
|                                                 |  |                                                                         |        
|Noninterest-earning assets:                      |  |                                                                         |        
|Cash                                             |  |                                                                         | 4,837  
|Premises and equipment                           |  |                                                                         | 16,737 
|Interest
    receivable and other                |  |                                                                         | 42,494 
|Total
    noninterest-earning assets             |  |                                                                         | 64,068 
|Total assets                                     |  | $                                                                       | 564,566
|                                                 |  |                                                                         |        
|Interest-bearing liabilities:                    |  |                                                                         |        
|Demand deposits                                  |  | $                                                                       | 42,293 
|Savings deposits                                 |  |                                                                         | 113,244
|Time deposits                                    |  |                                                                         | 273,453
|Other short-term borrowings                      |  |                                                                         | 6,739  
|Long-term debt                                   |  |                                                                         | 70,714 
|Total
    interest-bearing liabilities           |  |                                                                         | 506,443
|Cost of average interest-bearing
    liabilities |  |                                                                         |        
|                                                 |  |                                                                         |        
|Noninterest-bearing liabilities:                 |  |                                                                         |        
|Demand deposits                                  |  |                                                                         | 35,646 
|Interest
    payable and other                   |  |                                                                         | 2,850  
|Total
    noninterest-bearing liabilities        |  |                                                                         | 38,496 
|Total liabilities                                |  |                                                                         | 544,939
|                                                 |  |                                                                         |        
|Stockholders'
    equity                         |  |                                                                         | 19,627 
|Total
    liabilities and stockholders' equity   |  | $                                                                       | 564,566
|                                                 |  |                                                                         |        
|Net
    interest income                          |  |                                                                         |        
|                                                 |  |                                                                         |        
|Net
    yield on interest-earning assets         |  |                                                                         |        
















1Average loan balances
include nonaccrual loans.

2Deferred loan fees are included in
interest income.







24

















|                                    
|------------------------------------
|Management’s Discussion and Analysis
|                                    



Interest income during 2010 was $20.7
million, a decrease of 20.1% from the 2009 total of $25.9 million. Interest income for 2008 was $30.5 million. The decrease in
net interest income can primarily be attributed to the decrease in loans and investments and the increase in interest bearings
deposits with banks in 2010. Average earning assets were $500.5 million during 2010, a decrease of 3.9% from 2009. Average earning
assets decreased 1.8% to $481.9 million during 2009 over the 2008 balance of $490.9 million. Yields on interest-earning assets
during 2010, 2009, and 2008 were 4.1%, 5.4%, and 6.2%, respectively.



Interest rates charged on loans vary
with the degree of risk, maturity and amount of the loan. Competitive pressures, money market rates, availability of funds, and
government regulation also influence interest rates. On average, loans yielded 5.3%, 5.7% and 6.4% during 2010, 2009, and 2008,
respectively. Yields on loans decreased in 2010 primarily as a result of increases in non-accrual loans.



Interest
expense was $9.8 million during 2010, a decrease of 22.0% over 2009. Interest expense in 2009 was $12.5 million, a decrease of
26.0% over 2008. The decrease in 2010 is a result of our deposits re-pricing in 2010 as average cost of funds decreased approximately
62 basis points from 2009. The decrease in 2009 over 2008 is due to average cost of funds decreasing approximately 100 basis points
from 2008. The average rate paid on interest-bearing liabilities during 2010, 2009, and 2008 was 1.9%, 2.6%, and 3.6%, respectively.



Net
interest income was $10.9 million during 2010, a decrease of 18.2% from 2009. During 2009 net interest income decreased to $13.4
million. Net interest income was $13.6 million in 2008.The decreases in net interest income in 2010 and 2009 can primarily
be attributed to the decrease in loans and investments and the increase in interest bearing deposits with banks in 2010.Net interest margin during 2010, 2009, and 2008 was 2.2%, 2.8%, and 2.8%, respectively.



The
effects of changes in volumes and rates on net interest income for 2010, 2009 and 2008 are shown in the table below.



Rate/Volume
Variance Analysis (thousands)





|                              |  | 2010 Compared to 2009 |        |   | 2009 Compared to 2008 |  
|----------------------------- |  | --------------------- | ------ | - | --------------------- | -
|                              |  | Interest              |        |   |                       |  
|                              |  | Income/               |        |   | Variance              |  
|                              |  | Expense               |        |   | Attributable to       |  
|                              |  | Variance              |        |   | Rate                  |  
|Interest-earning assets:      |  |                       |        |   |                       |  
|Loans                         |  | $                     | (4,038 | ) |                       | $
|Investment securities         |  |                       | (1,274 | ) |                       |  
|Deposits with banks           |  |                       | 77     |   |                       |  
|Federal funds sold            |  |                       | 27     |   |                       |  
|Total                         |  |                       | (5,208 | ) |                       |  
|                              |  |                       |        |   |                       |  
|Interest-bearing liabilities: |  |                       |        |   |                       |  
|Demand deposits               |  |                       | 44     |   |                       |  
|Savings deposits              |  |                       | (145   | ) |                       |  
|Time deposits                 |  |                       | (2,411 | ) |                       |  
|Short-term borrowings         |  |                       | (80    | ) |                       |  
|Long-term debt                |  |                       | (185   | ) |                       |  
|Total                         |  |                       | (2,777 | ) |                       |  
|Net interest income           |  | $                     | (2,431 | ) |                       | $







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

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



25











|                                    
|------------------------------------
|Management’s Discussion and Analysis
|                                    









Provision for Loan Losses



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



The provision for loan loss expense
was $12,205,554, $16,579,908, and $2,990,096 during 2010, 2009, and 2008 respectively. The Bank's allowance for loan losses as
a percentage of gross loans was 3.84%, 2.90% and 1.86% at the end of 2010, 2009, and 2008, respectively. Additional information
regarding loan loss provisions is discussed below under the heading “Nonperforming and Problem Assets.”



Noninterest Income



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



Noninterest
income totaled $6.7 million, $3.9 million, and $966,000 for the years ended December 31, 2010, 2009, and 2008,
respectively. Noninterest income increased in 2010 primarilydue to increases in gains on sales of investment
securities, an increase of $123,000 of ATM and check cashing fees and an increase of $25,000 in mortgage origination income. Service
charges on deposit accounts were 41.3% of total noninterest income. Service charges tend to increase as the
number of deposit accounts increases. The Bank's fee structure is reviewed annually to determine if adjustments to fees
are warranted.



The Bank purchased life insurance for
certain key employees in December 2004, March 2007, December 2007, June 2008, December 2008 and December 2010, providing
$648,000, $741,000 and $548,000 of noninterest income for the years ended December 31, 2010, 2009 and 2008, respectively.





26











|                                    
|------------------------------------
|Management’s Discussion and Analysis
|                                    











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



Sources
of Noninterest Income (thousands)





|                                             |  | 2010 |       |  | 2009 |   |       | 2008 | 
|-------------------------------------------- |  | ---- | ----- |  | ---- | - | ----- | ---- | 
|                                             |  |      |       |  |      |   |       |      | 
|Service charges on deposit accounts          |  | $    | 2,778 |  |      | $ | 3,023 |      | 
|ATM and check cashing fees                   |  |      | 998   |  |      |   | 875   |      | 
|Gain (loss) on sale of investment securities |  |      | 1,593 |  |      |   | (887  | )    | 
|Mortgage origination                         |  |      | 378   |  |      |   | 380   |      | 
|Insurance commission                         |  |      | 9     |  |      |   | 13    |      | 
|Income from financial services               |  |      | 102   |  |      |   | 139   |      | 
|Earnings on bank owned life insurance        |  |      | 648   |  |      |   | 741   |      | 
|Impairment of investment securities          |  |      | -     |  |      |   | (419  | )    | 
|Other                                        |  |      | 218   |  |      |   | 44    |      | 
|Total noninterest income                     |  | $    | 6,724 |  |      | $ | 3,909 |      | 



Noninterest Expense



Noninterest expense for 2010, 2009,
and 2008 was $17.0 million, $18.5 million and $15.4 million, respectively. The majority of the increase in noninterest expense
for 2010 can be attributed primarily to write-downs or losses on foreclosed assets of $1.7 million in 2010, $776,000 in 2009 and
with no expense in 2008 and regulatory agency expense of $1.8 million in 2010, $1.3 million in 2009 and $389,000 in 2008.



Total personnel expenses, the largest
component of noninterest expense, were $6.3 million, $7.1 million and $8.2 million during 2010, 2009 and 2008, respectively. Personnel
expenses decreased 11.7% during 2010 and decreased 13.0% during 2009. Substantially all of the decrease in 2010 resulted from cost cutting initiatives in salaries and employee benefits.



Combined occupancy and furniture
and equipment expense was $2.1 million, $2.1 million and $2.0 million, or 12.0%, 11.3% and 13.1% of noninterest expense
during 2010, 2009 and 2008, respectively. Professional services expense, including fees paid to attorneys, independent
auditors and consultants was $1.2 million, $853,000, and $490,000 in 2010, 2009 and 2008, respectively. The increase in 2010
can be mostly attributed to legal fees related to efforts to collect principal and interest from borrowers and guarantors on
various outstanding loans.



Advertising and public relations expense
decreased to $261,000 in 2010 from $311,000 in 2009 as these expenses were reduced as the result of cost cutting initiatives to
marketing expenses in 2010. Data processing and credit card processing fees totaled $1.1 million, $1.2 million and $1.3 million during
2010, 2009 and 2008, respectively. These fees relate directly to the number of accounts serviced and transactions processed.



In 2010 and 2009, losses on other
real estate owned were written down to fair value. There were no expenses in 2008 related to fair value write-downs of other
real estate owned.



Total regulatory expense from FDIC
deposit insurance assessments increased to $1.8 million in 2010 from $1.3 million in 2009 and $389,000 in 2008.



The overhead ratio of
noninterest expense to adjusted total revenues (net interest income plus noninterest income excluding securities
transactions) was 107%, 107% and 111% in 2010, 2009, and 2008, respectively. The primary elements of noninterest expense for
the fiscal years ended December 31, 2010, 2009, and 2008 are summarized in the following table.





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|Management’s Discussion and Analysis
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Sources of Noninterest Expense (thousands)



|                                 |  | 2010 |        |  | 2009 |   |        | 2008 | 
|-------------------------------- |  | ---- | ------ |  | ---- | - | ------ | ---- | 
|                                 |  |      |        |  |      |   |        |      | 
|Salaries and wages               |  | $    | 5,722  |  |      | $ | 6,328  |      | 
|Employee benefits                |  |      | 570    |  |      |   | 802    |      | 
|Total personnel expense          |  |      | 6,292  |  |      |   | 7,130  |      | 
|                                 |  |      |        |  |      |   |        |      | 
|Occupancy expense                |  |      | 1,473  |  |      |   | 1,513  |      | 
|Furniture and equipment          |  |      | 585    |  |      |   | 584    |      | 
|Printing and supplies            |  |      | 96     |  |      |   | 96     |      | 
|Professional services            |  |      | 1,158  |  |      |   | 853    |      | 
|Postage and office supplies      |  |      | 147    |  |      |   | 155    |      | 
|Telephone                        |  |      | 175    |  |      |   | 178    |      | 
|Dues and subscriptions           |  |      | 87     |  |      |   | 77     |      | 
|Education and seminars           |  |      | 34     |  |      |   | 32     |      | 
|Franchise and local taxes        |  |      | 88     |  |      |   | 94     |      | 
|Foreclosed assets, net           |  |      | 2,504  |  |      |   | 776    |      | 
|Advertising and public relations |  |      | 261    |  |      |   | 311    |      | 
|Regulatory agency expense        |  |      | 1,643  |  |      |   | 1,293  |      | 
|Director fees                    |  |      | -      |  |      |   | -      |      | 
|Data processing services         |  |      | 1,134  |  |      |   | 1,175  |      | 
|Amortization of deposit premium  |  |      | 90     |  |      |   | 191    |      | 
|Goodwill impairment charge       |  |      | -      |  |      |   | 2,727  |      | 
|Other operating expense          |  |      | 1,223  |  |      |   | 1,330  |      | 
|Total noninterest expenses       |  | $    | 16,990 |  |      | $ | 18,515 |      | 



Income Taxes



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



Income tax expense (benefit) was
$3,688,212, $(3,628,000) and $(1,827,000) for 2010, 2009 and 2008, respectively. There were no net deferred income tax assets
at December 31, 2010 and net deferred income tax assets of approximately $3,195,000 and $6,994,000 at December 31, 2009 and
2008, respectively  which were included in other assets. At December 31, 2010 and 2009, $12,548,053 and
$3,652,000 respectively, was placed in a valuation allowance established on net deferred tax assets as discussed in Note 18
of “Notes to Consolidated Financial Statements”. Accounting Standards Codification Topic 740, Income Taxes,
requires that companies assess whether a valuation allowance should be established against their deferred tax assets based on
the consideration of all available evidence using “a more likely than not” standard that the tax position will be realized or
sustained upon examination. The Company’s management considers both positive and negative evidence and analyzes changes
in near-term market conditions as well as other factors which may impact future operating results. At December 31, 2010,
the Company’s management believes that it is not likely it will be able to realize its net deferred tax assets.



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



28









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|Management’s Discussion and Analysis
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The cumulative loss incurred by the
Company in 2008, 2009 and 2010 was the primary negative factor considered by management. Additionally general economic conditions
in the Company’s primary markets and the potential for ongoing weakening asset quality were also evaluated as potential negative
factors.



Earning Assets



Average earning assets were $500.5 million
during 2010, an increase of 2.0% from 2009. Average earning assets were $481.9 million in 2009, a decrease of 1.8% over the $490.9
million balance for 2008. Total average earning assets represented 88.7%, 86.3%, and 91.0% of total average assets during the years
ended December 31, 2010, 2009 and 2008, respectively. A summary of average assets is shown in the following table.



Average
Asset Mix (dollars in thousands)



|                        |  | 2010    |         |  | 2009    |  |        | 2008    | 
|----------------------- |  | ------- | ------- |  | ------- |  | ------ | ------- | 
|                        |  | Average |         |  |         |  |        | Average | 
|                        |  | Balance |         |  | Percent |  |        | Balance | 
|Earning assets:         |  |         |         |  |         |  |        |         | 
|Loans, net              |  | $       | 322,255 |  |         |  | 57.08  | %       | 
|Investment securities   |  |         | 93,619  |  |         |  | 16.58  | %       | 
|Federal funds sold      |  |         | 22,388  |  |         |  | 3.97   | %       | 
|Deposits with banks     |  |         | 62,236  |  |         |  | 11.02  | %       | 
|Total earning assets    |  | $       | 500,498 |  |         |  | 88.65  | %       | 
|                        |  |         |         |  |         |  |        |         | 
|Nonearning assets:      |  |         |         |  |         |  |        |         | 
|Cash and due from banks |  |         | 4,837   |  |         |  | .86    | %       | 
|Premises and equipment  |  |         | 16,737  |  |         |  | 2.96   | %       | 
|Other assets            |  |         | 42,494  |  |         |  | 7.53   | %       | 
|Total nonearning assets |  |         | 64,068  |  |         |  | 11.35  | %       | 
|Total assets            |  | $       | 564,566 |  |         |  | 100.00 | %       | 



Loans



The
Bank makes both consumer and commercial loans to borrowers within its market area, including low- and moderate-income
areas. The Bank’s market area is generally defined to be all of Columbus, Brunswick, Bladen and New Hanover counties of North
Carolina and Lancaster and Horry counties of South Carolina. The Bank emphasizes
consumer based installment loans, commercial loans to small and medium sized businesses and real estate loans.



29







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|Management’s Discussion and Analysis
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A significant portion of the loan portfolio
is made up of loans secured by various types of real estate. Real estate loans represented 90.2%,
86.3%, and 83.6% of total loans at December 31, 2010, 2009, and 2008, respectively. Total loans secured by one-to-four family residential
properties represented 45.5%, 22.8% and 21.7% of total loans at the end of 2010, 2009 and 2008, respectively. Loans for commercial
and business purposes were $26.1 million, $32.5 million and $43.0 million, or 6.4%, 9.3% and 11.1% of total loans outstanding at
December 31, 2010, 2009 and 2008, respectively.



The amounts of gross loans outstanding
by type at December 31, 2010 through 2006 are shown in the following table.



Loan
Portfolio Summary (thousands)



|                             |  | 2010 |         |  | 2009 |   |         | 2008 |  |   | 2007    |  |  | 2006 |        
|---------------------------- |  | ---- | ------- |  | ---- | - | ------- | ---- |  | - | ------- |  |  | ---- | -------
|                             |  |      |         |  |      |   |         |      |  |   |         |  |  |      |        
|Construction and development |  | $    | 81,087  |  |      | $ | 121,838 |      |  | $ | 125,878 |  |  | $    | 121,760
|Farmland                     |  |      | 2,494   |  |      |   | 2,473   |      |  |   | 3,343   |  |  |      | 3,806  
|1-4 family residential       |  |      | 184,218 |  |      |   | 80,071  |      |  |   | 83,734  |  |  |      | 75,671 
|Multifamily residential      |  |      | 8,946   |  |      |   | 9,879   |      |  |   | 11,802  |  |  |      | 3,670  
|Nonfarm, nonresidential      |  |      | 88,912  |  |      |   | 88,197  |      |  |   | 98,438  |  |  |      | 93,222 
|Total real estate            |  |      | 365,657 |  |      |   | 302,458 |      |  |   | 323,195 |  |  |      | 298,129
|                             |  |      |         |  |      |   |         |      |  |   |         |  |  |      |        
|Agricultural                 |  |      | 402     |  |      |   | 563     |      |  |   | 654     |  |  |      | 671    
|Commercial and industrial    |  |      | 26,134  |  |      |   | 32,551  |      |  |   | 42,958  |  |  |      | 43,617 
|Consumer                     |  |      | 12,712  |  |      |   | 13,380  |      |  |   | 17,217  |  |  |      | 13,950 
|Other                        |  |      | 328     |  |      |   | 1,512   |      |  |   | 2,432   |  |  |      | 4,610  
|Total                        |  | $    | 405,233 |  |      | $ | 350,464 |      |  | $ | 386,456 |  |  | $    | 360,977



The maturity/re-pricing distributions
of loans as of December 31, 2010 are set forth in the following table.



Maturity
Schedule of Loans (dollars in thousands)



|                                   |  | Commercial |        |  | Construction |   |        |        |  |   |         |  |  |         |        
|---------------------------------- |  | ---------- | ------ |  | ------------ | - | ------ | ------ |  | - | ------- |  |  | ------- | -------
|                                   |  | and        |        |  | and          |   |        |        |  |   | Total   |  |  |         |        
|                                   |  | Industrial |        |  | Development  |   |        | Others |  |   | Amount  |  |  | Percent |        
|                                   |  |            |        |  |              |   |        |        |  |   |         |  |  |         |        
|Three months or less               |  | $          | 8,115  |  |              | $ | 25,247 |        |  | $ | 71,165  |  |  | $       | 104,527
|Over three months to twelve months |  |            | 3,436  |  |              |   | 10,690 |        |  |   | 16,651  |  |  |         | 30,777 
|Over one year to five years        |  |            | 11,990 |  |              |   | 37,301 |        |  |   | 67,012  |  |  |         | 116,303
|Over five years                    |  |            | 2,593  |  |              |   | 7,849  |        |  |   | 143,184 |  |  |         | 153,626
|Total loans                        |  | $          | 26,134 |  |              | $ | 81,087 |        |  | $ | 298,012 |  |  | $       | 405,233



Investment Securities



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



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



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|Management’s Discussion and Analysis
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The Company attempts to manage
the investment portfolio in a conservative manner with virtually all investments taking the form of purchases of government
sponsored enterprises, corporate securities, municipal securities, and mortgage-backed securities. Management views the
investment portfolio as a source of income, and purchases securities with that objective in mind.



However, adjustments are necessary in
the portfolio to provide an adequate source of liquidity which can be used to meet funding requirements for loan demand and deposit
fluctuations and to mitigate interest rate risk. Therefore, management may sell certain securities prior to their maturity.



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



Investment
Securities (dollars in thousands)



|                                            |  | December 31, 2010  |      
|------------------------------------------- |  | ------------------ | -----
|                                            |  | Amortized Cost Due |      
|                                            |  |                    |      
|                                            |  | In One Yr.         |      
|                                            |  | Or Less            |      
|                                            |  |                    |      
|Investment securities                       |  |                    |      
|Municipal
    securities                    |  |                    | -    
|Corporate securities                        |  |                    | 2,000
|Single issue trust preferred
    securities |  |                    | -    
|Mortgage-backed securities                  |  |                    | -    
|Total                                       |  | $                  | 2,000
|                                            |  |                    |      
|Weighted average yields                     |  |                    |      
|Municipal securities                        |  |                    | -    
|Corporate securities                        |  |                    | 1.83 
|Single issue trust preferred
    securities |  |                    | -    
|Mortgage-backed securities                  |  |                    | -    
|Consolidated                                |  |                    | 1.83 



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|Management’s Discussion and Analysis
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|                                        |  | 2009  |       
|--------------------------------------- |  | ----- | ------
|                                        |  | Book  |       
|                                        |  | Value |       
|Investment securities                   |  |       |       
|Municipal securities                    |  |       | 13,083
|Corporate securities                    |  |       | 5,618 
|Single issue trust preferred securities |  |       | 12,090
|Pooled trust preferred securities       |  |       | 134   
|Mortgage-backed securities              |  |       | 61,167
|Total                                   |  | $     | 92,092



The
interest rate environment and the need for liquidity resulted in an annualized average yield on the investment portfolio of
3.5%, 5.1%, and 6.0% during 2010, 2009 and 2008, respectively. At December 31, 2010,
2009 and 2008, the market value of the investment portfolio was $67.5 million, $87.8 million, and $87.4 million,
respectively. Amortized cost was $71.3 million, $92.1 million, and $96.7 million. The
investment portfolio was restructured in 2010, as municipal securities, corporate securities and single issue trust preferred
securities were replaced with mortgage-backed securities in an attempt to reduce risk on the balance sheet.



Federal Funds Sold



Federal funds represent the most liquid
portion of the Bank's invested funds and generally the lowest yielding portion of earning assets. However, because of the flat
yield curve and the need to maintain liquidity, management maintained a significant amount of federal funds during the past three
years. At December 31, 2010 and December 31, 2009, federal funds sold were $2.2 million and $21.3 million, respectively.



Deposits



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



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



Average
total deposits were $464.6 million during 2010. This is an increase of 11.8% over 2009. Average total deposits were $443.0 million
for the year ended December 31, 2009, an increase of 6.6% over 2008. The majority of those deposits were core deposits. The percentage
of the Bank's average deposits that were interest bearing in 2010 was 92.3%, 92.1% in 2009 and 91.9% in 2008. Average demand deposits
which earn no interest were $35.6 million, $34.9 million and $33.8 million for the periods ended December 31, 2010, 2009 and 2008,
respectively.



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



Average deposits and related average
rates paid for the periods ended December 31, 2010, 2009, and 2008 are summarized in the following table.



Average Deposit Mix (dollars in
thousands)



|                                    |  | 2010   |         |  | 2009 |  |      | 2008   | 
|----------------------------------- |  | ------ | ------- |  | ---- |  | ---- | ------ | 
|                                    |  | Amount |         |  | Rate |  |      | Amount | 
|Interest bearing deposits:          |  |        |         |  |      |  |      |        | 
|Demand accounts                     |  | $      | 42,293  |  |      |  | .52  | %      | 
|Money market                        |  |        | 100,688 |  |      |  | 1.14 |        | 
|Savings                             |  |        | 12,556  |  |      |  | .55  |        | 
|Time deposit                        |  |        | 273,453 |  |      |  | 1.94 |        | 
|Total interest bearing deposits     |  |        | 428,990 |  |      |  | 1.57 |        | 
|                                    |  |        |         |  |      |  |      |        | 
|Noninterest bearing demand deposits |  |        | 35,646  |  |      |  |      |        | 
|Total deposits                      |  | $      | 464,636 |  |      |  |      |        | 



The following table provides maturity
information relating to time deposits of $100,000 or more at December 31, 2010.



Large
Time Deposit Maturities, (dollars in thousands)



|Remaining maturity of three months or less          |  | $ | 42,803  | 
|--------------------------------------------------- |  | - | ------- | 
|Remaining maturity over three through twelve months |  |   | 80,539  | 
|Remaining maturity over twelve months               |  |   | 63,820  | 
|Total time deposits of $100,000 or more             |  | $ | 187,162 | 



Securities Sold Under Agreements to Repurchase



Other borrowed funds consisting of securities
sold under agreements to repurchase and federal funds purchased were $19.8 million, $20.6 million and $23.8 million at December
31, 2010, 2009 and 2008, respectively. Average short-term debt was $6.7 million, $8.9 million and $22.6 million during 2010, 2009
and 2008, respectively. The related interest expense was $127,511, $208,032 and $763,493 during 2010, 2009 and 2008, respectively.



Other Short-term Borrowings



There was one fixed rate FHLB advance
of $5,000,000 at December 31, 2010 and one fixed rate FHLB advance of $2,500,000 at December 31, 2009. Also
included in other short-term borrowings was a$900,000 facility which is funded by AloStar Bank of Commerce that will mature
on July 1, 2020 at a 5.00% lending rate.



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|Management’s Discussion and Analysis
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Long-term
Debt



As
a member of the Federal Home Loan Bank of Atlanta, the Bank has the ability to borrow up to 10% of total assets in the form of
FHLB advances. At December 31, 2010 and 2009, advances of $35.0 million and $40.0 million, respectively, were outstanding. The average
amount outstanding during 2010 and 2009 was $40.2 million and $40.2 million, respectively. Approximately $19.0 million in 1-4 family
residential loans, $12.2 million in commercial real estate loans,$7.2 million in home equity line of credit loans and $5.2
million in securities were pledged as collateral for the FHLB advances at December 31, 2010.



|Maturity Date |  | Advance |            |  | Rate | 
|------------- |  | ------- | ---------- |  | ---- | 
|              |  |         |            |  |      | 
|07/17/12      |  |         | 9,000,000  |  |      | 
|09/04/12      |  |         | 6,000,000  |  |      | 
|09/03/13      |  |         | 6,000,000  |  |      | 
|12/02/13      |  |         | 5,000,000  |  |      | 
|09/29/15      |  |         | 4,000,000  |  |      | 
|04/22/19      |  |         | 5,000,000  |  |      | 
|              |  | $       | 35,000,000 |  |      | 



On June 27, 2008, Waccamaw
Bank, sold in a private placement to qualified institutional investors, an aggregate of $3,000,000 of subordinated notes that
will mature on July 1, 2015 at 3 month LIBOR plus 350 basis points.



Capital



Stockholders’ equity was $14.1
million at December 31, 2010. This was a 17.6% decrease from the $17.2 million at the end of 2009. Average stockholders' equity
as a percentage of average total assets was 3.5%, 5.2% and 6.2% for 2010, 2009, and 2008, respectively.





On March 31, 2011, the Company issued
546,375 shares of fixed rate noncumulative perpetual preferred stock, series B (the “Series B Preferred Stock”),
to Monterey I Holdings, LLC. The Series B Preferred Stock was issued in exchange for 546,375 outstanding shares of fixed rate
noncumulative perpetual preferred stock, series A, of the Company’s wholly owned subsidiary, Waccamaw Bank (the “Bank”).
The shares of the Bank’s series A preferred stock were held by Monterey Holdings prior to the exchange and were originally
issued to Monterey Holdings by the Bank pursuant to a subscription offer agreement dated December 23, 2010, whereby Monterey
Holdings purchased 546,375 shares of the Bank’s series A preferred stock and a warrant covering 300,000 shares of the Company’s
common stock for an aggregate contract price of $16,392,266. A discount against the fixed rate noncumulative perpetual preferred
stock, Series A was taken in the amount of $6,944,605 at December 31, 2010.





The Company completed a rights
offering on August 3, 2010 of shares of the Company’s common stock at a price per share of $1.25. The shares of common
stock were offered for sale to the holders of record of the Company’s common stock as of the close of business on May
14, 2010. The offering raised $2,394,000 less expenses of $540,000 of additional capital through the sale of 1,915,041 shares
of common stock.



34







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|Management’s Discussion and Analysis
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Regulatory guidelines relating to capital adequacy
provide minimum risk-based ratios which assess capital adequacy while encompassing credit risks, including those related to off-balance
sheet activities. Capital ratios under these guidelines are computed by weighing the relative risk of each asset category to derive
risk-adjusted assets. For the Company, risk-based capital guidelines require minimum ratios of core (Tier 1) capital to risk-weighted
assets of 4.0% and total regulatory capital (core capital plus allowance for loan losses up to 1.25% of risk-weighted assets) to
risk-weighted assets of 8.0%. As of December 31, 2010, the Company’s Tier 1 risk-weighted capital ratio and total capital
ratio were 6.7% and 7.5%, respectively.



The Bank also has capital ratio constraints
with which to comply. These ratios are slightly different than those required at the parent company level. At December 31, 2010,
the Bank’s capital ratios were as follows: Tier 1 leverage ratio, 5.4%, Tier 1 risk-based capital ratio, 6.9% and total risk-based
ratio, 8.8%. At December 31, 2010, these capital ratios classified the Bank as “adequately capitalized” in accordance
with the FDIC’s regulatory capital rules. The Company’s and Bank’s actual capital amounts and ratios are presented
at December 31, 2010 in the following table.



Capital Requirements (dollars in
thousands)



Waccamaw Bankshares, Inc.

|                 |  |                  |        |  |                |  |      | Risk-based Capital | 
|---------------- |  | ---------------- | ------ |  | -------------- |  | ---- | ------------------ | 
|                 |  | Leverage Capital |        |  | Tier 1 Capital |  |      | Total Capital      | 
|                 |  | Amount           |        |  | Percentage(1)  |  |      | Amount             | 
|                 |  |                  |        |  |                |  |      |                    | 
|Actual           |  | $                | 29,795 |  |                |  | 5.27 | %                  | 
|Well Capitalized |  |                  | 28,222 |  |                |  | 5.00 | %                  | 



Waccamaw Bank

|                 |  |                  |        |  |                |  |      | Risk-based Capital | 
|---------------- |  | ---------------- | ------ |  | -------------- |  | ---- | ------------------ | 
|                 |  | Leverage Capital |        |  | Tier 1 Capital |  |      | Total Capital      | 
|                 |  | Amount           |        |  | Percentage(1)  |  |      | Amount             | 
|                 |  |                  |        |  |                |  |      |                    | 
|Actual           |  | $                | 30,578 |  |                |  | 5.42 | %                  | 
|Well Capitalized |  |                  | 28,192 |  |                |  | 5.00 | %                  | 



---

| | (1) | Percentage of total adjusted average assets. The Federal Reserve Board (“FRB”) minimum
leverage ratio requirement is 4 percent to 5 percent, depending on the institution’s composite rating as determined by its
regulators. The FRB has not advised the Company of any specific requirements applicable to it.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



Based on unaudited financial
information, as of December 31, 2011, the resulting bank regulatory capital ratios of total capital to risk weighted assets, Tier
1 capital to risk weighted assets and Tier 1 capital to average assets are 4.96%, 3.08% and 2.08%, respectively. Based on these
levels, the Bank is considered significantly undercapitalized.



Generally
accepted accounting principles require that in the event of changes about the likelihood of realization of a deferred tax asset
that results in the establishment of a deferred tax asset valuation allowance related to unrealized losses on available for sale
investment securities, that valuation allowance be established through operation even thought the original deferred tax asset was
established through other comprehensive income. The guidance on how to address this inconsistent treatment with respect to the
calculation of regulatory capital is not well defined. Accordingly, the capital amounts and ratios in the table above include an
adjustment related to establishment of such a deferred tax asset valuation. After this adjustment, regulatory capital as presented
is the same amount as would be reported had the related deferred tax asset has not been recorded. Management has discussed this
treatment with applicable bank regulators and management has not been informed that this treatment is incorrect. However, due to
the lack of clear guidance, it is possible the regulators could conclude this adjustment is not appropriate. If that were the case,
Tier 1 and total regulatory capital for December 31, 2011 and December 31, 2010 would be reduced by $1,457,000 and $898,000, respectively
and the bank capital ratios would approximate the following:



|                                       |  |  | 2011 |   |  |  | 2010 |  
|-------------------------------------- |  |  | ---- | - |  |  | ---- | -
|                                       |  |  |      |   |  |  |      |  
|Total capital to risk weighted assets  |  |  | 1.93 | % |  |  | 5.16 | %
|Tier 1 capital to risk weighted assets |  |  | 2.85 | % |  |  | 6.56 | %
|Tier 1 capital to average assets       |  |  | 4.73 | % |  |  | 8.49 | %





Nonperforming and Problem Assets



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



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



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



35







|                                    
|------------------------------------
|Management’s Discussion and Analysis
|                                    



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



Allowance
for Loan Losses (dollars in thousands)



|                                                           |  | 2010 |         |   | 2009 |   |         | 2008 |  |   | 2007    |   |  | 2006 |        
|---------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | -------
|                                                           |  |      |         |   |      |   |         |      |  |   |         |   |  |      |        
|Balance at beginning of period                             |  | $    | 10,149  |   |      | $ | 7,188   |      |  | $ | 5,386   |   |  | $    | 4,886  
|Charge-offs:                                               |  |      |         |   |      |   |         |      |  |   |         |   |  |      |        
|Construction loans                                         |  |      | (4,320  | ) |      |   | (6,881  | )    |  |   | (492    | ) |  |      | (86    
|Commercial and industrial loans                            |  |      | (330    | ) |      |   | (1,847  | )    |  |   | (231    | ) |  |      | (1     
|Consumer and other                                         |  |      | (2,224  | ) |      |   | (4,983  | )    |  |   | (476    | ) |  |      | (201   
|Total charge-offs                                          |  |      | (6,874  | ) |      |   | (13,711 | )    |  |   | (1,199  | ) |  |      | (288   
|Recoveries:                                                |  |      |         |   |      |   |         |      |  |   |         |   |  |      |        
|Construction loans                                         |  |      | 40      |   |      |   | (55     | )    |  |   | -       |   |  |      | 379    
|Commercial and industrial loans                            |  |      | 8       |   |      |   | 4       |      |  |   | 4       |   |  |      | -      
|Consumer and other                                         |  |      | 12      |   |      |   | 143     |      |  |   | 7       |   |  |      | 23     
|Total recoveries                                           |  |      | 60      |   |      |   | 92      |      |  |   | 11      |   |  |      | 402    
|                                                           |  |      |         |   |      |   |         |      |  |   |         |   |  |      |        
|Net charge-offs                                            |  |      | (6,814  | ) |      |   | (13,619 | )    |  |   | (1,188  | ) |  |      | 114    
|                                                           |  |      |         |   |      |   |         |      |  |   |         |   |  |      |        
|Allowance purchased from The Bank of Heath Springs         |  |      | -       |   |      |   | -       |      |  |   | -       |   |  |      | -      
|                                                           |  |      |         |   |      |   |         |      |  |   |         |   |  |      |        
|Provision for loan losses                                  |  |      | 12,206  |   |      |   | 16,580  |      |  |   | 2,990   |   |  |      | 386    
|                                                           |  |      |         |   |      |   |         |      |  |   |         |   |  |      |        
|Balance at the end of the year                             |  | $    | 15,541  |   |      | $ | 10,149  |      |  | $ | 7,188   |   |  | $    | 5,386  
|                                                           |  |      |         |   |      |   |         |      |  |   |         |   |  |      |        
|Total loans outstanding at year-end                        |  | $    | 405,233 |   |      | $ | 350,464 |      |  | $ | 386,456 |   |  | $    | 360,977
|                                                           |  |      |         |   |      |   |         |      |  |   |         |   |  |      |        
|Average net loans outstanding for the year                 |  | $    | 322,255 |   |      | $ | 368,458 |      |  | $ | 376,747 |   |  | $    | 332,451
|                                                           |  |      |         |   |      |   |         |      |  |   |         |   |  |      |        
|Allowance for loan losses to loans outstanding             |  |      | 3.84    | % |      |   | 2.90    | %    |  |   | 1.86    | % |  |      | 1.49   
|Ratio of net loan charge-offs to average loans outstanding |  |      | 2.11    | % |      |   | 3.70    | %    |  |   | .32     | % |  |      | (0.03  



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



Allowance
for Loan Losses by Category (dollars in thousands)



|                             |  | 2010   |        |  | 2009 |  |        | 2008   |  |   | 2007   |  |  | 2006   |       
|---------------------------- |  | ------ | ------ |  | ---- |  | ------ | ------ |  | - | ------ |  |  | ------ | ------
|                             |  | Amount |        |  | %(1) |  |        | Amount |  |   | %(1)   |  |  | Amount |       
|                             |  |        |        |  |      |  |        |        |  |   |        |  |  |        |       
|Construction and development |  | $      | 7,665  |  |      |  | 49.32  |        |  | $ | 3,556  |  |  |        | 35.04 
|Farmland                     |  |        | 66     |  |      |  | .43    |        |  |   | 70     |  |  |        | .69   
|1-4 family residential       |  |        | 1,405  |  |      |  | 9.04   |        |  |   | 2,282  |  |  |        | 22.48 
|Multifamily residential      |  |        | 1,676  |  |      |  | 10.78  |        |  |   | 327    |  |  |        | 3.22  
|Nonfarm, nonresidential      |  |        | 2,911  |  |      |  | 18.73  |        |  |   | 2,533  |  |  |        | 24.96 
|Total real estate            |  |        | 13,723 |  |      |  | 88.30  |        |  |   | 8,768  |  |  |        | 86.39 
|                             |  |        |        |  |      |  |        |        |  |   |        |  |  |        |       
|Agricultural                 |  |        | 16     |  |      |  | .10    |        |  |   | 16     |  |  |        | .16   
|Commercial and industrial    |  |        | 1,563  |  |      |  | 10.06  |        |  |   | 943    |  |  |        | 9.29  
|Consumer                     |  |        | 105    |  |      |  | .68    |        |  |   | 380    |  |  |        | 3.74  
|Other                        |  |        | 134    |  |      |  | .86    |        |  |   | 42     |  |  |        | .42   
|Total                        |  | $      | 15,541 |  |      |  | 100.00 |        |  | $ | 10,149 |  |  |        | 100.00



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



36







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|Management’s Discussion and Analysis
|                                    



Real estate prices,
general economic trends, and various other factors can greatly affect loan losses and no assurances can be made about future
losses. It is management’s assessment that the allowance for loan losses as of December 31, 2010 was appropriate in
light of the risk inherent within the Company’s loan portfolio.



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



Nonperforming Assets (dollars in
thousands)



|                                                               |  | 2010 |        |   | 2009 |   |        | 2008 |  |   | 2007   |   |  | 2006 |      
|-------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ---- | -----
|                                                               |  |      |        |   |      |   |        |      |  |   |        |   |  |      |      
|Nonaccrual loans                                               |  | $    | 39,841 |   |      | $ | 21,440 |      |  | $ | 15,633 |   |  | $    | 1,534
|Loans past due 90 days or more
    and still accruing interest |  |      | 2,924  |   |      |   | 1,409  |      |  |   | 1,451  |   |  |      | 2,608
|Total nonperforming loans                                      |  |      | 42,765 |   |      |   | 22,849 |      |  |   | 17,084 |   |  |      | 4,142
|                                                               |  |      |        |   |      |   |        |      |  |   |        |   |  |      |      
|Other real estate and repossessed
    personal property        |  |      | 9,594  |   |      |   | 5,015  |      |  |   | 963    |   |  |      | 340  
|Total nonperforming assets                                     |  | $    | 52,359 |   |      | $ | 27,864 |      |  | $ | 18,047 |   |  | $    | 4,482
|                                                               |  |      |        |   |      |   |        |      |  |   |        |   |  |      |      
|Nonperforming assets as a percentage of:                       |  |      |        |   |      |   |        |      |  |   |        |   |  |      |      
|Total assets                                                   |  |      | 9.55   | % |      |   | 5.23   | %    |  |   | 3.36   | % |  |      | .88  
|Total loans                                                    |  |      | 12.93  | % |      |   | 7.96   | %    |  |   | 4.67   | % |  |      | 1.24 



Asset
Quality





At
December 31, 2010, the Company had approximately $11.0 million in loans that were 30-89 days past due. This represented 2.72% of
gross loans outstanding on that date. This is a decrease from December 31, 2009 when there were approximately $26.3 million
in loans that were 30-89 days past due, or 7.50% of gross loans outstanding. At December 31, 2008 there were approximately $8.0
million in loans that were 30-89 days past due, or 2.07% of gross loans outstanding. The increase in past dues is spread throughout
each category of the loan portfolio and is due primarily to the continued weakening of economic conditions both locally and nationally.
Non-accrual loans increased $18.4 million to $39.8 million at December 31, 2010 compared to $21.4 million at December 31, 2009,
primarily as a result of 8 loan relationships of $1 million or more totaling $17.5 million that were reclassified from past due
status to non-accrual. Non-accrual loans totaled $15.6 million at December 31, 2008.The Company had ten loans that were
considered troubled debt restructured loans which totaled $3,576,818 at December 31, 2010.



The
percentage of non-performing loans (non-accrual loans and loans that were 90 days or more past due but still in accruing status)
to total loans increased 378 basis points from 6.78% at December 31, 2009 to 10.56% at December 31, 2010. The percentage
of non-performing loans at December 31, 2008 was 4.02%.



At
December 31, 2010, there were $52.7 million of loans that were reviewed for individual impairment under ASC 310-10.
$28.4 million of these loans required a specific reserve of $6.2 million. At December 31, 2009, $41.6 million in loans
were classified as impaired. None of these impaired loans required a specific reserve at December 31, 2009. At
December 31, 2008, $25.2 million in loans were classified as impaired of which $22.8 million required a specific reserve
of $3.6 million. The allowance for loan losses was $15.5 million at December 31, 2010, or 3.84% of gross loans outstanding.
This is an increase of 94 basis points from the 2.90% of gross loans at December 31, 2009. The allowance for loans losses was
$7.2 million at December 31, 2008. The allowance for loan losses at December 31, 2010 represented 29.51% of impaired
loans compared to 24.41% at December 31, 2009. The allowance for loans losses at December 31, 2008 represented 28.49% of
impaired loans. This increase in the allowance for 2010 resulted from provisions for loan losses of $12.2 million, offset by net charge-offs of $6.8 million. Most of the loans charged-off in 2010 were classified as impaired at
December 31, 2010. It is management’s assessment that the allowance for loan losses as of December 31, 2010 was
appropriate in light of the risk inherent within the Company’s loan portfolio. No assurances, however, can be made that
further adjustments to the allowance for loan losses may not be deemed necessary.



37







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|------------------------------------
|Management’s Discussion and Analysis
|                                    





At
December 31, 2010 there were potential problem loans of $24.4 million classified as special mention loans.Special mention
loans have potential weaknesses which may, if not checked or corrected, weaken the loan or inadequately protect the Company’s
credit position at some future date.



The total non-performing assets, (non-accrual
loans, loans greater than 90 days past due and still accruing and other real estate owned), at December 31, 2010, December 31,
2009 and December 31, 2008 were $52.4 million, $27.9 million and $18.0 million, respectively. The allowance for loan losses at
December 31, 2010 represented 29.7% of non-performing assets compared to 36.4% at December 31, 2009.



Since
2007, the allowance for loan losses model had been modified and refined. The previous method included a ASC 450 component that
incorporated a risk grade assessment that was primarily based on peer group averages. In response to changes in the economic environment,
in early 2008, the Bank implemented a new allowance for loan losses model, developed by a vendor with expertise in credit risk
monitoring. The new model incorporates a ASC 450 component that builds upon actual historical losses by call report code, adjusted
for certain environmental changes in the lending environment.

Additional
information is as follows:



|                                     |  | 2010 |             |   | 2009 |   |             | 2008 | 
|------------------------------------ |  | ---- | ----------- | - | ---- | - | ----------- | ---- | 
|                                     |  |      |             |   |      |   |             |      | 
|Impaired loans                       |  | $    | 52,658,648  |   |      | $ | 41,575,130  |      | 
|Unimpaired loans                     |  |      | 352,358,075 |   |      |   | 308,594,595 |      | 
|Gross loans                          |  | $    | 405,016,723 |   |      | $ | 350,169,725 |      | 
|                                     |  |      |             |   |      |   |             |      | 
|Specific reserve on impaired loans   |  | $    | 6,191,765   |   |      | $ | -           |      | 
|Reserve related to ASC 450           |  |      | 9,349,523   |   |      |   | 10,148,927  |      | 
|Total allowance for loan losses      |  | $    | 15,541,288  |   |      | $ | 10,148,927  |      | 
|                                     |  |      |             |   |      |   |             |      | 
|Allowance to gross loans             |  |      | 3.84        | % |      |   | 2.90        | %    | 
|Specific reserve to impaired loans   |  |      | 11.76       | % |      |   | -           |      | 
|ASC 450 reserves to unimpaired loans |  |      | 2.65        | % |      |   | 3.29        | %    | 



The
table on the following page presents certain information regarding the significant credit relationships that make up the majority
of the non-accrual and impaired loans in our portfolio as of December 31, 2010.



38







|                                    
|------------------------------------
|Management’s Discussion and Analysis
|                                    



|Loan Customer Type             |  | Loan Amount |           | Loan Type |      | Reserve $ |         | As of Date |            | Previous Charge-
    off |         | Regulatory Classification |                 | Status |         | Initial Impairment |  | Valuation |   | Appraisal Date |  | Valuation Basis         |  | Loan Origination |  | Past due Counters
    (30/60/90)
|------------------------------ |  | ----------- | --------- | --------- | ---- | --------- | ------- | ---------- | ---------- | ------------------------ | ------- | ------------------------- | --------------- | ------ | ------- | ------------------ |  | --------- | - | -------------- |  | ----------------------- |  | ---------------- |  | --------------------------------
|                               |  |             |           |           |      |           |         |            |            |                          |         |                           |                 |        |         |                    |  |           |   |                |  |                         |  |                  |  |                                 
|Residential A&D                |  | $           | 4,639,903 |           | 1A2  |           | 268,903 |            | 1/16/2011  |                          | 0       |                           | Substandard     |        | NA*     |                    |  |           | $ | 4,371,000      |  | 6/15/2009               |  | FV               |  | 8/1/2006 12/20/2007             
|                               |  |             |           |           |      |           |         |            |            |                          |         |                           |                 |        |         |                    |  |           |   |                |  |                         |  |                  |  |                                 
|Residential A&D                |  | $           | 4,031,543 |           | 1A2  |           | 0       |            | 10/28/2010 |                          | 0       |                           | Substandard     |        | NA      |                    |  |           | $ | 4,699,200      |  | 10/1/2010               |  | FV               |  | 7/9/2007                        
|                               |  |             |           |           |      |           |         |            |            |                          |         |                           |                 |        |         |                    |  |           |   |                |  |                         |  |                  |  |                                 
|Residential A&D                |  | $           | 3,330,299 |           | 1A2  |           | 0       |            | 12/13/2010 |                          | 347,266 |                           | Substandard     |        | NA      |                    |  |           | $ | 3,789,610      |  | 6/15/10 3/29/10         |  | FV               |  | 10/31/2008                      
|                               |  |             |           |           |      |           |         |            |            |                          |         |                           |                 |        |         |                    |  |           |   |                |  |                         |  |                  |  |                                 
|Hotels (3)                     |  | $           | 2,994,264 |           | 1D   |           | 0       |            | 9/9/2010   |                          | 0       |                           | Substandard     |        | NA      |                    |  |           | $ | 4,393,967      |  | 9/3/2008                |  | FV               |  | 9/14/2005                       
|                               |  |             |           |           |      |           |         |            |            |                          |         |                           |                 |        |         |                    |  |           |   |                |  |                         |  |                  |  |                                 
|Hardwood flooring manufacturer |  | $           | 2,548,375 |           | 1E1  |           | 0       |            | 9/13/2010  |                          | 725,000 |                           | Substandard     |        | NA      |                    |  |           | $ | 2,548,375      |  | 4/24/2009               |  | FV               |  | 8/9/2006 1/16/2007              
|                               |  |             |           |           |      |           |         |            |            |                          |         |                           |                 |        |         |                    |  |           |   |                |  |                         |  |                  |  |                                 
|Commercial income producing    |  | $           | 2,107,879 |           | 1E2  |           | 0       |            | 10/21/2010 |                          | 0       |                           | Substandard     |        | NA      |                    |  |           | $ | 2,089,032      |  | 1/31/2009               |  | FV               |  | 3/25/2003
    2/18/2009         
|                               |  |             |           |           |      |           |         |            |            |                          |         |                           |                 |        |         |                    |  |           |   |                |  |                         |  |                  |  |                                 
|Residential A&D                |  | $           | 1,554,805 |           | 1E2  |           | 0       |            | 12/13/2010 |                          | 8,555   |                           | Substandard     |        |         |                    |  |           | $ | 1,564,375      |  | 7/15/2008               |  | FV               |  | 6/28/2004                       
|                               |  |             |           |           |      |           |         |            |            |                          |         |                           |                 |        |         |                    |  |           |   |                |  |                         |  |                  |  |                                 
|Wrecker service                |  | $           | 1,354,944 |           | 1C2A |           | 0       |            | 9/9/2010   |                          | 0       |                           | Substandard     |        | Accrual |                    |  |           | $ | 1,465,782      |  | 6/1/2005       3/1/2008 |  | FV               |  | 3/11/2005                       
|                               |  |             |           |           |      |           |         |            |            |                          |         |                           |                 |        |         |                    |  |           |   |                |  |                         |  |                  |  |                                 
|Residential A&D                |  | $           | 1,235,684 |           | 1A2  |           | 610,884 |            | 12/27/2010 |                          | 0       |                           | Substandard     |        | NA      |                    |  |           | $ | 624,800        |  | 4/29/2010               |  | FV               |  | 1/17/2008                       
|                               |  |             |           |           |      |           |         |            |            |                          |         |                           |                 |        |         |                    |  |           |   |                |  |                         |  |                  |  |                                 
|Individual                     |  | $           | 1,061,887 |           | 1C2A |           | 6,765   |            | 10/20/2010 |                          | 0       |                           | Special Mention |        | Accrual |                    |  |           | $ | 1,055,122      |  | 1/11/2010     12/7/2009 |  | FV               |  | 11/8/2007                       
|                               |  |             |           |           |      |           |         |            |            |                          |         |                           |                 |        |         |                    |  |           |   |                |  |                         |  |                  |  |                                 
|Residential A&D                |  | $           | 1,029,628 |           | 1A2  |           | 0       |            | 1/16/2011  |                          | 0       |                           | Substandard     |        | Accrual |                    |  |           | $ | 1,333,679      |  | 1/11/10        12/7/09  |  | FV               |  | 7/31/2009                       
|                               |  |             |           |           |      |           |         |            |            |                          |         |                           |                 |        |         |                    |  |           |   |                |  |                         |  |                  |  |                                 
|Residential A&D                |  | $           | 1,010,411 |           | 1A2  |           | 0       |            | 10/22/2010 |                          | 0       |                           | Substandard     |        | Accrual |                    |  |           | $ | 1,665,280      |  | 12/23/2010              |  | FV               |  | 12/28/2008                      
|                               |  |             |           |           |      |           |         |            |            |                          |         |                           |                 |        |         |                    |  |           |   |                |  |                         |  |                  |  |                                 
|Residential A&D                |  | $           | 1,002,500 |           | 1A2  |           | 0       |            | 9/9/2010   |                          | 0       |                           | Substandard     |        | NA      |                    |  |           | $ | 1,585,300      |  | 2/1/2008                |  | FV               |  | 8/25/2003                       
|                               |  |             |           |           |      |           |         |            |            |                          |         |                           |                 |        |         |                    |  |           |   |                |  |                         |  |                  |  |                                 
|Commercial income producing    |  | $           | 963,330   |           | 1E2  |           | 0       |            | 9/9/2010   |                          | 0       |                           | Substandard     |        | Accrual |                    |  |           | $ | 1,315,250      |  | 1/10/2010               |  | FV               |  | 7/9/2007                        
|                               |  |             |           |           |      |           |         |            |            |                          |         |                           |                 |        |         |                    |  |           |   |                |  |                         |  |                  |  |                                 
|Residential A&D                |  | $           | 938,846   |           | 1A2  |           | 283,063 |            | 10/19/2010 |                          | 16,043  |                           | Substandard     |        | NA      |                    |  |           | $ | 655,783        |  | 3/29/2010               |  | FV               |  | 8/15/2006 4/24/2007             
|                               |  |             |           |           |      |           |         |            |            |                          |         |                           |                 |        |         |                    |  |           |   |                |  |                         |  |                  |  |                                 
|Day Care                       |  | $           | 904,170   |           | 1E1  |           | 25,320  |            | 10/20/2010 |                          | 0       |                           | Substandard     |        | Accrual |                    |  |           | $ | 878,850        |  | 12/28/2009              |  | FV               |  | 4/7/2005                        
|                               |  |             |           |           |      |           |         |            |            |                          |         |                           |                 |        |         |                    |  |           |   |                |  |                         |  |                  |  |                                 
|Residential A&D                |  | $           | 887,980   |           | 1D   |           | 0       |            | 12/13/2010 |                          | 324,000 |                           | Substandard     |        | NA      |                    |  |           | $ | 887,980        |  | 6/7/2010                |  | FV               |  | 6/26/2010                       
|                               |  |             |           |           |      |           |         |            |            |                          |         |                           |                 |        |         |                    |  |           |   |                |  |                         |  |                  |  |                                 
|Residential A&D                |  | $           | 869,465   |           | 1A2  |           | 0       |            | 9/9/2010   |                          | 0       |                           | Substandard     |        | NA      |                    |  |           | $ | 1,989,784      |  | 1/15/2009               |  | FV               |  | 3/17/2006                       
|                               |  |             |           |           |      |           |         |            |            |                          |         |                           |                 |        |         |                    |  |           |   |                |  |                         |  |                  |  |                                 
|Tile flooring operation        |  | $           | 825,847   |           | 1E2  |           | 0       |            | 9/13/2010  |                          | 126,527 |                           | Substandard     |        | NA      |                    |  |           | $ | 840,000        |  | 7/15/2009               |  | FV               |  | 4/10/2007                       



* Nonaccrual.



39







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|------------------------------------
|Management’s Discussion and Analysis
|                                    



The
Bank’s allowance for loan and lease losses methodology involves the following: First, the Bank evaluates loans
and relationships greater than $500,000 which are in non-performing status (non-accrual, greater than 90 days still accruing,
etc.) or otherwise deemed to be impaired for individual impairment under ASC 310-10. Further, individual impairment is
calculated for any loan, regardless of size, if classified as a Troubled Debt Restructure. Once the ASC 310-10 analysis
is completed, the valuation is reviewed for required specific reserve adjustment at least quarterly. On large or complex
credits (generally those in excess of $1,000,000), the Bank obtains a liquidation or quick-sale appraisal at the initial
impairment determination and adjusts the specific reserve upon receipt and review of the appraisal. Generally, the Bank
obtains an updated appraisal on such properties annually. On smaller credits, the decision to pay for an in-debt appraisal is
made on a case-by-case basis. In cases where such an updated appraisal is not obtained, the Bank may elect to apply a
discount to the most recent appraisal obtained for the property in question. This discount is based on changes in value
observed from appraisals on similar properties and knowledge about recent sales of similar properties. Again, these
evaluations are reviewed quarterly.



Loans
evaluated under ASC 310-10 are removed from the ASC 450 general loan classifications, to avoid double reserving. Our ALLL model
breaks ASC 450 down into two parts: reserves based upon historical losses (adjusted to account for current economic outlook or
other factors), risk grade or past due status, years to impairment, and an “unallocated” section based on observations
of general economic conditions, local unemployment figures, GDP trends, or other quantitative or qualitative factors.



Liquidity and Sensitivity



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



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



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



At
December 31, 2010, the Bank was cumulatively asset-sensitive (earning assets subject to interest rate changes exceeded interest-bearing
liabilities subject to changes in interest rates). Demand, savings and money market accounts re-pricing within three months totaled
$153.4 million. Historically, these short-term deposits are not as rate sensitive as other types of interest-bearing deposits.
The Bank is asset sensitive in the three month or less time period, with the four to twelve months time period being liability-sensitive,
the thirteen to sixty months time period being asset-sensitive and the over sixty months time period being asset-sensitive.



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



40







|                                    
|------------------------------------
|Management’s Discussion and Analysis
|                                    



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



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



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



Interest
Rate Sensitivity (dollars in thousands)



|                                                             |  | December 31, 2010     |        
|------------------------------------------------------------ |  | --------------------- | -------
|                                                             |  | Maturities/Re-pricing |        
|                                                             |  | 1-3                   |        
|                                                             |  | Months                |        
|Earning assets:                                              |  |                       |        
|Loans                                                        |  | $                     | 104,527
|Investments                                                  |  |                       | -      
|Federal funds sold                                           |  |                       | 2,210  
|Deposits with banks                                          |  |                       | 28,080 
|Total                                                        |  |                       | 134,817
|                                                             |  |                       |        
|Interest-bearing liabilities:                                |  |                       |        
|Demand accounts                                              |  |                       | 46,482 
|Savings and money market                                     |  |                       | 106,906
|Time deposits                                                |  |                       | 63,803 
|Repurchase agreements and purchased funds                    |  |                       | 2,776  
|Other short-term borrowings                                  |  |                       | 900    
|Long-term debt                                               |  |                       | -      
|Subordinated debentures                                      |  |                       | 12,372 
|Total                                                        |  |                       | 233,239
|Interest rate gap                                            |  | $                     | (98,422
|                                                             |  |                       |        
|Cumulative interest sensitivity gap                          |  | $                     | (98,422
|                                                             |  |                       |        
|Ratio of sensitivity gap to total earnings assets            |  |                       | (19.42 
|Cumulative ratio of sensitivity gap to total earnings assets |  |                       | (19.42 



Effects of Inflation



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



41







|                                    
|------------------------------------
|Management’s Discussion and Analysis
|                                    



Commitments
and Contingencies



Litigation



No legal proceedings are required
to be disclosed pursuant to this item as of December 31, 2010.



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:



|                             |  | 2010 |            |  | 2009 |  
|---------------------------- |  | ---- | ---------- |  | ---- | -
|                             |  |      |            |  |      |  
|Commitments to extend credit |  | $    | 65,392,000 |  |      | $
|Stand-by letters of credit   |  |      | 1,066,000  |  |      |  
|                             |  | $    | 66,458,000 |  |      | $



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 7. The distribution of
commitments to extend credit approximates the distribution of loans outstanding.



The
Bank's primary focus is commercial, consumer and small business transactions. The Bank endeavors to avoid significant credit
exposure to any single borrower or group of related borrowers.



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



42







Financial Ratios



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



Key
Financial Ratios



|                                 |  | 2010 |        |    | 2009 |  |        | 2008 | 
|-------------------------------- |  | ---- | ------ | -- | ---- |  | ------ | ---- | 
|                                 |  |      |        |    |      |  |        |      | 
|Average equity to average assets |  |      | 3.48   | %  |      |  | 5.17   | %    | 
|Return on average assets         |  |      | (2.70  | )% |      |  | (2.54  | )%   | 
|Return on average equity         |  |      | (77.64 | )% |      |  | (49.18 | )%   | 



43







ITEM 7A – QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK



Smaller reporting companies such as
the Company are not required to provide the information required by this item.



ITEM 8 – FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA





44













REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM





To the Board of Directors and Stockholders
Waccamaw Bankshares, Inc.

Whiteville, North Carolina





We have audited the accompanying consolidated
balance sheets of Waccamaw Bankshares, Inc. and subsidiary (the “Company”) as of December 31, 2010 and 2009, and
the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the years then ended.
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express
an opinion on these financial statements based on our 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. The Company
is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits
include consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate
in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An also audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.





In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the financial position of Waccamaw Bankshares, Inc. and
subsidiary as of December 31, 2010 and 2009, and the results of their operations and their cash flows for the years then ended
in conformity with accounting principles generally accepted in the United States of America.



The accompanying consolidated financial statements
have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements,
the Company has suffered recurring credit losses that have eroded regulatory capital ratios. As of December 31, 2011 the Company
is considered substantially undercapitalized based on their regulatory capital level. This raises substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial
statements do not include any adjustments that would be necessary should the Company be unable to continue as a going concern.







/s/
Elliott Davis, PLLC







Galax, Virginia
February 29, 2012





45







|                              
|------------------------------
|Consolidated
Balance Sheets   
|December 31, 2010
    and 2009



|                                                                                                                                                                                                                                    |  | 2010 |             |   | 2009 |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | -
|Assets                                                                                                                                                                                                                              |  |      |             |   |      |  
|                                                                                                                                                                                                                                    |  |      |             |   |      |  
|Cash and due from banks                                                                                                                                                                                                             |  | $    | 4,877,988   |   |      | $
|Interest-bearing deposits with banks                                                                                                                                                                                                |  |      | 28,079,615  |   |      |  
|Federal funds sold                                                                                                                                                                                                                  |  |      | 2,210,000   |   |      |  
|Total cash and cash equivalents                                                                                                                                                                                                     |  |      | 35,167,603  |   |      |  
|                                                                                                                                                                                                                                    |  |      |             |   |      |  
|Investment securities, available for sale                                                                                                                                                                                           |  |      | 67,487,471  |   |      |  
|Restricted equity securities                                                                                                                                                                                                        |  |      | 3,759,500   |   |      |  
|Loans, net of allowance for loan losses of $15,541,288  in 2010 and $10,148,927  in 2009                                                                                                                                            |  |      | 389,475,435 |   |      |  
|Property and equipment, net                                                                                                                                                                                                         |  |      | 16,410,961  |   |      |  
|Intangible assets, net                                                                                                                                                                                                              |  |      | 160,000     |   |      |  
|Accrued income                                                                                                                                                                                                                      |  |      | 1,831,912   |   |      |  
|Bank owned life insurance                                                                                                                                                                                                           |  |      | 18,330,003  |   |      |  
|Foreclosed assets                                                                                                                                                                                                                   |  |      | 9,588,710   |   |      |  
|Other assets                                                                                                                                                                                                                        |  |      | 6,010,023   |   |      |  
|Total assets                                                                                                                                                                                                                        |  | $    | 548,221,618 |   |      | $
|                                                                                                                                                                                                                                    |  |      |             |   |      |  
|Liabilities and Stockholders' Equity                                                                                                                                                                                                |  |      |             |   |      |  
|                                                                                                                                                                                                                                    |  |      |             |   |      |  
|Liabilities                                                                                                                                                                                                                         |  |      |             |   |      |  
|Noninterest-bearing deposits                                                                                                                                                                                                        |  | $    | 35,354,965  |   |      | $
|Interest-bearing deposits                                                                                                                                                                                                           |  |      | 419,591,979 |   |      |  
|Total deposits                                                                                                                                                                                                                      |  |      | 454,946,944 |   |      |  
|                                                                                                                                                                                                                                    |  |      |             |   |      |  
|Securities sold under agreements to repurchase                                                                                                                                                                                      |  |      | 19,776,000  |   |      |  
|Other short-term borrowings                                                                                                                                                                                                         |  |      | 5,900,000   |   |      |  
|Long-term debt                                                                                                                                                                                                                      |  |      | 38,000,000  |   |      |  
|Junior subordinated debentures                                                                                                                                                                                                      |  |      | 12,372,000  |   |      |  
|Accrued interest payable                                                                                                                                                                                                            |  |      | 1,275,231   |   |      |  
|Other liabilities                                                                                                                                                                                                                   |  |      | 1,812,132   |   |      |  
|Total liabilities                                                                                                                                                                                                                   |  |      | 534,082,307 |   |      |  
|                                                                                                                                                                                                                                    |  |      |             |   |      |  
|Commitments and contingencies (Note 13,16, 19)                                                                                                                                                                                      |  |      | -           |   |      |  
|                                                                                                                                                                                                                                    |  |      |             |   |      |  
|Stockholders’ equity                                                                                                                                                                                                                |  |      |             |   |      |  
|Preferred stock, Series A, convertible, non-cumulative, non-voting, no par value; 1,000,000 shares authorized; 550 shares issued and outstanding at December 31, 2010 and 2009, respectively                                        |  |      | 9,064       |   |      |  
|Preferred stock, Series B, convertible, non-cumulative, non-voting, no par value; 1,000,000 shares authorized; 546,375 and 0 shares issued and outstanding at December 31, 2010 and 2009, respectively, less discount of $6,488,497 |  |      | 9,603,769   |   |      |  
|Common stock, no par value; 50,000,000 shares authorized; 7,466,224 and 5,551,183 shares issued and outstanding at December 31, 2010 and 2009, respectively                                                                         |  |      | 27,084,927  |   |      |  
|Common stock warrants                                                                                                                                                                                                               |  |      | 300,000     |   |      |  
|Retained deficit                                                                                                                                                                                                                    |  |      | (20,535,626 | ) |      |  
|Accumulated other comprehensive loss                                                                                                                                                                                                |  |      | (2,322,823  | ) |      |  
|Total stockholders’ equity                                                                                                                                                                                                          |  |      | 14,139,311  |   |      |  
|Total liabilities and stockholders’ equity                                                                                                                                                                                          |  | $    | 548,221,618 |   |      | $



See Notes to Consolidated Financial Statements



46







|                                          
|------------------------------------------
|Consolidated
Statements of Operations     
|Years ended December
    31, 2010 and 2009



|                                                                           |  | 2010 |             |   | 2009 |  
|-------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | -
|                                                                           |  |      |             |   |      |  
|Interest income                                                            |  |      |             |   |      |  
|Loans and fees on loans                                                    |  | $    | 17,076,159  |   |      | $
|Investment securities, taxable                                             |  |      | 2,932,446   |   |      |  
|Investment securities, nontaxable                                          |  |      | 367,633     |   |      |  
|Federal funds sold                                                         |  |      | 180,789     |   |      |  
|Deposits with banks                                                        |  |      | 123,693     |   |      |  
|Total interest income                                                      |  |      | 20,680,720  |   |      |  
|                                                                           |  |      |             |   |      |  
|Interest expense                                                           |  |      |             |   |      |  
|Deposits                                                                   |  |      | 6,750,280   |   |      |  
|Federal funds purchased and securities sold under agreements to repurchase |  |      | 675,395     |   |      |  
|Other borrowed funds                                                       |  |      | 2,332,992   |   |      |  
|Total interest expense                                                     |  |      | 9,758,667   |   |      |  
|Net interest income                                                        |  |      | 10,922,053  |   |      |  
|                                                                           |  |      |             |   |      |  
|Provision for loan losses                                                  |  |      | 12,205,554  |   |      |  
|Net interest loss after
    provision for loan losses                      |  |      | (1,283,501  | ) |      |  
|                                                                           |  |      |             |   |      |  
|Noninterest income (expense)                                               |  |      |             |   |      |  
|Service charges on deposit accounts                                        |  |      | 2,778,195   |   |      |  
|ATM and check cashing fees                                                 |  |      | 997,844     |   |      |  
|Mortgage origination income                                                |  |      | 377,665     |   |      |  
|Income from financial services                                             |  |      | 101,601     |   |      |  
|Earnings on bank owned life insurance                                      |  |      | 647,649     |   |      |  
|Net realized (losses) gains on sale of investment securities               |  |      | 1,593,388   |   |      |  
|Impairment on investment securities available for sale                     |  |      | -           |   |      |  
|Other operating income                                                     |  |      | 227,700     |   |      |  
|Total noninterest income                                                   |  |      | 6,724,042   |   |      |  
|                                                                           |  |      |             |   |      |  
|Noninterest expense                                                        |  |      |             |   |      |  
|Salaries and employee benefits                                             |  |      | 6,291,938   |   |      |  
|Occupancy and equipment                                                    |  |      | 2,057,780   |   |      |  
|Data processing                                                            |  |      | 1,134,293   |   |      |  
|Advertising                                                                |  |      | 260,755     |   |      |  
|Regulatory agency expense                                                  |  |      | 1,643,459   |   |      |  
|Professional services                                                      |  |      | 1,157,843   |   |      |  
|Foreclosed assets, net                                                     |  |      | 2,503,628   |   |      |  
|Goodwill impairment charge                                                 |  |      | -           |   |      |  
|Other expense                                                              |  |      | 1,940,318   |   |      |  
|Total noninterest expense                                                  |  |      | 16,990,014  |   |      |  
|Loss before income taxes                                                   |  |      | (11,549,473 | ) |      |  
|                                                                           |  |      |             |   |      |  
|Income tax expense (benefit)                                               |  |      | 3,688,212   |   |      |  
|Net loss                                                                   |  | $    | (15,237,685 | ) |      | $
|                                                                           |  |      |             |   |      |  
|Basic loss per share                                                       |  | $    | (2.45       | ) |      | $
|Diluted loss per share                                                     |  | $    | (2.45       | ) |      | $
|Weighted average common shares outstanding                                 |  |      | 6,217,512   |   |      |  
|Weighted average dilutive common shares outstanding                        |  |      | 6,217,512   |   |      |  



See Notes to Consolidated Financial Statements



47







|                                                          
|----------------------------------------------------------
|Consolidated Statements of
Changes in Stockholders’ Equity
|Years
ended December 31, 2010 and 2009                    



|                                                                                                                            |  |                 |            |   |          |   |         |                 |  |   |          |   |  |          |            |   | Accumulated   |   |             |       | 
|--------------------------------------------------------------------------------------------------------------------------- |  | --------------- | ---------- | - | -------- | - | ------- | --------------- |  | - | -------- | - |  | -------- | ---------- | - | ------------- | - | ----------- | ----- | 
|                                                                                                                            |  |                 |            |   | Common   |   |         |                 |  |   |          |   |  | Other    |            |   |               |  
|                                                                                                                            |  | Preferred Stock |            |   | Stock    |   |         | Preferred       |  |   | Common   |   |  | Retained |            |   | Comprehensive |   |             |       | 
|                                                                                                                            |  | Stock, Series B |            |   | Warrants |   |         | Stock, Series A |  |   | Stock    |   |  | Earnings |            |   | Income (Loss) |   |             | Total | 
|                                                                                                                            |  |                 |            |   |          |   |         |                 |  |   |          |   |  |          |            |   |               |   |             |       | 
|December 31, 2008                                                                                                           |  | $               | -          |   |          | $ | -       |                 |  | $ | 464,476  |   |  | $        | 24,591,884 |   |               | $ | 8,907,591   |       | 
|                                                                                                                            |  |                 |            |   |          |   |         |                 |  |   |          |   |  |          |            |   |               |   |             |       | 
|Comprehensive income                                                                                                        |  |                 |            |   |          |   |         |                 |  |   |          |   |  |          |            |   |               |   |             |       | 
|Net loss                                                                                                                    |  |                 | -          |   |          |   | -       |                 |  |   | -        |   |  |          | -          |   |               |   | (14,205,532 | )     | 
|Net change in unrealized
    gain on investment securities available for sale, net of income taxes of $1,669,468            |  |                 | -          |   |          |   | -       |                 |  |   | -        |   |  |          | -          |   |               |   | -           |       | 
|Reclassification adjustment
    of impairment in investments securities available for sale, net of income taxes of $161,413 |  |                 | -          |   |          |   | -       |                 |  |   | -        |   |  |          | -          |   |               |   | -           |       | 
|Reclassification adjustment
    of loss recognized on  sale net of income taxes of $341,805                                 |  |                 | -          |   |          |   | -       |                 |  |   | -        |   |  |          | -          |   |               |   | -           |       | 
|Total comprehensive loss                                                                                                    |  |                 |            |   |          |   |         |                 |  |   |          |   |  |          |            |   |               |   |             |       | 
|                                                                                                                            |  |                 |            |   |          |   |         |                 |  |   |          |   |  |          |            |   |               |   |             |       | 
|Reversal of non-credit
    related impairment                                                                               |  |                 | -          |   |          |   | -       |                 |  |   | -        |   |  |          | -          |   |               |   | 168,451     |       | 
|Stock based compensation                                                                                                    |  |                 | -          |   |          |   | -       |                 |  |   | -        |   |  |          | 122,378    |   |               |   | -           |       | 
|Stock issuance costs                                                                                                        |  |                 | -          |   |          |   | -       |                 |  |   | -        |   |  |          | (69,904    | ) |               |   | -           |       | 
|Conversion
    of preferred stock to common stock                                                                           |  |                 | -          |   |          |   | -       |                 |  |   | (455,512 | ) |  |          | 455,412    |   |               |   | -           |       | 
|December 31, 2009                                                                                                           |  |                 | -          |   |          |   | -       |                 |  |   | 9,064    |   |  |          | 25,099,770 |   |               |   | (5,129,490  | )     | 
|                                                                                                                            |  |                 |            |   |          |   |         |                 |  |   |          |   |  |          |            |   |               |   |             |       | 
|Comprehensive loss                                                                                                          |  |                 |            |   |          |   |         |                 |  |   |          |   |  |          |            |   |               |   |             |       | 
|Net loss                                                                                                                    |  |                 | -          |   |          |   | -       |                 |  |   | -        |   |  |          | -          |   |               |   | (15,237,685 | )     | 
|Net change in unrealized
    gain on investment securities available for sale, net of income taxes of $823,516              |  |                 | -          |   |          |   | -       |                 |  |   | -        |   |  |          | -          |   |               |   | -           |       | 
|Reclassification adjustment
    of gain recognized  on sale net of income taxes of $(614,315)                               |  |                 | -          |   |          |   | -       |                 |  |   | -        |   |  |          | -          |   |               |   | -           |       | 
|Total comprehensive loss                                                                                                    |  |                 |            |   |          |   |         |                 |  |   |          |   |  |          |            |   |               |   |             |       | 
|                                                                                                                            |  |                 |            |   |          |   |         |                 |  |   |          |   |  |          |            |   |               |   |             |       | 
|Issuance of preferred
    stock, Series B                                                                                   |  |                 | 16,092,266 |   |          |   | -       |                 |  |   | -        |   |  |          | -          |   |               |   | -           |       | 
|Issuance of common stock-warrants                                                                                           |  |                 | -          |   |          |   | 300,000 |                 |  |   | -        |   |  |          | -          |   |               |   | -           |       | 
|Discount on preferred
    stock, Series B                                                                                   |  |                 | (6,488,497 | ) |          |   | -       |                 |  |   | -        |   |  |          | -          |   |               |   | -           |       | 
|Issuance of common stock                                                                                                    |  |                 | -          |   |          |   | -       |                 |  |   | -        |   |  |          | 2,393,801  |   |               |   | -           |       | 
|Reversal of non-credit
    related impairment                                                                               |  |                 | -          |   |          |   | -       |                 |  |   | -        |   |  |          | -          |   |               |   | (168,451    | )     | 
|Stock based compensation                                                                                                    |  |                 | -          |   |          |   | -       |                 |  |   | -        |   |  |          | 85,335     |   |               |   | -           |       | 
|Stock
    issuance costs                                                                                                    |  |                 | -          |   |          |   | -       |                 |  |   | -        |   |  |          | (493,979   | ) |               |   | -           |       | 
|December 31, 2010                                                                                                           |  | $               | 9,603,769  |   |          | $ | 300,000 |                 |  | $ | 9,064    |   |  | $        | 27,084,927 |   |               | $ | (20,535,626 | )     | 



See Notes to Consolidated Financial Statements



48







|                                                
|------------------------------------------------
|Consolidated Statements of
Changes in Cash Flows
|For the years ended December 31, 2010 and 2009  





|                                                                           |  | 2010 |              |   | 2009 |  
|-------------------------------------------------------------------------- |  | ---- | ------------ | - | ---- | -
|Cash flows from operating activities                                       |  |      |              |   |      |  
|Net loss                                                                   |  | $    | (15,237,685  | ) |      | $
|Adjustments to reconcile net loss
    to net cash provided  by operations: |  |      |              |   |      |  
|Depreciation and amortization                                              |  |      | 920,088      |   |      |  
|Impairment of goodwill                                                     |  |      | -            |   |      |  
|Stock-based compensation                                                   |  |      | 85,335       |   |      |  
|Provision for loan losses                                                  |  |      | 12,205,554   |   |      |  
|Accretion of discount on securities, net of amortization of  premiums      |  |      | 729,207      |   |      |  
|Write-down of foreclosed assets                                            |  |      | 2.357,318    |   |      |  
|(Gain) loss on sale of investment securities                               |  |      | (1,593,388   | ) |      |  
|Impairment of investment securities                                        |  |      | -            |   |      |  
|Income from bank owned life insurance                                      |  |      | (647,649     | ) |      |  
|Deferred taxes                                                             |  |      | (3,666,532   | ) |      |  
|Changes in assets and liabilities:                                         |  |      |              |   |      |  
|Accrued income                                                             |  |      | 617,169      |   |      |  
|Other assets                                                               |  |      | 13,883,522   |   |      |  
|Accrued interest payable                                                   |  |      | 332,542      |   |      |  
|Other liabilities                                                          |  |      | (286,861     | ) |      |  
|Net cash provided by operating activities                                  |  |      | 9,698,620    |   |      |  
|                                                                           |  |      |              |   |      |  
|Cash flows from investing activities                                       |  |      |              |   |      |  
|Sales (purchases) of restricted equity securities                          |  |      | 281,850      |   |      |  
|Purchases of investment securities                                         |  |      | (115,823,040 | ) |      |  
|Maturities of investment securities                                        |  |      | 8,940,943    |   |      |  
|Net decrease in loans                                                      |  |      | 21,847,641   |   |      |  
|Purchase of HELOC loans                                                    |  |      | (82,833,207  | ) |      |  
|Proceeds from sales of investment securities                               |  |      | 127,248,131  |   |      |  
|Surrender (investment) in bank owned life insurance                        |  |      | 893,660      |   |      |  
|Purchases of property and equipment                                        |  |      | (218,134     | ) |      |  
|Proceeds from sale of foreclosed assets                                    |  |      | 2,277,358    |   |      |  
|Net cash provided by (used in) investing activities                        |  |      | (37,384,798  | ) |      |  
|                                                                           |  |      |              |   |      |  
|Cash flows from financing activities                                       |  |      |              |   |      |  
|Net increase (decrease) in noninterest-bearing deposits                    |  |      | 2,414,155    |   |      |  
|Net increase in interest-bearing deposits                                  |  |      | 18,994,831   |   |      |  
|Net decrease in securities sold under agreements to repurchase             |  |      | (839,000     | ) |      |  
|Net (decrease) in short-term borrowings                                    |  |      | 2,400,000    |   |      |  
|Net repayment of long-term debt                                            |  |      | (5,000,000   | ) |      |  
|Proceeds from issuance of common stock                                     |  |      | 2,393,801    |   |      |  
|Proceeds from acquisition of preferred stock, Series B, net                |  |      | 2,393,801    |   |      |  
|Proceeds from issuance of common stock warrants                            |  |      | 9,603,769    |   |      |  
|Stock issuance costs and redemption of fractional shares                   |  |      | (493,979     | ) |      |  
|Net cash provided by financing activities                                  |  |      | 19,869,808   |   |      |  
|Increase (decrease) in cash and cash equivalents                           |  |      | (7,816,370   | ) |      |  
|                                                                           |  |      |              |   |      |  
|Cash and cash equivalents, beginning                                       |  |      | 42,983,973   |   |      |  
|Cash and cash equivalents, ending                                          |  | $    | 35,167,603   |   |      | $
|                                                                           |  |      |              |   |      |  
|Supplemental disclosure of cash flow information                           |  |      |              |   |      |  
|Interest paid                                                              |  | $    | 9,426,125    |   |      | $
|Taxes paid                                                                 |  | $    | -            |   |      | $
|                                                                           |  |      |              |   |      |  
|Supplemental disclosure of noncash activities                              |  |      |              |   |      |  
|Real estate acquired in settlement of loans                                |  | $    | 9,229,145    |   |      | $





See Notes to Consolidated Financial Statements



49







|                                              
|----------------------------------------------
|Notes to Consolidated Financial Statements    
|For the years ended December 31, 2010 and 2009



Note 1. Organization and Summary
of Significant Accounting Policies



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



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



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



Going Concern Considerations



The consolidated financial statements
have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the
normal course of business for the foreseeable future. These consolidated financial statements do not include any adjustments relating
to the recoverability or classification of assets or the amounts and classification of liabilities that may be necessary should
we be unable to continue as a going concern.



The substantial
uncertainties throughout the economy and U.S. banking industry coupled with current market conditions have adversely affected
the Company’s 2010 results and capital levels. The significant losses in 2010 and 2009, primarily related to credit
losses and the valuation allowance on deferred tax assets, reduced the Company’s capital levels. In order to again
become well capitalized under federal banking agencies’ guidelines, management believes that the Company will need to
raise additional capital to recapitalize the Bank and to absorb the potential future credit losses associated with the
disposition of its nonperforming assets. Accordingly, management is in the process of evaluating various alternatives to
increase tangible common equity and regulatory capital through the issuance of additional equity in public or private
offerings. Management is actively evaluating a number of potential capital sources, asset reductions, and other balance sheet
management strategies with the goal of increasing its level of regulatory capital to support its balance sheet long-term.
Management is currently reducing and otherwise restructuring its balance sheet to improve capital ratios.



Current market conditions for
banking institutions, the overall uncertainty in financial markets, and a depressed  stock price are significant barriers to
the success of any plan to issue additional equity in public or private offerings.  An equity financing transaction
would result in substantial dilution to the Company's current shareholders and could adversely affect the market price of the
Company's common stock.  There can be no assurance as to whether these efforts will be successful, either on a
short-term or long-term basis.  Should these efforts be unsuccessful, due to existing regulatory
restrictions on cash payments and dividends between the Bank and the holding company, the Company may be unable to
discharge its liabilities in the normal course of business. There can be no assurance that the Company will be successful in
any efforts to raise additional capital during 2012.



Both the parent company and the banking
subsidiary actively manage liquidity and cash flow needs. The Company is prohibited from declaring or paying dividends without prior approval of its federal and state banking regulators. Even if this requirement were not in place, the Company does not intend to declare or pay dividends to shareholders at any time in the foreseeable future. At December 31, 2010, the Company had $35 million of cash and cash
equivalents. The Company has no long-term debt maturing in 2011 and $15 million maturing in 2012.





The Company’s loan agreement,
for the $1,000,000 line of credit debt obligation, includes financial covenants requiring the Bank to maintain a minimum
weighted average return on assets of greater than 0.50% on an annualized basis, maintain total equity capital of $43,499,000,
and that at all times the percentage of non-performing loans to gross loans shall not exceed 4.00%. The Company did not meet
these covenants in 2010 and has not obtained a waiver through December 31, 2011. The obligation is collateralized by a pledge
of all shares of common stock in Waccamaw Bank. The lender could demand the common stock from the Company unless and until
the covenants are in compliance or a waiver has been issued.





50







|                                              
|----------------------------------------------
|Notes to Consolidated Financial Statements    
|For the years ended December 31, 2010 and 2009



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



Going Concern Considerations, continued



Liquidity at the bank level is
dependent upon the deposit franchise which funds 81% of the Company’s assets (or 57% excluding brokered CDs). The
FDIC’s changes to permanently increase the amount of deposit insurance to $250,000 per deposit relationship and to
provide unlimited deposit insurance for certain transaction accounts until December 31, 2012, have contributed to the
stability of the deposit base. All banks that have elected to participate in the Transaction Account Guarantee Program
(“TAGP”) have the same FDIC insurance coverage. Potential loss of deposits would be a primary funding need in a
liquidity crisis. Deposit balances which are not covered by FDIC insurance total approximately $16.0 million currently, and
would increase to approximately $22.5 million without the benefit of the FDIC’s TAGP, currently scheduled to expire at
December 31, 2012. Thus, the primary deposit-related liquidity risk relates to balances which are not insured. As of December
31, 2011 the Company has liquid assets of approximately $128 million to address liquidity needs. If a
liquidity issue presents itself, deposit promotions would be expected to yield significant in-flows of cash, but could be
limited based on limitations on maximum interest rates that may be offered by banks that are not well
capitalized.



In addition, certain borrowings, such
as brokered CDs and FHLB advances, are dependent on various credit eligibility criteria which may be impacted by changes in the
Company’s financial position and/or results of operations. Given the weakened economy, and current market conditions, there
is no assurance that the Company will, if it chooses to do so, be able to obtain new borrowings or issue additional equity on terms
that are satisfactory.





Effective November 29, 2011, the Company and
the Bank entered into a Prompt Corrective Action Directive (the “Directive”) with the Board of Governors of the Federal
Reserve System (the “Board of Governors”).



The Directive is a formal corrective action
in which the Board of Governors has determined that, as of October 30, 2011, Waccamaw Bank is critically undercapitalized, as defined
in section 208.43(b)(5) of Regulation H of the Board of Governors.



Among other things, the Directive requires the Bank no later than
January 6, 2012 to:



| | • | Increase the Bank’s equity through the sale of shares or contributions to surplus in an amount
sufficient to make the Bank adequately capitalized as defined in section 208.43(b)(2) of Regulation H of the Board of Governors;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Enter into and close a contract to be acquired by a depository institution holding company or combine with another insured
depository institution, closing under which contract is conditioned only on the receipt of necessary regulatory approvals, the
continued accuracy of customary representations and warranties and the performance of customary pre-closing covenants;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Take other necessary measures to make the Bank adequately capitalized;
| | - | ----------------------------------------------------------------------



| | • | Restrict the making of any capital distributions, including, but not limited to, the payment of dividends;
| | - | ----------------------------------------------------------------------------------------------------------



| | • | Restrict the payment of bonuses to senior executive officers and increases in compensation of such officers; and
| | - | ----------------------------------------------------------------------------------------------------------------



| | • | Restrict certain activities, including, but not limited to, making any material change in accounting methods and engaging in
any covered transaction, as defined in section 23A of the Federal Reserve Act, without the prior written approval of the FDIC.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





51







|                                              
|----------------------------------------------
|Notes to Consolidated Financial Statements    
|For the years ended December 31, 2010 and 2009



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



Going Concern Considerations, 
continued



Due
to the recent favorable ruling by the Federal Reserve Board of Governors allowing a portion of the preferred stock to be
regulatory capital, the Bank’s capital status at September 30, 2011, changed from critically undercapitalized to
significantly undercapitalized. Although the Directive has not been terminated, the Company continues to take measures to
make the Bank adequately capitalized through the sale of branches and selling stock through a private stock
offering.



During 2011, the Company continued
to experience losses from operations primarily due to loan losses. Based on unaudited financial information, as of December 31,
2011, consolidated total assets are $561,120,907, equity is $(3,625,647) and net loss from operations is $18,725,248 for the year
ended December 31, 2011. The resulting bank regulatory capital ratios of total capital to risk weighted assets, Tier 1 capital
to risk weighted assets and Tier 1 capital to average assets are 4.96%, 3.08% and 2.08%, respectively. Based on these levels, the
Bank is considered significantly undercapitalized.





Generally
accepted accounting principles require that in the event of changes about the likelihood of realization of a deferred tax asset
that results in the establishment of a deferred tax asset valuation allowance related to unrealized losses on available for sale
investment securities, that valuation allowance be established through operation even thought the original deferred tax asset was
established through other comprehensive income. The guidance on how to address this inconsistent treatment with respect to the
calculation of regulatory capital is not well defined. Accordingly, the capital amounts and ratios in the table above include an
adjustment related to establishment of such a deferred tax asset valuation. After this adjustment, regulatory capital as presented
is the same amount as would be reported had the related deferred tax asset has not been recorded. Management has discussed this
treatment with applicable bank regulators and management has not been informed that this treatment is incorrect. However, due to
the lack of clear guidance, it is possible the regulators could conclude this adjustment is not appropriate. If that were the case,
Tier 1 and total regulatory capital for December 31, 2011 would be reduced by $898,000 and the bank capital ratios would approximate
the following:





|                                       |  |  | 2011 |  
|-------------------------------------- |  |  | ---- | -
|                                       |  |  |      |  
|Total capital to risk weighted assets  |  |  | 1.93 | %
|Tier 1 capital to risk weighted assets |  |  | 2.85 | %
|Tier 1 capital to average assets       |  |  | 4.73 |  





Based on current capital levels and continued
operating losses management believes the Company will require additional capital to be able to remain viable. Management has implemented various strategies including a private stock offering and selling branches
to provide this needed capital. In spite of Management’s best efforts, there is no guarantee management will be successful
in raising the additional capital. Accordingly, there is substantial doubt about the Company’s ability to continue as a going
concern.



Critical
Accounting Policies



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



Principles
of Consolidation



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



Business Segments



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



Use
of Estimates



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



52







|                                              
|----------------------------------------------
|Notes to Consolidated Financial Statements    
|For the years ended December 31, 2010 and 2009



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 determination of other than temporary impairment on investment securities, the valuation of deferred tax assets and the valuation
of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the
allowances for loan and foreclosed real estate losses, management obtains independent appraisals for significant properties.



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



Cash
and Cash Equivalents



For
the purpose of presentation in the statement of cash flows, cash and cash equivalents are defined as those amounts included in
the balance sheet caption "cash and due from banks" and "interest-bearing deposits with banks", and “federal
funds sold.” Generally, federal funds are purchased and sold for one-day periods.



Interest-Bearing
Deposits with Banks



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



Trading
Securities



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



Investment
Securities



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



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



53







|                                              
|----------------------------------------------
|Notes to Consolidated Financial Statements    
|For the years ended December 31, 2010 and 2009



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



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.



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



Interest is accrued and credited to
income based on the principal amount outstanding. The accrual of interest on impaired loans is discontinued when, in management’s
opinion, the borrower may be unable to make payments as they become due. When interest accrual is discontinued, all unpaid accrued
interest is reversed. Interest income is subsequently recognized on the cash-basis or cost-recovery method, as appropriate. When
facts and circumstances indicate the borrower has regained the ability to make required payments, the loan is returned to accrual
status. Past due status of loans is determined based on contractual terms.



Allowance for Loan Losses



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



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



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



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



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



54







|                                              
|----------------------------------------------
|Notes to Consolidated Financial Statements    
|For the years ended December 31, 2010 and 2009



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



Property
and Equipment



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



|                        |  | Years
|----------------------- |  | -----
|Leasehold improvements  |  | 5-30 
|Automobile              |  | 5    
|Furniture and equipment |  | 3-10 
|Buildings               |  | 10-40



Intangible Assets



Intangible assets consist of purchased
core deposit intangible assets and are accounted for in accordance with generally accepted accounting principles. The Company evaluates
the remaining useful life of each intangible asset that is being amortized to determine whether events and circumstances warrant
a revision to the remaining period of amortization. Intangible assets are currently being amortized over estimated useful lives
of 10 years.



Foreclosed Assets



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



Transfers of Financial Assets



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



Stock
Compensation Plans



The Company recognizes compensation
cost relating to share-based payment transactions. Generally accepted accounting principles require entities to measure the cost
of employee services received in exchange for stock options based on the grant-date fair value of the award, and to recognize the
cost over the period the employee is required to provide services for the award. Compensation cost has been measured using the
fair value of an award on the grant date and is recognized over the service period, which is usually the vesting period.



55







|                                              
|----------------------------------------------
|Notes to Consolidated Financial Statements    
|For the years ended December 31, 2010 and 2009



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



Advertising Expense



The
Company expenses advertising costs as they are incurred. Advertising expense for the years ended December 31, 2010 and 2009 was
approximately $261,000 and $311,000, respectively.



Income
Taxes



Provision
for income taxes is based on amounts reported in the statements of income (after exclusion of non-taxable income such as interest
on state and municipal securities) and consists of taxes currently due plus deferred taxes on temporary differences in the recognition
of income and expense for tax and financial statement purposes. Deferred tax assets, net of a valuation allowance if appropriate,
and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which
the deferred tax assets or liabilities are expected to be realized or settled. Due to uncertainty regarding the realization of
the entire deferred tax asset, management has recorded a deferred tax asset valuation allowance as of December 31, 2010. Details
are included in Note 18. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through
the provision for income taxes.



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



When
tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities,
while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately
sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available
evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution
of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions
that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50%
likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax
position taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in
the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities
upon examination. Management is not aware of any material uncertain tax positions and no liability has been recognized at December
31, 2010. Interest and penalties associated with unrecognized tax benefits would be classified as additional interest expense or
other expense, respectively, in the statement of income.



Comprehensive Income



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



Basic
Earnings per Share



Basic
earnings (loss) 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.



56







|                                              
|----------------------------------------------
|Notes to Consolidated Financial Statements    
|For the years ended December 31, 2010 and 2009



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



Diluted Earnings per Share



The computation of
diluted earnings (loss) per share is similar to the computation of basic earnings per share except that the denominator is
increased to include the number of additional common shares that would have been outstanding if dilutive potential common
shares had been issued. The numerator is adjusted for any changes in income or loss that would result from the assumed
conversion of those potential common stock equivalents. Potential common stock equivalents include the Company’sSeries A convertible preferred stock and related outstanding warrants
and shares associated with stock-based compensation. Due to the net losses in 2010 and 2009, dilutive common stock equivalents
have been excluded from the computation of dilutive earnings per share as the result would be anti-dilutive.



Financial
Instruments



Derivatives
that are used as part of the asset/liability management process are linked to specific assets or liabilities and have high
correlation between the contract and the underlying item being hedged, both at inception and throughout the hedge period. In
addition, forwards and option contracts must reduce the risk attributed to a particular exposure, and for hedges of
anticipatory transactions, the significant terms and characteristics of the transaction must be identified and the
transactions must be probable of occurring. All derivative financial instruments held or issued by the Company are held or
issued for purposes other than trading. The Bank has entered into a structured repo obligation with Barclays Capital, Inc.,
see note 13. Within the structured repo are embedded derivatives which will not have a material effect on the results
of operations.



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



Fair
Value of Financial Instruments



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



Reclassification



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



Subsequent
Events



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



57







|                                              
|----------------------------------------------
|Notes to Consolidated Financial Statements    
|For the years ended December 31, 2010 and 2009



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



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 March 2010, guidance related to derivatives
and hedging was amended to exempt embedded credit derivative features related to the transfer of credit risk from
potential bifurcation and separate accounting. Embedded features related to other types of risk and other embedded credit derivative
features are not exempt from potential bifurcation and separate accounting. The amendments were effective for the Company on July
1, 2010. These amendments will have no impact on the financial statements.



Stock compensation guidance was updated
in April 2010 to address the classification of employee share-based payment awards with exercise prices denominated in the currency
of a market in which a substantial portion of the entity’s equity securities trade. The guidance states that these awards
should not be considered to contain a condition that is not a market, performance, or service condition. Share based payments
that contain conditions related to market performance and service must be recorded as liabilities. These awards should not be
classified as liabilities if they otherwise qualify to be classified as equity. The amendments in this update are effective for
fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The Company does not expect
the update to have an impact on the financial statements.



In April 2010, guidance was issued related
to accounting for acquired troubled loans that are subsequently modified. The guidance provides that if these loans meet the criteria
to be accounted for within a pool, modifications to one or more of these loans does not result in the removal of the modified loan
from the pool even if the modification would otherwise be considered a troubled debt restructuring. The pool of assets in which
the loan is included will continue to be considered for impairment. The amendments do not apply to loans not meeting the criteria
to be accounted for within a pool. These amendments are effective for modifications of loans accounted for within pools occurring
in the first interim or annual period ending on or after July 15, 2010. These amendments had no impact on the financial statements.





In July 2010, the Receivables topic of the
ASC was amended to require expanded disclosures related to a company’s allowance for credit losses and the credit quality
of its financing receivables. The amendments will require the allowance disclosures to be provided on a disaggregated basis. The
Company included the disclosures in its financial statements for the year ended December 31, 2010.



On July 21, 2010, President Obama signed
into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which significantly
changes the regulation of financial institutions and the financial services industry.  The Dodd-Frank Act includes several
provisions that will affect how community banks, thrifts, and small bank and thrift holding companies will be regulated in the
future.  Among other things, these provisions abolish the Office of Thrift Supervision and transfer its functions to
the other federal banking agencies, relax rules regarding interstate branching, allow financial institutions to pay interest on
business checking accounts, change the scope of federal deposit insurance coverage, and impose new capital requirements on bank
and thrift holding companies.  The Dodd-Frank Act also establishes the Bureau of Consumer Financial Protection as an
independent entity within the Federal Reserve, which will be given the authority to promulgate consumer protection regulations
applicable to all entities offering consumer financial services or products, including banks.  Additionally, the Dodd-Frank
Act includes a series of provisions covering mortgage loan origination standards affecting originator compensation, minimum repayment
standards, and pre-payments.  Management is actively reviewing the provisions of the Dodd-Frank Act and assessing its probable
impact on our business, financial condition, and results of operations.



58







|                                              
|----------------------------------------------
|Notes to Consolidated Financial Statements    
|For the years ended December 31, 2010 and 2009



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



Recent
Accounting Pronouncements, continued





Disclosures about Troubled Debt Restructurings
(“TDRs”) required by ASU 2010-20 were deferred by the Financial Accounting Standards Board (“FASB”) in
ASU 2011-01 issued in January 2011. In April 2011 the FASB issued ASU 2011-02 to assist creditors with their determination of when
a restructuring is a TDR. The determination is based on whether the restructuring constitutes a concession and whether the debtor
is experiencing financial difficulties as both events must be present. This standard is expected to have no impact on the Company.





In December 2010,
the Intangibles topic of the ASC was amended to modify Step 1 of the goodwill impairment test for reporting units with zero or
negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if
it is more likely than not that a goodwill impairment exists. Any resulting goodwill impairment should be recorded as a cumulative-effect
adjustment to beginning retained earnings upon adoption. Impairments occurring subsequent to adoption should be included in earnings.
The amendment was effective for the Company on January 1, 2011.



In September 2011, the Intangibles topic
was again amended to permit an entity to consider qualitative factors to determine whether it is more likely than not that the
fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the
two-step goodwill impairment test. These amendments were effective for the Company on January 1, 2012.



In April 2011, the criteria used to
determine effective control of transferred assets in the Transfers and Servicing topic of the ASC was amended by ASU 2011-03.
The requirement for the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed
terms and the collateral maintenance implementation guidance related to that criterion were removed from the assessment of effective
control. The other criteria to assess effective control were not changed. The amendments are effective for the Company beginning
January 1, 2012 but are not expected to have a material effect on the financial statements.



59







|                                              
|----------------------------------------------
|Notes to Consolidated Financial Statements    
|For the years ended December 31, 2010 and 2009



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



Recent Accounting Pronouncements,
continued



ASU 2011-04 was issued in May 2011 to
amend the Fair Value Measurement topic of the ASC by clarifying the application of existing fair value measurement and disclosure
requirements and by changing particular principles or requirements for measuring fair value or for disclosing information about
fair value measurements. The amendments were effective for the Company beginning January 1, 2012 but are not expected to have a
material effect on the financial statements.



The Comprehensive Income topic of the
ASC was amended in June 2011. The amendment eliminates the option to present other comprehensive income as a part of the statement
of changes in stockholders’ equity and requires consecutive presentation of the statement of net income and other comprehensive
income. The amendments will be applicable to the Company on January 1, 2012 and will be applied retrospectively. In December 2011,
the topic was further amended to defer the effective date of presenting reclassification adjustments from other comprehensive income
to net income on the face of the financial statements. Companies should continue to report reclassifications out of accumulated
other comprehensive income consistent with the presentation requirements in effect prior to the amendments while FASB redeliberates
future requirements.



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







Note
2.Loan Swap and Preferred Stock Transaction



Loans



On September 30, 2010, the Bank entered into
an agreement whereby the Bank would sell and Augusta Holdings, LLC (“Augusta”) would buy nonperforming real estate
loans for the contractual pay-off amount (par value) of $11.2 million. The carrying value of these loans was $7.3 million as the
carrying amounts had been reduced to reflect the fair value of the underlying collateral in measuring the impairment under the
requirements of ASC 310-10-35. During the negotiations of this transaction, the Bank agreed to purchase from Augusta, a home equity
line of credit (HELOC) loan pool. The price of the pool was the amount of the aggregate principal balances (par value) of the loans
in the pool, effectively the pool par value of $110.1 million. The pool met certain credit quality and performance criteria. Under
the terms of the HELOC pool purchase agreement, the Bank was able to exclude loans that did not meet the following criteria:



| | · | A current FICO score of a least 660 as of the date of the transaction.
| | - | ----------------------------------------------------------------------

| | · | Loans have not been past due more than 30 days in the twelve months preceding the closing of the
transaction.
| | - | -------------------------------------------------------------------------------------------------------------

| | · | The weighted average loan to value would not exceed 90 percent as of the time the loan was originated.
| | - | ------------------------------------------------------------------------------------------------------







60









|                                              
|----------------------------------------------
|Notes to Consolidated Financial Statements    
|For the years ended December 31, 2010 and 2009



Note 2. Loan Swap and Preferred Stock Transaction, continued



Management performed detailed due diligence
procedures on approximately 20 percent of the pool and removed from the pool any loans that did not meet the criteria above. In
addition, as part of the transaction, as a credit enhancement, Augusta indemnified the Bank against credit losses in the pool for
a period of five years from the transaction date, up to a maximum amount of 10% of the pool or approximately $11.0 million. The
sale of the nonperforming assets and the purchase of the HELOC pool closed on December 22, 2010.



Preferred stock



On December 23, 2010, the Bank
entered into an agreement to sell to Monterey I Holdings, LLC (Monterey) 546,375 shares of series A preferred stock for $16.4
million with a dividend yield of 9%. The noncumulative perpetual preferred stock was issued at the bank level and was
exchangeable for preferred stock of the Company. The series B preferred stock may be converted to 819,564 shares of
the Company’s common stock at the option of the buyer. In addition, the Company issued warrants to allow Monterey
to purchase up to 300,000 shares of the Company’s common stock at 50% of the market value of the common stock on the
date of issue. The preferred stock contract settled on December 23, 2010.



Augusta and Monterey have elements of common
ownership and are considered related parties with respect to each other. They are not related parties with respect to the Company
or the Bank. Based on the relationship of the counterparties, timing and other facts and circumstances surrounding the transactions,
management has concluded that the transactions should be considered one transaction for financial reporting purposes.



Management determined that since there was
significant noncash consideration transferred, the transactions should be properly recorded at fair value under the guidance at
ASC 845-10. Also in accordance with ASC 845-10, the fair value of the assets received shall be used to measure the cost if that
value is more clearly evident than the fair value of the asset surrendered. Management determined the fair value of a homogenous
HELOC pool meeting specific credit quality criteria prepared by a qualified valuation professional with prior experience valuing
similar loan pools is more clearly evident than the fair values of coastal residential real estate developments and other highly
volatile real estate that secures the non-performing loans and preferred shares in a market with very few comparable equity transactions.



61









|                                              
|----------------------------------------------
|Notes to Consolidated Financial Statements    
|For the years ended December 31, 2010 and 2009



Note
2.Loan Swap and Preferred Stock Transaction, continued



Preferred stock, continued



Accordingly, the Bank retained an outside valuation
consulting firm to provide a valuation of the HELOC pool within the guidance at ASC 820-10. The Bank received the valuation on
October 5, 2011. The report indicated the fair value of the $110.1 million HELOC pool to be approximately $100.0 million. The valuation
was primarily based on discounted cash flows as projected based on the location of the underlying collateral and the current FICO
score of the borrower. Based on the valuation report, credit losses on the pool are projected to be $3.1 million over the life
of the pool.



Fair Value of the Transaction



As summary of assets received and consideration
transferred at fair value and a description of how the item was valued is presented below (in thousands):



|Fair Value received                                          |  |   |          |  
|------------------------------------------------------------ |  | - | -------- | -
|HELOC pool, net of discount                                  |  | $ | 100,002  |  
|Credit enhancement                                           |  |   | -        |  
|Interest receivable                                          |  |   | 386      |  
|Total FV received                                            |  | $ | 100,388  |  
|                                                             |  |   |          |  
|Fair Value of consideration paid                             |  |   |          |  
|Non-performing loans                                         |  | $ | (7,309   | )
|Cash                                                         |  |   | (82,833  | )
|Warrants                                                     |  |   | (300     | )
|Preferred stock, net of discount                             |  |   | (9,604   | )
|Total FV received                                            |  | $ | (100,046 | )
|                                                             |  |   |          |  
|Back interest on non-performing loans recorded in operations |  | $ | 342      |  



HELOC Pool - Fair value as determined by a valuation report prepared by an independent third party.



Credit Enhancement – The credit enhancement is unsecured and contractually not due to be settled until two years after the close of the transaction and then annually thereafter for the remaining three years. Due to concerns about the counterparty’s ability to honor the obligation of the credit enhancement, management has determined there is not sufficient evidence to support any value related to the credit enhancement. Accordingly, the credit enhancement has been determined to have no fair value. The Company also believes that the credit enhancement may be considered continuing involvement in the loans sold and may raise questions about whether or not a sale of these assets may recorded under generally accepted accounting principles. We will address this issue in the future by obtaining a legal opinion that addresses the isolation of the assets sold if we determine in the future that there is sufficient evidence to support a value related to the credit enhancement.



Interest Receivable – This is the interest receivable from the HELOC pool borrowers at the time if the transfer, valued at the actual amount of the accrual as of the date of closing.



Non-performing Loans – Fair value determined based on the value of the collateral underlying the individual loans as determined by recent outside appraisals.



Cash – This is the actual amount of net cash paid by the Bank for the pool.



Warrants – Valued based on management’s estimate.





Preferred stock – Fair value is based
on the excess of the fair value of the assets received over the fair value of the assets and other instruments transferred to
Augusta as part of the transaction.



62









|                                              
|----------------------------------------------
|Notes to Consolidated Financial Statements    
|For the years ended December 31, 2010 and 2009









Note 2. Loan Swap and Preferred Stock Transaction, continued



HELOC Pool Discount



The HELOC pool value as determined by the valuation report resulted
as discount to par of approximately $10.1 million. Based on the valuation report, management expects to have credit losses on the
portfolio of $3.1 million. Accordingly, that amount of the discount will be used as a credit reserve to cover those losses. The
reminder of the discount ($7 million) will be accreted into income over the expected life of the pool using the level yield method.
Because the last transaction closed on December 23, 2010, no accretion was recorded during 2010. Management began accreting the
discount during 2011.





Current Status



As of January 31, 2012 the HELOC pool had paid down $15.8 million and the outstanding balance was $93.9 million. Loans totaling $291 thousand were charged off during 2011.



Note
3.Subsequent Events



Series B Preferred Stock Offering



In
December 2010, the Bank offered 546,375 shares of its fixed-rate noncumulative perpetual preferred stock, series A (the “Series
A Preferred Stock”). The Series A Preferred Stock has a liquidation amount of $30.00 per share and pays interest at a per
annum rate of 9.0% on the liquidation amount per share. Each share of Series A Preferred Stock is convertible into 1.5 shares
of the Company’s common stock at the election of the holder. Each share of Series A Preferred Stock is also exchangeable
for one share of the Company’s fixed-rate noncumulative perpetual preferred stock, series B (the “Series B Preferred
Stock”) at the election of the Company. The Company also issued a warrant giving the holder the right to purchase 300,000
shares of the Company’s common stock at an exercise price equal to 50% of the market price on the date of issue. At March
31, 2011, the Company exercised its right to exchange one share of the Company's series B preferred stock for each outstanding
share of the Bank's series A preferred stock. At March 31, 2011, 546,375 shares of the Company's series B preferred stock were
outstanding. The Company elected to consolidate the preferred stock at the Bank level for reporting purposes at the Company level
due to the expected filing of the March 31, 2011 10-Q which, based on the conversion would show the preferred as equity. The preferred
stock was to be reported as a minority interest prior to the concurrent filing of the March 31, 2011 10-Q, but due to the exchange
from the Bank to the Company, the Company elected to report the minority interest as preferred stock, as that would be the classification
as of the date of filing of the December 31, 2010 financial statements. This election had no impact on total consolidated assets,
equity or results of operations.



Note
4. 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.



63







|                                              
|----------------------------------------------
|Notes to Consolidated Financial Statements    
|For the years ended December 31, 2010 and 2009



Note
4. Business Combinations, continued



The
acquisition was accounted for as a purchase transaction and accordingly the results of operations attributable to the acquired
company are included in our consolidated financial statements only from the date of acquisition. The excess of purchase price over
fair value of net tangible and identified intangible assets acquired will be evaluated annually for impairment and written down
as those values become impaired. Identified intangible assets will be amortized over their expected useful life. The Company recorded
a goodwill impairment charge of $2.7 million in 2009 as referenced in Note 1 on Goodwill.



Note
5. 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 $4,235,000 and $2,740,000 for the period including December 31, 2010 and 2009, respectively.



Note
6. Investment Securities



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



|                                        |  | Amortized |            |  | Unrealized |   |         | Unrealized |  |   | Fair       |  
|--------------------------------------- |  | --------- | ---------- |  | ---------- | - | ------- | ---------- |  | - | ---------- | -
|                                        |  | Cost      |            |  | Gains      |   |         | Losses     |  |   | Value      |  
|                                        |  |           |            |  |            |   |         |            |  |   |            |  
|2010                                    |  |           |            |  |            |   |         |            |  |   |            |  
|Mortgage backed securities              |  |           | 53,183,549 |  |            |   | 185,418 |            |  |   | (528,685   | )
|Corporate securities                    |  |           | 4,235,298  |  |            |   | -       |            |  |   | (835,910   | )
|Single issue trust preferred securities |  |           | 6,477,417  |  |            |   | 105,118 |            |  |   | (1,515,855 | )
|Municipal securities                    |  |           | 7,371,228  |  |            |   | 2,311   |            |  |   | (1,192,418 | )
|                                        |  | $         | 71,267,492 |  |            | $ | 292,847 |            |  | $ | (4,072,868 | )
|                                        |  |           |            |  |            |   |         |            |  |   |            |  
|2009                                    |  |           |            |  |            |   |         |            |  |   |            |  
|Mortgage backed securities              |  |           | 61,167,200 |  |            |   | 159,880 |            |  |   | (768,810   | )
|Corporate securities                    |  |           | 5,617,961  |  |            |   | -       |            |  |   | (1,116,151 | )
|Single issue trust preferred securities |  |           | 12,089,781 |  |            |   | 148,661 |            |  |   | (1,686,293 | )
|Pooled trust preferred securities       |  |           | 133,935    |  |            |   | -       |            |  |   | (51,680    | )
|Municipal securities                    |  |           | 13,083,406 |  |            |   | 29,210  |            |  |   | (1,037,781 | )
|                                        |  | $         | 92,092,283 |  |            | $ | 337,751 |            |  | $ | (4,660,715 | )



Restricted
equity securities are carried at cost and consist of investments in stock of the Federal Home Loan Bank of Atlanta (FHLB) and The
Federal Reserve Bank of Richmond (Federal Reserve). Both of those entities are correspondents of the Bank. The FHLB requires financial
institutions to make equity investments in the FHLB in order to borrow from it. The Bank is required to hold that stock so long
as it borrows from the FHLB. The FHLB has indefinitely suspended redemptions of their stock. The Federal Reserve requires banks
to purchase stock as a condition of membership in the Federal Reserve system.



Investment
securities with market values of $44,237,670 and $43,507,833 at December 31, 2010 and 2009, respectively were pledged as collateral
on public deposits and for other banking purposes as required or permitted by law. Gross realized gains and losses resulting from
the sale of securities for the years ended December 31, 2010 and 2009 are as follows:



|                |  | 2010 |           |   | 2009 |  
|--------------- |  | ---- | --------- | - | ---- | -
|                |  |      |           |   |      |  
|Realized gains  |  | $    | 1,736,328 |   |      | $
|Realized losses |  |      | (142,940  | ) |      |  
|                |  | $    | 1,593,388 |   |      | $



64







|                                              
|----------------------------------------------
|Notes to Consolidated Financial Statements    
|For the years ended December 31, 2010 and 2009



Note
6. Investment Securities, continued



The
scheduled contractual maturities of securities (all available for sale) at December 31, 2010 are as follows:



|                              |  | Amortized |            |  | Fair  |  
|----------------------------- |  | --------- | ---------- |  | ----- | -
|                              |  | Cost      |            |  | Value |  
|                              |  |           |            |  |       |  
|Due in one year or less       |  | $         | 2,000,000  |  |       | $
|Due in one through five years |  |           | 1,001,768  |  |       |  
|Due in five through ten years |  |           | 30,115     |  |       |  
|Due after ten years           |  |           | 68,235,609 |  |       |  
|                              |  | $         | 71,267,492 |  |       | $



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, 2010 and December 31, 2009.



|                                          |  | Less Than 12 Months |            |  | 12 Months or More |   |            | Total | 
|----------------------------------------- |  | ------------------- | ---------- |  | ----------------- | - | ---------- | ----- | 
|                                          |  | Fair                |            |  | Unrealized        |   |            | Fair  | 
|                                          |  | Value               |            |  | Losses            |   |            | Value | 
|                                          |  |                     |            |  |                   |   |            |       | 
|December 31, 2010                         |  |                     |            |  |                   |   |            |       | 
|Mortgage backed securities                |  | $                   | 26,224,692 |  |                   | $ | (528,685   | )     | 
|Corporate securities                      |  |                     | -          |  |                   |   | -          |       | 
|Single issue trust preferred securities   |  |                     | 1,951,479  |  |                   |   | (80,092    | )     | 
|Municipal securities                      |  |                     | 459,066    |  |                   |   | (55,934    | )     | 
|Total temporarily impaired
    securities |  | $                   | 28,635,237 |  |                   | $ | (664,711   | )     | 
|                                          |  |                     |            |  |                   |   |            |       | 
|December 31, 2009                         |  |                     |            |  |                   |   |            |       | 
|Mortgage backed securities                |  | $                   | 42,983,307 |  |                   | $ | (768,810   | )     | 
|Corporate securities                      |  |                     | 1,398,872  |  |                   |   | (896,151   | )     | 
|Single issue trust preferred securities   |  |                     | 1,994,732  |  |                   |   | (925,992   | )     | 
|Pooled trust preferred securities         |  |                     | 33,118     |  |                   |   | (51,680    | )     | 
|Municipal securities                      |  |                     | 1,356,260  |  |                   |   | (43,738    | )     | 
|Total temporarily impaired
    securities |  | $                   | 47,766,289 |  |                   | $ | (2,686,371 | )     | 



Management
evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market
concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been
less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company
to retain its investment in the issuer for a period of time sufficient to allow any anticipated recovery in fair value.
The changes in fair value in our available for sale portfolio reflect normal market conditions and vary; either positively or negatively,
based primarily on changes in general levels of market interest rates relative to the yields of the portfolio. Additionally, changes
in the fair value of securities available for sale do not affect our income nor does it affect the Bank’s regulatory capital
requirements. The Bank has invested in trust preferred securities and management is closely monitoring these securities. There
was no other than temporary impairment charges for December 31, 2010.



Other than temporary impairment charges
for December 31, 2009 consisted of a pooled trust preferred security of $418,710.



Unrealized losses associated with the
investment securities total $4.1 million. Of that amount, $3.4 million has existed for a period of twelve consecutive months or
longer. Unrealized losses that are related to the prevailing interest rate environment will decline over time and recover as these
securities approach maturity. The unrealized losses in the municipal securities portfolio are due to widening credit spreads in
the municipal securities market and are the result of concerns about the bond insurers associated with these securities. At December 31,
2010, the Company believes that all contractual cash flows will be received on this portfolio.



65







|                                              
|----------------------------------------------
|Notes to Consolidated Financial Statements    
|For the years ended December 31, 2010 and 2009



Note
6. Investment Securities, continued



The single-issue securities
are trust-preferred issuances from other bank holding companies and had a total market value of approximately
$5.1 million as of December 31, 2010, compared with their adjusted cost basis of approximately $6.5 million.
Management does not believe any individual unrealized loss as of December 31, 2010, represents other-than-temporary
impairment. The Company has the ability and believes it is more likely than not that it will hold these securities until such
time as the value recovers or the securities mature. Furthermore, the Company believes that portions of the change in value
are attributable to changes in market interest rates and the current state of illiquidity within the market for securitized
assets.



Note
7. Loans Receivable



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



|                                  |  | 2010         |         |   | 2009 |  
|--------------------------------- |  | ------------ | ------- | - | ---- | -
|                                  |  | In thousands |        
|                                  |  |              |         |   |      |  
|Commercial                        |  | $            | 26,134  |   |      | $
|Real estate:                      |  |              |         |   |      |  
|Construction and land development |  |              | 81,087  |   |      |  
|Residential, 1-4 families         |  |              | 184,218 |   |      |  
|Residential, 5 or more families   |  |              | 8,946   |   |      |  
|Farmland                          |  |              | 2,494   |   |      |  
|Nonfarm, nonresidential           |  |              | 88,912  |   |      |  
|Agricultural                      |  |              | 402     |   |      |  
|Consumer                          |  |              | 12,712  |   |      |  
|Other                             |  |              | 328     |   |      |  
|                                  |  |              | 405,233 |   |      |  
|                                  |  |              |         |   |      |  
|Deferred loan fees, net of costs  |  |              | (217    | ) |      |  
|Allowance for loan losses         |  |              | (15,541 | ) |      |  
|                                  |  | $            | 389,475 |   |      | $



Approximately $19.0 million in 1-4 family
residential loans, $12.2 million in commercial real estate loans, $7.2 million in home equity line of credit loans and $5.2 million
of securities were pledged as collateral securing Federal Home Loan Bank advances included in long-term debt at December 31, 2010.



66







|                                              
|----------------------------------------------
|Notes to Consolidated Financial Statements    
|For the years ended December 31, 2010 and 2009



Note
7. Loans Receivable, continued



The age analysis of past due loans as
of December 31, 2010 is set forth in the following table.



Past Due Loans (dollars in thousands)



|                             |  |          |        |  | 90 Days or |   |       |         |  |   |          |  |  |         |        |  |       |  
|---------------------------- |  | -------- | ------ |  | ---------- | - | ----- | ------- |  | - | -------- |  |  | ------- | ------ |  | ----- | -
|                             |  | 30-89    |        |  | More and   |   |       | Non     |  |   |          |  |  |         |        |  |       |  
|                             |  | Days     |        |  | accruing   |   |       | Accrual |  |   | Total    |  |  |         |        |  | Total |  
|                             |  | Past Due |        |  | Past Due   |   |       | Loans   |  |   | Past Due |  |  | Current |        |  | Loans |  
|                             |  |          |        |  |            |   |       |         |  |   |          |  |  |         |        |  |       |  
|Construction and development |  | $        | 4,199  |  |            | $ | 1,158 |         |  | $ | 21,768   |  |  | $       | 27,125 |  |       | $
|Farmland                     |  |          | 134    |  |            |   | 267   |         |  |   | 15       |  |  |         | 416    |  |       |  
|1-4 family residential       |  |          | 3,538  |  |            |   | 521   |         |  |   | 4,057    |  |  |         | 8,116  |  |       |  
|Multifamily residential      |  |          | -      |  |            |   | -     |         |  |   | 4,032    |  |  |         | 4,032  |  |       |  
|Nonfarm, nonresidential      |  |          | 1,560  |  |            |   | 414   |         |  |   | 8,169    |  |  |         | 10,143 |  |       |  
|Total real estate            |  |          | 9,431  |  |            |   | 2,360 |         |  |   | 38,041   |  |  |         | 49,832 |  |       |  
|                             |  |          |        |  |            |   |       |         |  |   |          |  |  |         |        |  |       |  
|Agricultural                 |  |          | -      |  |            |   | -     |         |  |   | -        |  |  |         | -      |  |       |  
|Commercial and industrial    |  |          | 1,534  |  |            |   | 503   |         |  |   | 1,617    |  |  |         | 3,651  |  |       |  
|Consumer                     |  |          | 32     |  |            |   | 61    |         |  |   | 183      |  |  |         | 276    |  |       |  
|Other                        |  |          | -      |  |            |   | -     |         |  |   | -        |  |  |         | -      |  |       |  
|Total                        |  | $        | 10,997 |  |            | $ | 2,924 |         |  | $ | 39,841   |  |  | $       | 53,759 |  |       | $



The Company categorizes loans receivable
into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial
information, historical payment experience, credit documentation, public information, and current economic trends, among other
factors. The Company analyzes loans and leases individually by classifying the loans receivable as to credit risk. The Company
uses the following definitions for risk ratings:



Pass – Loans in this category
are considered to have a low likelihood of loss based on relevant information analyzed about the ability of the borrowers to service
their debt and other factors.



Special Mention – Loans
in this category are currently protected but are potentially weak, including adverse trends in borrower’s operations, credit
quality or financial strength. Those loans constitute an undue and unwarranted credit risk but not to the point of justifying a
substandard classification. The credit risk may be relatively minor yet constitute an unwarranted risk in light of the circumstances.
Special mention loans have potential weaknesses which may, if not checked or corrected, weaken the loan or inadequately protect
the Company’s credit position at some future date.



Substandard – A substandard
loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged,
if any. Loans classified as substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the
debt; they are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not
corrected.



Doubtful – Loans classified
Doubtful have all the weaknesses inherent in loans classified Substandard, plus the added characteristic that the weaknesses make
collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable.



67







|                                              
|----------------------------------------------
|Notes to Consolidated Financial Statements    
|For the years ended December 31, 2010 and 2009



Note
7. Loans Receivable, continued



As of December 31, 2010, and based
on the most recent analysis performed, the risk category of loans receivable was as follows:



Loans by risk category (dollars
in thousands)



|                             |  |      |         |  | Special |   |        |             |  |   |          |  |  |       |      
|---------------------------- |  | ---- | ------- |  | ------- | - | ------ | ----------- |  | - | -------- |  |  | ----- | -----
|                             |  | Pass |         |  | Mention |   |        | Substandard |  |   | Doubtful |  |  | Total |      
|                             |  |      |         |  |         |   |        |             |  |   |          |  |  |       |      
|Construction and development |  | $    | 37,909  |  |         | $ | 4,001  |             |  | $ | 37,898   |  |  | $     | 1,279
|Farmland                     |  |      | 1,987   |  |         |   | 90     |             |  |   | 402      |  |  |       | 15   
|1-4 family residential       |  |      | 160,967 |  |         |   | 6,932  |             |  |   | 14,483   |  |  |       | 1,836
|Multifamily residential      |  |      | 4,341   |  |         |   | 60     |             |  |   | 4,545    |  |  |       | -    
|Nonfarm, nonresidential      |  |      | 56,337  |  |         |   | 10,675 |             |  |   | 21,266   |  |  |       | 634  
|Total real estate            |  |      | 261,541 |  |         |   | 21,758 |             |  |   | 78,594   |  |  |       | 3,764
|                             |  |      |         |  |         |   |        |             |  |   |          |  |  |       |      
|Agricultural                 |  |      | 393     |  |         |   | 4      |             |  |   | 5        |  |  |       | -    
|Commercial and industrial    |  |      | 20,028  |  |         |   | 2,158  |             |  |   | 2,887    |  |  |       | 1,061
|Consumer                     |  |      | 11,886  |  |         |   | 469    |             |  |   | 236      |  |  |       | 121  
|Other                        |  |      | 328     |  |         |   | -      |             |  |   | -        |  |  |       | -    
|Total                        |  | $    | 294,176 |  |         | $ | 24,389 |             |  | $ | 81,722   |  |  | $     | 4,946



Note
8. Allowance for Loan Losses



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



|                                  |  | 2010 |            |   | 2009 |  
|--------------------------------- |  | ---- | ---------- | - | ---- | -
|                                  |  |      |            |   |      |  
|Balance, beginning                |  | $    | 10,148,927 |   |      | $
|Provision charged to expense      |  |      | 12,205,554 |   |      |  
|Recoveries of amounts charged off |  |      | 60,142     |   |      |  
|Amounts charged off               |  |      | (6,873,335 | ) |      |  
|Balance, ending                   |  | $    | 15,541,288 |   |      | $



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



|                                                             |  | 2010 |            |  | 2009 |  
|------------------------------------------------------------ |  | ---- | ---------- |  | ---- | -
|                                                             |  |      |            |  |      |  
|Average investment in impaired loans                         |  | $    | 56,591,000 |  |      | $
|Interest income recognized on impaired loans                 |  | $    | 2,274,000  |  |      | $
|Interest income recognized on a cash basis on impaired loans |  | $    | 2,274,000  |  |      | $



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





The following table presents information concerning
the Company’s investment in loans considered impaired as of December 31, 2010:





|                                              |  |            |        |  |           |  |        |           |  |   | Average    |  |  |          |       
|--------------------------------------------- |  | ---------- | ------ |  | --------- |  | ------ | --------- |  | - | ---------- |  |  | -------- | ------
|                                              |  |            |        |  | Unpaid    |  |        |           |  |   | Recorded   |  |  | Interest |       
|                                              |  | Recorded   |        |  | Principal |  |        | Related   |  |   | Investment |  |  | Income   |       
|                                              |  | Investment |        |  | Balance   |  |        | Allowance |  |   | Recognized |  |  |          |       
|Impaired loans without a valuation allowance: |  |            |        |  |           |  |        |           |  |   |            |  |  |          |       
|Construction and development                  |  | $          | 13,238 |  |           |  | 16,684 |           |  |   | -          |  |  | $        | 15,087
|Farmland                                      |  |            | -      |  |           |  | -      |           |  |   | -          |  |  |          | -     
|1-4 family residential                        |  |            | 2,563  |  |           |  | 2,563  |           |  |   | -          |  |  |          | 2,585 
|Multifamily residential                       |  |            | 1,109  |  |           |  | 1,433  |           |  |   | -          |  |  |          | 1,328 
|Nonfarm, nonresidential                       |  |            | 7,303  |  |           |  | 8,504  |           |  |   | -          |  |  |          | 8,432 
|Agricultural                                  |  |            | -      |  |           |  | -      |           |  |   | -          |  |  |          | -     
|Commercial and industrial                     |  |            | -      |  |           |  | -      |           |  |   | -          |  |  |          | -     
|Consumer                                      |  |            | -      |  |           |  | -      |           |  |   | -          |  |  |          | -     
|Other                                         |  |            | -      |  |           |  | -      |           |  |   | -          |  |  |          | -     
|                                              |  |            |        |  |           |  |        |           |  |   |            |  |  |          |       
|Impaired loans with a valuation allowance:    |  |            |        |  |           |  |        |           |  |   |            |  |  |          |       
|Construction and development                  |  |            | 11,714 |  |           |  | 13,003 |           |  |   | 2,278      |  |  |          | 12,434
|Farmland                                      |  |            | -      |  |           |  | -      |           |  |   | -          |  |  |          | -     
|1-4 family residential                        |  |            | 2,761  |  |           |  | 2,761  |           |  |   | 617        |  |  |          | 2,787 
|Multifamily residential                       |  |            | 2,994  |  |           |  | 2,994  |           |  |   | 1,226      |  |  |          | 2,921 
|Nonfarm, nonresidential                       |  |            | 10,554 |  |           |  | 10,563 |           |  |   | 1,646      |  |  |          | 10,593
|Agricultural                                  |  |            | -      |  |           |  | -      |           |  |   | -          |  |  |          | -     
|Commercial and industrial                     |  |            | 424    |  |           |  | 424    |           |  |   | 424        |  |  |          | 424   
|Consumer                                      |  |            | -      |  |           |  | -      |           |  |   | -          |  |  |          | -     
|Other                                         |  |            | -      |  |           |  | -      |           |  |   | -          |  |  |          | -     
|Total                                         |  | $          | 52,660 |  |           |  | 58,929 |           |  | $ | 6,191      |  |  |          | 56,591





68







|                                              
|----------------------------------------------
|Notes to Consolidated Financial Statements    
|For the years ended December 31, 2010 and 2009



Note
8. Allowance for Loan Losses, continued



Allowance for Loan Losses and Recorded
Investment in Loan Receivables (in thousands)



|                             |  | Construction |        |  |             |   |        |             |  |   |                |  |  | Commercial |        |  |          |   |        |           |  |   |             |  |  |       |      
|---------------------------- |  | ------------ | ------ |  | ----------- | - | ------ | ----------- |  | - | -------------- |  |  | ---------- | ------ |  | -------- | - | ------ | --------- |  | - | ----------- |  |  | ----- | -----
|                             |  | and          |        |  | 1-4 Family  |   |        | Multifamily |  |   | Nonfarm,       |  |  | and        |        |  |          |   |        | All Other |  |   |             |  |  |       |      
|December 31,
    2010        |  | Development  |        |  | Residential |   |        | Residential |  |   | Nonresidential |  |  | Industrial |        |  | Consumer |   |        | FAS 5     |  |   | Unallocated |  |  | Total |      
|                             |  |              |        |  |             |   |        |             |  |   |                |  |  |            |        |  |          |   |        |           |  |   |             |  |  |       |      
|Allowance for Loan Losses:   |  |              |        |  |             |   |        |             |  |   |                |  |  |            |        |  |          |   |        |           |  |   |             |  |  |       |      
|Ending balance               |  | $            | 7,281  |  |             | $ | 1,163  |             |  | $ | 1,676          |  |  | $          | 2,892  |  |          | $ | 1,563  |           |  | $ | 106         |  |  | $     | 137  
|                             |  |              |        |  |             |   |        |             |  |   |                |  |  |            |        |  |          |   |        |           |  |   |             |  |  |       |      
|Individually evaluated       |  |              | 2,278  |  |             |   | 617    |             |  |   | 1,226          |  |  |            | 1,646  |  |          |   | 424    |           |  |   | -           |  |  |       | -    
|                             |  |              |        |  |             |   |        |             |  |   |                |  |  |            |        |  |          |   |        |           |  |   |             |  |  |       |      
|Collectively evaluated       |  |              | 5,003  |  |             |   | 546    |             |  |   | 450            |  |  |            | 1,246  |  |          |   | 1,139  |           |  |   | 106         |  |  |       | 137  
|                             |  |              |        |  |             |   |        |             |  |   |                |  |  |            |        |  |          |   |        |           |  |   |             |  |  |       |      
|Loans Receivable:            |  |              |        |  |             |   |        |             |  |   |                |  |  |            |        |  |          |   |        |           |  |   |             |  |  |       |      
|Ending balance               |  |              | 81,156 |  |             |   | 84,421 |             |  |   | 8,946          |  |  |            | 88,848 |  |          |   | 25,972 |           |  |   | 10,851      |  |  |       | 4,125
|                             |  |              |        |  |             |   |        |             |  |   |                |  |  |            |        |  |          |   |        |           |  |   |             |  |  |       |      
|Loans individually evaluated |  |              | 24,951 |  |             |   | 5,323  |             |  |   | 4,103          |  |  |            | 17,857 |  |          |   | 424    |           |  |   | -           |  |  |       | -    
|                             |  |              |        |  |             |   |        |             |  |   |                |  |  |            |        |  |          |   |        |           |  |   |             |  |  |       |      
|Loans collectively evaluated |  |              | 56,205 |  |             |   | 79,098 |             |  |   | 4,843          |  |  |            | 70,991 |  |          |   | 25,548 |           |  |   | 10,851      |  |  |       | 4,125



Note 9. Property and Equipment



Components of Property and Equipment



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



|                              |  | 2010 |            |  | 2009 |  
|----------------------------- |  | ---- | ---------- |  | ---- | -
|                              |  |      |            |  |      |  
|Land                          |  | $    | 5,613,089  |  |      | $
|Buildings                     |  |      | 9,999,267  |  |      |  
|Construction in progress      |  |      | -          |  |      |  
|Leasehold improvements        |  |      | 1,097,606  |  |      |  
|Automobiles                   |  |      | 55,818     |  |      |  
|Furniture and equipment       |  |      | 4,001,204  |  |      |  
|                              |  |      | 20,766,984 |  |      |  
|                              |  |      |            |  |      |  
|Less accumulated depreciation |  |      | 4,365,023  |  |      |  
|                              |  | $    | 16,410,961 |  |      | $



Depreciation
expense reported in net income was approximately $760,000 and $764,000 for the years ended December 31, 2010 and 2009, respectively.



69







|                                              
|----------------------------------------------
|Notes to Consolidated Financial Statements    
|For the years ended December 31, 2010 and 2009



Note
9. Property and Equipment



Leases



The
Bank leases several banking facilities and its operations center under agreements accounted for as operating leases. Rent expense
was approximately $407,000 and $401,000 in 2010 and 2009, respectively. Future minimum lease payments under non-cancelable commitments
are as follows.



|2011       |  | $ | 348,855   | 
|---------- |  | - | --------- | 
|2012       |  |   | 315,737   | 
|2013       |  |   | 284,564   | 
|2014       |  |   | 198,407   | 
|2015       |  |   | 115,090   | 
|Thereafter |  |   | 51,450    | 
|           |  | $ | 1,314,103 | 



Note 10. Intangible Assets



The book value of intangible
assets at December 31, 2010 and 2009 are $160,000 and $237,270, respectively and are determined as follow:



|                            |  | As of December 31, 2010 |           |  | As of December 31, 2009 |  
|--------------------------- |  | ----------------------- | --------- |  | ----------------------- | -
|                            |  | Gross Carrying          |           |  | Accumulated             |  
|                            |  | Amount                  |           |  | Amortization            |  
|                            |  |                         |           |  |                         |  
|Amortized intangible assets |  |                         |           |  |                         |  
|Deposit premium             |  | $                       | 2,439,918 |  |                         | $
|Other                       |  |                         | 200,000   |  |                         |  
|Total                       |  | $                       | 2,639,918 |  |                         | $



Amortization expense is calculated on
a straight-line basis over a period of ten years and was approximately $90,000 and $179,000
in 2010 and 2009, respectively. Management expects amortization expense to be approximately $30,000 over the remaining five
years.



Note 11. Deposits



Time deposits in denominations of $100,000
or more were $187.2 million and $176.8 million at December 31, 2010 and 2009, respectively. Interest expense on such deposits aggregated
approximately $2.9 million and $4.2 million in 2010 and 2009, respectively. Time deposits in denominations of $100,000 or more,
maturing subsequent to December 31, 2010 are as follows (amounts in thousands):



Large
Time Deposit Maturities, (thousands)



|2011                                    |  | $ | 123,342 | 
|--------------------------------------- |  | - | ------- | 
|2012                                    |  |   | 35,142  | 
|2013                                    |  |   | 36,623  | 
|2014                                    |  |   | 324     | 
|2015                                    |  |   | 1,731   | 
|Total time deposits of $100,000 or more |  | $ | 187,162 | 





The
Bank has brokered deposits totaling $117.6 million with terms of no greater than 3 years as of December 31, 2010.Effective
November 29, 2011, the Company and the Bank entered into a Prompt Corrective Action Directive with the Board of Governors of the
Federal Reserve System whichrestricts the Bank from accepting any new brokered deposits or renewing
any existing brokered deposits.





70







|                                              
|----------------------------------------------
|Notes to Consolidated Financial Statements    
|For the years ended December 31, 2010 and 2009



Note 12. Borrowed Funds



Other short-term borrowings



Securities
sold under agreements to repurchase and federal funds purchased generally mature within one day to 12 months from the transaction
date. Also included in other short-term borrowings is one fixed rate FHLB advance of $5,000,000 at December 31, 2010. There was
one fixed rate FHLB advance of $2,500,000 at December 31, 2009.Also included in other short-term borrowings was a $900,000
line of credit at a 5.00% lending rate that will mature on July 1, 2020.





The Company’s loan agreement, for the
$900,000 line of credit debt obligation noted above, includes financial covenants requiring the Bank to maintain a minimum weighted
average return on assets of greater than 0.50% on an annualized basis, maintain total equity capital of $43,499,000 at all times
and the percentage of non-performing loans to gross loans shall not exceed 4.00%. The Company did not meet these covenants in 2010
and has not obtained a waiver through December 31, 2011. This loan is secured by the common stock of Waccamaw Bank. As such, the
debt obligation has been classified in other short-term borrowings due to the covenant violations.



Additional
information is summarized below:



|                                                       |  | 2010 |           |   | 2009 |  
|------------------------------------------------------ |  | ---- | --------- | - | ---- | -
|                                                       |  |      |           |   |      |  
|Outstanding balance at December 31                     |  | $    | 5,900,000 |   |      | $
|Year-end weighted average rate                         |  |      | 3.95      | % |      |  
|Daily average outstanding during the period            |  | $    | 2,881,507 |   |      | $
|Average rate for the year                              |  |      | 4.43      | % |      |  
|Maximum outstanding at any month-end during the period |  | $    | 5,900,000 |   |      | $



Securities
sold under agreements to repurchase



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



|                                                       |  | 2010 |            |   | 2009 |  
|------------------------------------------------------ |  | ---- | ---------- | - | ---- | -
|                                                       |  |      |            |   |      |  
|Outstanding balance at December 31                     |  | $    | 19,776,000 |   |      | $
|Year-end weighted average rate                         |  |      | 3.37       | % |      |  
|Daily average outstanding during the period            |  | $    | 20,857,370 |   |      | $
|Average rate for the year                              |  |      | 3.24       | % |      |  
|Maximum outstanding at any month-end during the period |  | $    | 23,325,000 |   |      | $



Securities
sold under agreements to repurchase are reflected at the amount of cash received in connection with the transaction. The Company
may be required to provide additional collateral based on the fair value of the underlying securities.



Overnight
securities sold under agreements to repurchase are collateralized financing transactions and are primarily executed with local
Bank customers. Overnight repos totaled$2.8million and $3.6 million at December 31, 2010
and 2009, respectively.



Our term
repos totaled $17.0 million at December 31, 2010 and December 31, 2009 and include embedded derivatives. These structured
repos consist of $10.0 million with an interest rateof 3.80%that matures on November 21, 2018
and can be called at the counterparty’s option quarterly beginning on November 21, 2009 and can be called at the counterparty’s
or the Bank’s option annually beginning on November 21, 2012, $3.5 million with an interest rateof 3.92% that matures
on December 19, 2017 and $3.5 million with an interest rate of 3.82% thatmatures on December 19, 2017.



71







|                                              
|----------------------------------------------
|Notes to Consolidated Financial Statements    
|For the years ended December 31, 2010 and 2009



Note 12. Borrowed Funds, continued



Unused lines of credit



The
Bank has established a credit facility to provide additional liquidity if and as needed. This consists of a secured line of credit
with a correspondent bank for $4,300,000, which can be canceled at any time. In addition, the Bank has the ability to borrow up
to ten percent of total bank assets from the Federal Home Loan Bank of Atlanta, subject to the pledging of specific bank assets
as collateral. The Federal Home Loan Bank of Atlanta has the ability to cancel this line at any time. At December 31, 2010 and
December 31, 2009 there were no amounts outstanding under these credit facilities.



Long-term debt



At
December 31, 2010 and 2009, $35,000,000 and $40,000,000, respectively were outstanding under Federal Home Loan Bank advances. Approximately
$19.0 million in 1-4 family residential loans, $12.2 million in commercial real estate loans,$7.2 million in home equity
line of credit loans and $5.2 million in securities were pledged as collateral for the FHLB
advances at December 31, 2010. Also included in long-term debt is $3,000,000 of subordinated notes bearing interest at 3-month
LIBOR plus 350 basis points that will mature on July 1, 2015.



|Maturity Date |  | Advance |            |  | Rate | 
|------------- |  | ------- | ---------- |  | ---- | 
|              |  |         |            |  |      | 
|07/17/12      |  |         | 9,000,000  |  |      | 
|09/04/12      |  |         | 6,000,000  |  |      | 
|09/03/13      |  |         | 6,000,000  |  |      | 
|12/02/13      |  |         | 5,000,000  |  |      | 
|09/29/15      |  |         | 4,000,000  |  |      | 
|04/22/19      |  |         | 5,000,000  |  |      | 
|              |  | $       | 35,000,000 |  |      | 





Due to the Bank’s current capital position and adverse rating
from the Federal Home Loan Bank, the Bank is unable to obtain any new advances, but is able to renew existing advances as they
mature with similar maturities and structures.





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



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



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



Waccamaw Statutory Trust II, a
statutory business trust (the Trust), was created by the Company on July 18, 2008, at which time the Trust issued $4,000,000
in aggregate liquidation amount of preferred capital trust securities which mature October 1, 2038. Distributions are payable
on the securities at a floating rate indexed to the 3-month London Interbank Offered Rate (“LIBOR”), and the
securities may be prepaid at par by the Trust at any time after July 18, 2013. The principal assets of the Trust are $4.1
million of the Company’s junior subordinated debentures which mature on October 1, 2038, and bear interest at a
floating rate indexed to the 3-month LIBOR, and which are callable by the Company after July 18, 2013. All $124 thousand in
aggregate liquidation amount of the Trust’s common securities are held by the Company.



72







|                                              
|----------------------------------------------
|Notes to Consolidated Financial Statements    
|For the years ended December 31, 2010 and 2009



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 1 capital for regulatory capital adequacy purposes to the extent that they do not exceed
33.3% of the Company’s total Tier 1 capital excluding these securities. Amounts in excess of this ratio will not be considered
Tier 1 capital but may be included in the calculation of the Company’s total risk-based capital ratio. The Company’s
obligations with respect to the issuance of the Trust’s preferred securities and common securities constitute a full and
unconditional guarantee by the Company of the Trust’s obligations with respect to the preferred securities and common securities.
Subject to certain exceptions and limitations, the Company may elect from time to time to defer interest payments on its junior
subordinated debentures, which would result in a deferral of distribution payments on the Trust’s preferred trust securities
and common securities. On December 17, 2009 the Company began to defer interest payments on the junior subordinated debentures
issued to Waccamaw Statutory Trust II. The Company has also elected to defer payments on the junior subordinated debentures issued
to Waccamaw Statutory Trust I. In the absence of an additional funding source, the ability of the Company to service these obligations
is dependent of the ability of the Bank to pay dividends to the holding company. Currently, the Bank does not have the ability
to pay dividends.



Note
14. Fair Value of Financial Instruments



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



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



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



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



| | Level 1 – | Valuation is based upon quoted prices for identical instruments traded in active markets.                                                                                                                                                                                                                                                                                             
| | --------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |           |                                                                                                                                                                                                                                                                                                                                                                                       
| | Level 2 – | Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.                                                                                                          
| |           |                                                                                                                                                                                                                                                                                                                                                                                       
| | Level 3 – | Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of option pricing models, discounted cash flow models and similar techniques.



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



73







|                                              
|----------------------------------------------
|Notes to Consolidated Financial Statements    
|For the years ended December 31, 2010 and 2009



Note
14. Fair Value of Financial Instruments, continued



Fair Value Hierarchy



Investment Securities Available
for Sale



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



Loans



The Company does not record loans at
fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is
established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual
terms of the loan agreement are considered as impaired. Once a loan is identified as individually impaired, management measures
the impairment. The fair value of impaired loans is estimated using one of several methods, including collateral value, market
value of similar debt, enterprise value, liquidation value, and discounted cash flows. Those impaired loans not requiring an allowance
represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans.
As of December 31, 2010, the Bank identified $52.7 million in impaired loans. Of these impaired loans, $28.4 million were identified
to have impairment of $6.2 million. The determination of impairment was based on the fair market value of collateral for each loan.
In situations where management discounts appraised values in determining fair value of appraisals, these levels will be considered
to be a Level 3 input.



Foreclosed Assets



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



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



Assets and Liabilities Recorded as
Fair Value on a Recurring Basis



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



|December 31, 2010                        |  | Total |        |  | Level 1 |   |   | Level 2 |  |   | Level 3 | 
|---------------------------------------- |  | ----- | ------ |  | ------- | - | - | ------- |  | - | ------- | 
|                                         |  |       |        |  |         |   |   |         |  |   |         | 
|Investment securities available for sale |  | $     | 67,487 |  |         | $ | - |         |  | $ | 64,501  | 
|Total assets at fair value               |  | $     | 64,487 |  |         | $ | - |         |  | $ | 64,501  | 



|December 31, 2009                        |  | Total |        |  | Level 1 |   |       | Level 2 |  |   | Level 3 | 
|---------------------------------------- |  | ----- | ------ |  | ------- | - | ----- | ------- |  | - | ------- | 
|                                         |  |       |        |  |         |   |       |         |  |   |         | 
|Investment securities available for sale |  | $     | 87,769 |  |         | $ | 3,890 |         |  | $ | 81,009  | 
|Total assets at fair value               |  | $     | 87,769 |  |         | $ | 3,890 |         |  | $ | 81,009  | 



74







|                                              
|----------------------------------------------
|Notes to Consolidated Financial Statements    
|For the years ended December 31, 2010 and 2009



Note
14. Fair Value of Financial Instruments, continued



Fair Value Hierarchy, continued



There were no liabilities measured at fair value on a recurring
basis at December 31, 2010 and 2009.



The following table presents additional
information about financial assets and liabilities measured at fair value at December 31, 2010 and 2009, on a recurring basis and
for which Level 3 inputs are utilized to determine fair value:



|                                                |  | Available      |       
|----------------------------------------------- |  | -------------- | ------
|                                                |  | for Sale       |       
|                                                |  | Securities     |       
|                                                |  | (In thousands) |       
|                                                |  |                |       
|Balance, January 1, 2009                        |  | $              | 3,939 
|Total gains or losses (realized/unrealized)     |  |                |       
|Included in earnings (or changes in net assets) |  |                | -     
|Included in other comprehensive income          |  |                | (1,069
|Purchases, issuances, and settlements           |  |                | -     
|Transfers in and/or out of Level 3              |  |                | -     
|Balance, December 31, 2009                      |  |                | 2,870 
|                                                |  |                |       
|Total gains or losses (realized/unrealized)     |  |                |       
|Included in earnings (or changes in net assets) |  |                | -     
|Included in other comprehensive income          |  |                | 116   
|Purchases, issuances, and settlements           |  |                | -     
|Transfers in and/or out of Level 3              |  |                | -     
|Balance, December 31, 2010                      |  | $              | 2,986 



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



|December 31, 2010          |  | Total |        |  | Level 1 |   |   | Level 2 |  |   | Level 3 | 
|-------------------------- |  | ----- | ------ |  | ------- | - | - | ------- |  | - | ------- | 
|                           |  |       |        |  |         |   |   |         |  |   |         | 
|Impaired loans             |  | $     | 22,255 |  |         | $ | - |         |  | $ | -       | 
|Foreclosed assets          |  |       | 9,589  |  |         |   | - |         |  |   | -       | 
|                           |  |       |        |  |         |   |   |         |  |   |         | 
|Total assets at fair value |  | $     | 31,844 |  |         | $ | - |         |  | $ | -       | 



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



There
were no liabilities measured at fair value on a nonrecurring basis at December 31, 2010 and 2009.



75







|                                              
|----------------------------------------------
|Notes to Consolidated Financial Statements    
|For the years ended December 31, 2010 and 2009



Note
14. Fair Value of Financial Instruments, continued



Assets and Liabilities Recorded
as Fair Value on a Nonrecurring Basis, continued



Generally accepted accounting principles
requires disclosure of fair value information about financial instruments, whether or not recognized in the Statement of Condition,
for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based
on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions
used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument.
The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value
amounts. Also, the fair value estimates presented herein are based on pertinent information available to management as of December 31,
2010 and 2009. Such amounts have not been comprehensively revalued for purposes of these financial statements since those dates,
and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.



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



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



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



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



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



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



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



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



COMMITMENTS TO EXTEND CREDIT AND
STANDBY LETTERS OF CREDIT — The value of these unrecognized financial instruments is estimated based on the fee income
associated with the commitments which, in the absence of credit exposure, is considered to approximate their settlement value.
As no significant credit exposure exists, and because such fee income is not material to the Company’s financial statements
at December 31, 2010 and 2009, the fair value of these commitments is not presented.



76







|                                              
|----------------------------------------------
|Notes to Consolidated Financial Statements    
|For the years ended December 31, 2010 and 2009



Note
14. Fair Value of Financial Instruments, continued



Assets and Liabilities Recorded
as Fair Value on a Nonrecurring Basis, continued



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



|                                                                           |  | December 31, 2010 |         |  | December 31, 2009 |  
|-------------------------------------------------------------------------- |  | ----------------- | ------- |  | ----------------- | -
|                                                                           |  | Carrying          |         |  | Fair              |  
|                                                                           |  | Amount            |         |  | Value             |  
|                                                                           |  |                   |         |  |                   |  
|Financial Assets                                                           |  |                   |         |  |                   |  
|Cash and due from banks                                                    |  | $                 | 4,878   |  |                   | $
|Interest-bearing deposits with banks                                       |  |                   | 28,080  |  |                   |  
|Federal funds sold                                                         |  |                   | 2,210   |  |                   |  
|Investment securities                                                      |  |                   | 67,487  |  |                   |  
|Restricted equity securities                                               |  |                   | 3,760   |  |                   |  
|Loans, net of allowance for loan losses                                    |  |                   | 389,475 |  |                   |  
|                                                                           |  |                   |         |  |                   |  
|Financial Liabilities                                                      |  |                   |         |  |                   |  
|Deposits                                                                   |  |                   | 454,947 |  |                   |  
|Securities sold under agreements to repurchase and federal funds purchased |  |                   | 19,776  |  |                   |  
|Other short-term borrowings                                                |  |                   | 5,900   |  |                   |  
|Long-term debt                                                             |  |                   | 38,000  |  |                   |  
|Junior subordinated debentures                                             |  |                   | 12,372  |  |                   |  



Note 15. Loss per Share



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



|                                                    |  | 2010 |             |   | 2009 |  
|--------------------------------------------------- |  | ---- | ----------- | - | ---- | -
|                                                    |  |      |             |   |      |  
|Net loss                                            |  | $    | (15,237,685 | ) |      | $
|                                                    |  |      |             |   |      |  
|Weighted average common shares outstanding          |  |      | 6,217,512   |   |      |  
|Effect of dilutive securities, options              |  |      | -           |   |      |  
|Effect of dilutive securities, preferred stock      |  |      | -           |   |      |  
|Weighted average common shares outstanding, diluted |  |      | 6,217,512   |   |      |  
|                                                    |  |      |             |   |      |  
|Basic loss per share                                |  | $    | (2.45       | ) |      | $
|Diluted loss per share                              |  | $    | (2.45       | ) |      | $



At December 31, 2010, 296,899 warrants
were outstanding with a $21.82 per share exercise price. These warrants could be used to purchase one share of the Company’s
common stock at any time until September 30, 2014. An additional 300,000 warrants to purchase one share of common stock at a price
of 50% of market price at time of issuance were outstanding at December 31, 2010. At December 31, 2010, 550 shares of the Company’s
Series A convertible preferred stock were outstanding. At December 31, 2010, 546,375 shares of the Company’s Series B convertible
preferred stock were outstanding. The Series A convertible preferred stock can be converted to one share of the Company’s
common stock at an exercise price of $16.48. The Series B convertible preferred stock is convertible into 1.5 shares of the Company’s
common stock. Exercise of these warrants, the Company’s convertible preferred stock and 275,049 options are not assumed in
computing 2010 diluted earnings per share due to the net loss of for the year ended December 31, 2010. The Company’sSeries A convertible preferred stock, Series B convertible preferred stock and
shares associated with stock-based compensation have been excluded from the computation of dilutive EPS as the result would be
anti-dilutive.



77









|                                                  
|--------------------------------------------------
|Notes to Consolidated Financial Statements        
|For the years ended December 31, 2010
    and 2009



Note
16. Change in Control Agreements



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



Note
17. Benefit Plans



Defined Contribution Plan



The Bank maintains a profit sharing
plan pursuant to Section 401(k) of the Internal Revenue Code. The plan covers substantially all employees at least 21 years of
age who have completed at least one month of service. Participants may contribute a percentage of compensation, subject to a maximum
allowed under the Code. The bank contributed up to 3% of an employee’s compensation who have completed at least twelve months
of service which vests over a five-year period. However, this contribution was eliminated in February, 2009. The Bank’s aggregate
contribution was $21,000 for the year ended December 31, 2009.



Supplemental benefits have been approved
by the Board of Directors for the directors and certain executive officers of Waccamaw Bank. Certain funding is provided informally
and indirectly by life insurance policies. The cash surrender value of the life insurance policies are recorded as a separate line
item in the accompanying balance sheets of $18,330,003 and $18,576,015 at December 31, 2010 and 2009, respectively. Income earned
on these policies is reflected as a separate line item in the Consolidated Statements of Operations. The Company recorded no expenses
due to suspending additional contributions in 2010 and expenses of $241,004 in 2009 and a liability of $483,448 in 2010 and 2009.



The
Company’s Board of Directors has adopted the Waccamaw Bankshares, Inc. 2008 Omnibus Stock Ownership and Long-Term Incentive
Plan. In accordance with the Company’s plan, the Company may grant Incentive Stock Options, Non-Qualified Stock Options,
Restricted Stock, Stock Appreciation Rights and/or Units and up to 705,973 shares of common stock may be issued (adjusted for stock
dividends). Options granted under the plan expire no more than 10 years from date of grant. Option exercise price under the plan
must be set by the Board of Directors at the date of grant and cannot be less than 100% of fair market value of the related stock
at the date of the grant.Under the plan, vesting is determined by the specific option agreements. It is the Company’s
policy to issue new shares to satisfy option exercises. Both the 1998
Incentive Stock Option Plan (Incentive Plan) and the 1998 Nonstatutory Stock Option Plan (Nonstatutory Plan) expired
in 2008; as the options not granted under these plans were terminated and the remaining options under these plans have a maximum
term of ten years from the original grant date.



As described in Note 1, the Company
is required to record compensation expense for all rewards granted after the date of adoption and for the unvested portion of previously
granted awards that remain outstanding at the date of adoption. Compensation cost charged to income was approximately $85,000 and
$122,000 for the years ended December 31, 2010 and 2009, respectively.



The weighted average fair value of each
stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The weighted average estimated
fair values of stock options grants and the assumptions that were used in calculating such fair values were based on estimates
at the date of grant as follows:





78









|                                                  
|--------------------------------------------------
|Notes to Consolidated Financial Statements        
|For the years ended December 31, 2010
    and 2009



Note
17. Benefit Plans, continued



Stock Option Plans



|                                                               |  | 2010 |       |   | 2009 |  
|-------------------------------------------------------------- |  | ---- | ----- | - | ---- | -
|                                                               |  |      |       |   |      |  
|Weighted average fair value of options granted during the year |  | $    | 2.12  |   |      | $
|                                                               |  |      |       |   |      |  
|Assumptions:                                                   |  |      |       |   |      |  
|Average risk free interest rate                                |  |      | 3.64  | % |      |  
|Average expected volatility                                    |  |      | 86.45 | % |      |  
|Expected dividend rate                                         |  |      | -     | % |      |  
|Expected life in years                                         |  |      | 10    |   |      |  



There was no cash received from option exercises
under the plans for the years ended December 31, 2010 and December 31, 2009. There was no total intrinsic value of options outstanding
for the years ended December 31, 2010 December 31, 2009.





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



Activity under the Omnibus Plan during
the years ended December 31, 2010 and 2009 is summarized below:



|                          |  | 2008 Omnibus Stock Ownership |        
|------------------------- |  | ---------------------------- | -------
|                          |  | and Long Term Incentive Plan |        
|                          |  | Available                    |        
|                          |  | for Grant                    |        
|                          |  |                              |        
|Balance December 31, 2008 |  |                              | 679,473
|                          |  |                              |        
|Forfeited                 |  |                              | 5,500  
|Granted                   |  |                              | (4,000 
|Exercised                 |  |                              | -      
|Balance December 31, 2009 |  |                              | 680,973
|                          |  |                              |        
|Forfeited                 |  |                              | 49,240 
|Granted                   |  |                              | (10,000
|Exercised                 |  |                              | -      
|Balance December 31, 2010 |  |                              | 720,213



79







|                                                  
|--------------------------------------------------
|Notes to Consolidated Financial Statements        
|For the years ended December 31, 2010
    and 2009



Note
17.	Benefit Plans, continued



Stock Option Plans, continued



A summary of option activity under the
plans as of and changes during the year ended December 31, 2010 is presented below:



|                                 |  |             |         |   | Weighted |   |       | Average     |  |  |           | 
|-------------------------------- |  | ----------- | ------- | - | -------- | - | ----- | ----------- |  |  | --------- | 
|                                 |  |             |         |   | Average  |   |       | Remaining   |  |  | Aggregate | 
|                                 |  | Options     |         |   | Exercise |   |       | Contractual |  |  | Intrinsic | 
|                                 |  | Outstanding |         |   | Price    |   |       | Term        |  |  | Value     | 
|                                 |  |             |         |   |          |   |       |             |  |  |           | 
|Outstanding at December 31, 2009 |  |             | 314,289 |   |          | $ | 14.69 |             |  |  |           | 
|Granted                          |  |             | 10,000  |   |          |   | 2.95  |             |  |  |           | 
|Forfeited                        |  |             | (49,240 | ) |          |   | 13.46 |             |  |  |           | 
|Exercised                        |  |             | -       |   |          |   | -     |             |  |  |           | 
|Expired                          |  |             | -       |   |          |   | -     |             |  |  |           | 
|Outstanding at December 31, 2010 |  |             | 275,049 |   |          | $ | 14.48 |             |  |  | 4.9 years | 
|Exercisable at December 31, 2010 |  |             | 243,608 |   |          | $ | 15.39 |             |  |  | 4.5 years | 



The total fair value of options that
were contractually vested during 2010 and 2009 was $70,431 and $103,973, respectively.



As of December 31, 2010 the Company
had unamortized compensation expense related to unvested stock options of $135,653 which is expected to be amortized over 5 years.  Total
unrecognized compensation cost related to outstanding non-vested stock options will be recognized over the following periods:



|2011  |  | $ | 67,481  | 
|----- |  | - | ------- | 
|2012  |  |   | 46,307  | 
|2013  |  |   | 17,105  | 
|2014  |  |   | 4,760   | 
|Total |  | $ | 135,653 | 



Note
18. Income Taxes



Current
and Deferred Income Tax Components



The components of income tax expense
are as follows:



|                             |  | 2010 |           |  | 2009 |  
|---------------------------- |  | ---- | --------- |  | ---- | -
|                             |  |      |           |  |      |  
|Current                      |  | $    | 21,680    |  |      | $
|Deferred                     |  |      | 3,666,532 |  |      |  
|Income tax expense (benefit) |  | $    | 3,688,212 |  |      | $



80







|                                                  
|--------------------------------------------------
|Notes to Consolidated Financial Statements        
|For the years ended December 31, 2010
    and 2009



Note 18. Income Taxes, continued



Deferred
Income Tax Analysis, continued



A reconciliation of income tax benefit
computed at the statutory federal income tax rate of 34% included in the statement of income follows:



|                                                 |  | 2010 |            |   | 2009 |  
|------------------------------------------------ |  | ---- | ---------- | - | ---- | -
|                                                 |  |      |            |   |      |  
|Tax at statutory federal rate                    |  | $    | (3,926,821 | ) |      | $
|Tax exempt interest                              |  |      | (118,014   | ) |      |  
|Tax exempt income from bank owned life insurance |  |      | (220,201   | ) |      |  
|State income tax, net of federal benefit         |  |      | (528,817   | ) |      |  
|Valuation allowance                              |  |      | 8,895,612  |   |      |  
|Other                                            |  |      | (413,547   | ) |      |  
|Income tax expense (benefit)                     |  | $    | 3,688,212  |   |      | $



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



|                                                      |  | 2010 |             |   | 2009 |  
|----------------------------------------------------- |  | ---- | ----------- | - | ---- | -
|                                                      |  |      |             |   |      |  
|Deferred tax assets                                   |  |      |             |   |      |  
|Allowance for loan losses                             |  | $    | 5,896,747   |   |      | $
|Employment benefit liability                          |  |      | 186,388     |   |      |  
|Deposit premium amortization                          |  |      | 298,442     |   |      |  
|Deferred loan fees                                    |  |      | 83,557      |   |      |  
|Tax amortization of goodwill                          |  |      | 702,259     |   |      |  
|Allowance for other real estate owned                 |  |      | 770,947     |   |      |  
|Net operating loss carryover                          |  |      | 2,640,362   |   |      |  
|NC net economic loss carryover                        |  |      | 922,259     |   |      |  
|Alternative minimum tax credit carryover              |  |      | 220,037     |   |      |  
|Unrealized loss on securities available for sale      |  |      | 1,457,349   |   |      |  
|Charitable contribution carryover                     |  |      | 11,690      |   |      |  
|Total gross deferred tax assets                       |  |      | 13,190,037  |   |      |  
|                                                      |  |      |             |   |      |  
|Less: Valuation allowance                             |  |      | (12,548,053 | ) |      |  
|Total deferred tax assets, net of valuation allowance |  |      | 641,984     |   |      |  



|Deferred tax liabilities   |  |   |          |   |  |   |           |  
|-------------------------- |  | - | -------- | - |  | - | --------- | -
|Depreciation               |  |   | (559,404 | ) |  |   | (559,849  | )
|Accretion of bond discount |  |   | (82,580  | ) |  |   | (80,586   | )
|                           |  |   |          |   |  |   |           |  
|Deferred tax liabilities   |  |   | (641,984 | ) |  |   | (640,435  | )
|Net deferred tax asset     |  | $ | -        |   |  | $ | 4,104,517 |  



At December 31, 2010, the Company had
a net deferred tax asset before any valuation allowance of $12,548,053, consisting of items noted in the table above. The Company
has established a valuation allowance of $12,548,053 against the above benefits. Based on historical and budgeted earnings and
tax planning strategies, management has determined the amount of deferred tax asset it is more likely than not that will be utilized
over the next year. Due to uncertainty related to long-term projections, any remaining deferred tax asset is off-set with a valuation
allowance.



The Company had analyzed the tax positions
taken or expected to be taken in and its tax returns and concluded it has no liability related to uncertain tax positions. The
Company’s federal and state income tax returns are open and subject to examination from the 2007 tax return year and forward.





81







|                                                  
|--------------------------------------------------
|Notes to Consolidated Financial Statements        
|For the years ended December 31, 2010
    and 2009



Note
19. Commitments and Contingencies



Litigation



No legal proceedings are required
to be disclosed pursuant to this item as of December 31, 2010.



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:



|                             |  | 2010 |            |  | 2009 |  
|---------------------------- |  | ---- | ---------- |  | ---- | -
|                             |  |      |            |  |      |  
|Commitments to extend credit |  | $    | 65,392,000 |  |      | $
|Stand-by letters of credit   |  |      | 1,066,000  |  |      |  
|                             |  | $    | 66,458,000 |  |      | $



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



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



Substantially
all of the Bank's loans and commitments to extend credit have been granted to customers in the Bank's market area and such customers
are generally depositors of the Bank. The concentrations of credit by type of loan are set forth in Note 7. The distribution of
commitments to extend credit approximates the distribution of loans outstanding. The Bank's primary focus is toward commercial,
consumer and small business transactions, and accordingly, it does not have a significant number of credits to any single borrower
or group of related borrowers in excess of $4,000,000.



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





82







|                                                  
|--------------------------------------------------
|Notes to Consolidated Financial Statements        
|For the years ended December 31, 2010
    and 2009



Note 20. Regulatory
Restrictions



Written
Agreement



Effective June 14, 2010, the Company
and the Bank entered into a Written Agreement (the “Agreement”) with the Federal Reserve Bank of Richmond (the “Reserve
Bank”) and the North Carolina Commissioner of Banks (“The Commissioner”).



The Agreement is a formal corrective
action pursuant to which the Bank has agreed to address specific issues set forth below, through the adoption and implementation
of procedures, plans and policies designed to enhance the safety and soundness of the Bank.



Among other things, the Agreement requires the Bank to:



| | • | Retain an independent consultant acceptable to the Reserve Bank and the Commissioner to conduct
a review of the effectiveness of the Bank’s corporate governance, board and management structure, to assess staffing needs
and to prepare a written report of findings and recommendations;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Formulate a plan to strengthen board oversight of the management and operations of the Bank;
| | - | --------------------------------------------------------------------------------------------



| | • | Formulate and implement a plan to strengthen credit risk management practices;
| | - | ------------------------------------------------------------------------------



| | • | Formulate a plan for the ongoing review and grading of the Bank’s loan portfolio by a qualified
independent party or by qualified staff that is independent of the Bank’s lending function;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Develop a plan to maintain sufficient capital at the Company, on a consolidated basis;
| | - | --------------------------------------------------------------------------------------



| | • | Not pay cash dividends without the prior written consent of the Reserve Bank and the Commissioner;
| | - | --------------------------------------------------------------------------------------------------



| | • | Not accept any new brokered deposits (contractual renewals or rollovers of existing brokered deposits
are permitted).
| | - | ---------------------------------------------------------------------------------------------------------------------



The Company must furnish periodic progress
reports to the Reserve Bank and the Commissioner regarding its compliance with the Agreement. The Agreement will remain in effect
until modified or terminated by the Reserve Bank and the Commissioner. The Bank reports regularly to its regulators on matters
of compliance with the Agreement, and the progress made to comply with the Agreement.



Prompt
Corrective Action



Effective November 29, 2011, the Company and
the Bank entered into a Prompt Corrective Action Directive (the “Directive”) with the Board of Governors of the Federal
Reserve System (the “Board of Governors”).



The Directive is a formal corrective action
in which the Board of Governors has determined that, as of October 30, 2011, Waccamaw Bank is critically undercapitalized, as defined
in section 208.43(b)(5) of Regulation H of the Board of Governors:



Among other things, the Directive requires the Bank no later than
January 6, 2012 to:



| | • | Increase the Bank’s equity through the sale of shares or contributions
to surplus in an amount sufficient to make the Bank adequately capitalized as defined in section 208.43(b)(2) of Regulation H of
the Board of Governors;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Enter into and close a contract to be acquired by a depository institution
holding company or combine with another insured depository institution, closing under which contract is conditioned only on the
receipt of necessary regulatory approvals, the continued accuracy of customary representations and warranties and the performance
of customary pre-closing covenants;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Take other necessary measures to make the Bank adequately capitalized;
| | - | ----------------------------------------------------------------------



| | • | Restrict the making of any capital distributions, including, but not
limited to, the payment of dividends.
| | - | ----------------------------------------------------------------------------------------------------------



| | • | Solicit and accept new deposit accounts or renew any time deposits
bearing an interest rate that exceeds the prevailing effective rates on deposits of comparable amounts and maturities in the Bank’s
market area without the prior written approval of the Federal Reserve Bank of Richmond (the “Reserve” Bank”);
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Restrict the payment of bonuses to senior executive officers and increases
in compensation of such officers;
| | - | ------------------------------------------------------------------------------------------------------------



| | • | Restrict certain activities, including, but not limited to, making any
material change in accounting methods and engaging in any covered transaction, as defined in section 23A of the Federal Reserve
Act without the prior written approval of the FDIC.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Company must furnish periodic progress reports to the Reserve Bank and the Commissioner regarding its compliance with the Agreement. The Agreement will remain in effect until modified or terminated by the Reserve Bank and the Commissioner. The Bank reports regularly to its regulators on matters of compliance with the Agreement, and the progress made to comply with the Agreement.



83







|                                                  
|--------------------------------------------------
|Notes to Consolidated Financial Statements        
|For the years ended December 31, 2010
    and 2009



Note 20. Regulatory
Restrictions, continued



Capital
Requirements, continued



Due
to the recent favorable ruling by the Federal Reserve Board of Governors reducing the amount of the deduction to regulatory
capital associated with the preferred stock to be regulatory capital, the Bank’s capital status at September 30,
2011 changed from critically undercapitalized to significantly undercapitalized. Although the Directive has not been
terminated, the Company continues to take measures to make the Bank adequately capitalized through the sale of branches and
selling stock through a private stock offering.



Dividends



The
Company’s dividend payments will be made from dividends received from the Bank. The Bank, as a North Carolina banking corporation,
may pay dividends only out of undivided profits (retained earnings) as determined pursuant to North Carolina General Statutes Section
53-87. As of December 31, 2010, there are no retained earnings from which to pay dividends. Regulatory authorities may also limit
payment of dividends by any bank when it is determined that such a limitation is in the public interest and is necessary to ensure
financial soundness of the Bank.



Capital
Requirements



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



Quantitative measures established by
regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets, as all those terms are
defined in the regulations. Management believes, as of December 31, 2010 that the Company and the Bank did not meet all capital
adequacy requirements to which they are subject and are therefore classified as “undercapitalized”.



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



|                                        |  |        |        |  |          |  |      |                   |  |   |                   |  |  | Minimum    |     
|--------------------------------------- |  | ------ | ------ |  | -------- |  | ---- | ----------------- |  | - | ----------------- |  |  | ---------- | ----
|                                        |  |        |        |  |          |  |      |                   |  |   |                   |  |  | To Be Well |     
|                                        |  |        |        |  |          |  |      | Minimum           |  |   | Capitalized Under | 
|                                        |  |        |        |  |          |  |      | Capital           |  |   | Prompt Corrective | 
|                                        |  | Actual |        |  | Required |  |      | Action Provisions | 
|                                        |  | Amount |        |  | Ratio    |  |      | Amount            |  |   | Ratio             |  |  | Amount     |     
|                                        |  |        |        |  |          |  |      |                   |  |   |                   |  |  |            |     
|December 31, 2010                       |  |        |        |  |          |  |      |                   |  |   |                   |  |  |            |     
|Total capital to risk- weighted assets  |  |        |        |  |          |  |      |                   |  |   |                   |  |  |            |     
|Consolidated                            |  | $      | 33,512 |  |          |  | 7.54 | %                 |  | $ | 35,547            |  |  |            | 8.00
|Bank                                    |  | $      | 39,153 |  |          |  | 8.82 | %                 |  | $ | 35,500            |  |  |            | 8.00
|                                        |  |        |        |  |          |  |      |                   |  |   |                   |  |  |            |     
|Tier 1 capital to risk- weighted assets |  |        |        |  |          |  |      |                   |  |   |                   |  |  |            |     
|Consolidated                            |  | $      | 29,759 |  |          |  | 6.70 | %                 |  | $ | 17,774            |  |  |            | 4.00
|Bank                                    |  | $      | 30,578 |  |          |  | 6.89 | %                 |  | $ | 17,750            |  |  |            | 4.00
|                                        |  |        |        |  |          |  |      |                   |  |   |                   |  |  |            |     
|Tier 1 capital to average assets        |  |        |        |  |          |  |      |                   |  |   |                   |  |  |            |     
|Consolidated                            |  | $      | 29,759 |  |          |  | 5.27 | %                 |  | $ | 22,577            |  |  |            | 4.00
|Bank                                    |  | $      | 30,578 |  |          |  | 5.42 | %                 |  | $ | 22,553            |  |  |            | 4.00



84







|                                                  
|--------------------------------------------------
|Notes to Consolidated Financial Statements        
|For the years ended December 31, 2010
    and 2009



Note 20. Regulatory
Restrictions, continued



Capital
Requirements, continued



|                                        |  |        |        |  |          |  |       |                   |  |   |                   |  |  | Minimum    |     
|--------------------------------------- |  | ------ | ------ |  | -------- |  | ----- | ----------------- |  | - | ----------------- |  |  | ---------- | ----
|                                        |  |        |        |  |          |  |       |                   |  |   |                   |  |  | To Be Well |     
|                                        |  |        |        |  |          |  |       | Minimum           |  |   | Capitalized Under | 
|                                        |  |        |        |  |          |  |       | Capital           |  |   | Prompt Corrective | 
|                                        |  | Actual |        |  | Required |  |       | Action Provisions | 
|                                        |  | Amount |        |  | Ratio    |  |       | Amount            |  |   | Ratio             |  |  | Amount     |     
|                                        |  |        |        |  |          |  |       |                   |  |   |                   |  |  |            |     
|December 31, 2009                       |  |        |        |  |          |  |       |                   |  |   |                   |  |  |            |     
|Total capital to risk- weighted assets  |  |        |        |  |          |  |       |                   |  |   |                   |  |  |            |     
|Consolidated                            |  | $      | 35,848 |  |          |  | 8.95  | %                 |  | $ | 32,029            |  |  |            | 8.00
|Bank                                    |  | $      | 40,401 |  |          |  | 10.11 | %                 |  | $ | 31,972            |  |  |            | 8.00
|                                        |  |        |        |  |          |  |       |                   |  |   |                   |  |  |            |     
|Tier 1 capital to risk- weighted assets |  |        |        |  |          |  |       |                   |  |   |                   |  |  |            |     
|Consolidated                            |  | $      | 31,742 |  |          |  | 7.93  | %                 |  | $ | 16,014            |  |  |            | 4.00
|Bank                                    |  | $      | 32,332 |  |          |  | 8.09  | %                 |  | $ | 15,986            |  |  |            | 4.00
|                                        |  |        |        |  |          |  |       |                   |  |   |                   |  |  |            |     
|Tier 1 capital to average assets        |  |        |        |  |          |  |       |                   |  |   |                   |  |  |            |     
|Consolidated                            |  | $      | 31,742 |  |          |  | 5.88  | %                 |  | $ | 21,596            |  |  |            | 4.00
|Bank                                    |  | $      | 32,332 |  |          |  | 6.00  | %                 |  | $ | 21,565            |  |  |            | 4.00





Based on unaudited financial
information, as of December 31, 2011, the resulting bank regulatory capital ratios of total capital to risk weighted assets, tier
1 capital to risk weighted assets and tier 1 capital to average assets are 4.96%, 3.08% and 2.08%, respectively. Based on these
levels, the Bank is considered significantly undercapitalized.



Generally
accepted accounting principles require that in the event of changes about the likelihood of realization of a deferred tax asset
that results in the establishment of a deferred tax asset valuation allowance related to unrealized losses on available for sale
investment securities, that valuation allowance be established through operation even thought the original deferred tax asset was
established through other comprehensive income. The guidance on how to address this inconsistent treatment with respect to the
calculation of regulatory capital is not well defined. Accordingly, the capital amounts and ratios in the table above include an
adjustment related to establishment of such a deferred tax asset valuation. After this adjustment, regulatory capital as presented
is the same amount as would be reported had the related deferred tax asset has not been recorded. Management has discussed this
treatment with applicable bank regulators and management has not been informed that this treatment is incorrect. However, due to
the lack of clear guidance, it is possible the regulators could conclude this adjustment is not appropriate. If that were the case,
Tier 1 and total regulatory capital for December 31, 2011 and December 31, 2010 would be reduced by $1,457,000 and $898,000, respectively
and the bank capital ratios would approximate the following:



|                                       |  |  | 2011 |   |  |  | 2010 |  
|-------------------------------------- |  |  | ---- | - |  |  | ---- | -
|                                       |  |  |      |   |  |  |      |  
|Total capital to risk weighted assets  |  |  | 1.93 | % |  |  | 5.16 | %
|Tier 1 capital to risk weighted assets |  |  | 2.85 | % |  |  | 6.56 | %
|Tier 1 capital to average assets       |  |  | 4.73 | % |  |  | 8.49 | %



Intercompany
transactions



Restrictions
on loans by the Bank to the Company are imposed by Federal Reserve Act Sections 23A and 23B, and differ from legal lending limits
on loans to external customers. Generally, a bank may lend up to 10% of its capital and surplus to its parent or other affiliate,
if the loan is secured and so long as certain safety and soundness requirements and market terms requirements are met. If collateral
is in the form of stocks, bonds, debentures or similar obligations, it must have a market value when the loan is made of at least
20% more than the amount of the loan, and if obligations of a state or political subdivision or agency thereof, it must have a
market value of at least 10% more than the amount of the loan. If such loans are secured by obligations of the United States or
agencies thereof, or by notes, drafts, bills of exchange or bankers' acceptances eligible for rediscount or purchase by a Federal
Reserve Bank, requirements for collateral in excess of loan amount do not apply. Under this definition, the legal lending limit
for the Bank on loans to the Company was approximately $2,800,000 at December 31, 2010. No 23A transactions existed at December
31, 2010 or 2009.



Note
21. 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:



85







|                                                  
|--------------------------------------------------
|Notes to Consolidated Financial Statements        
|For the years ended December 31, 2010
    and 2009



Note
21. Transactions with Related Parties, continued



Loans, continued



|                        |  | 2010 |            |   | 2009 |  
|----------------------- |  | ---- | ---------- | - | ---- | -
|                        |  |      |            |   |      |  
|Balance, beginning      |  | $    | 3,707,807  |   |      | $
|Change in relationships |  |      | 23         |   |      |  
|New loans and advances  |  |      | 469,023    |   |      |  
|Repayments              |  |      | (1,025,615 | ) |      |  
|Balance, ending         |  | $    | 3,151,238  |   |      | $



Note
22. Parent Company Financial Information



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



Balance Sheets

December
31, 2010 and 2009



|                                        |  | 2010 |            |  | 2009 |  
|--------------------------------------- |  | ---- | ---------- |  | ---- | -
|Assets                                  |  |      |            |  |      |  
|Cash and due from banks                 |  | $    | 461,065    |  |      | $
|Investment in subsidiary bank at equity |  |      | 26,958,012 |  |      |  
|Other assets                            |  |      | 485,773    |  |      |  
|Total assets                            |  | $    | 27,904,850 |  |      | $
|                                        |  |      |            |  |      |  
|Liabilities                             |  |      |            |  |      |  
|Short-term debt                         |  | $    | 900,000    |  |      | $
|Junior Subordinated debt                |  |      | 12,372,000 |  |      |  
|Other liabilities                       |  |      | 493,539    |  |      |  
|Total liabilities                       |  |      | 13,765,539 |  |      |  



Balance Sheets (continued)

December
31, 2010 and 2009



|                                                       |  | 2010 |             |   | 2009 |  
|------------------------------------------------------ |  | ---- | ----------- | - | ---- | -
|Stockholders' equity                                   |  |      |             |   |      |  
|Preferred stock, Series A                              |  |      | 9,064       |   |      |  
|Preferred stock, Series B, less discount of $6,488,497 |  |      | 9,603,769   |   |      |  
|Common stock warrants                                  |  |      | 300,000     |   |      |  
|Common stock                                           |  |      | 27,084,927  |   |      |  
|Retained (deficit)                                     |  |      | (20,535,626 | ) |      |  
|Accumulated other comprehensive loss                   |  |      | (2,322,823  | ) |      |  
|Total stockholders' equity                             |  |      | 14,139,311  |   |      |  
|Total liabilities and stockholders' equity             |  | $    | 27,904,849  |   |      | $



86







|                                                  
|--------------------------------------------------
|Notes to Consolidated Financial Statements        
|For the years ended December 31, 2010
    and 2009



Note
22. Parent Company Financial Information, continued



Statements of Operations

Years
ended December 31, 2010 and 2009



|                                                                         |  | 2010 |             |   | 2009 |  
|------------------------------------------------------------------------ |  | ---- | ----------- | - | ---- | -
|                                                                         |  |      |             |   |      |  
|Income                                                                   |  |      |             |   |      |  
|Investment securities, taxable                                           |  | $    | 20,949      |   |      | $
|Total income                                                             |  |      | 20,949      |   |      |  
|                                                                         |  |      |             |   |      |  
|Expenses                                                                 |  |      |             |   |      |  
|Salaries and employee benefits                                           |  |      | 85,335      |   |      |  
|Franchise tax                                                            |  |      | 26,025      |   |      |  
|Interest expense                                                         |  |      | 493,253     |   |      |  
|Other expenses                                                           |  |      | 750         |   |      |  
|Total expenses                                                           |  |      | 605,363     |   |      |  
|Loss before tax expense and equity in undistributed income of subsidiary |  |      | (584,414    | ) |      |  
|                                                                         |  |      |             |   |      |  
|Federal income tax benefit                                               |  |      | 169,687     |   |      |  
|State income tax expense                                                 |  |      | -           |   |      |  
|Total income tax benefit                                                 |  |      | 169,687     |   |      |  
|Loss before equity in undistributed income of subsidiary                 |  |      | (414,727    | ) |      |  
|                                                                         |  |      |             |   |      |  
|Equity in undistributed income (loss) of subsidiary                      |  |      | (14,822,958 | ) |      |  
|Net loss                                                                 |  | $    | (15,237,685 | ) |      | $



Statements of Cash Flows

Years
ended December 31, 2010 and 2009



|                                                       |  | 2010 |             |   | 2009 |  
|------------------------------------------------------ |  | ---- | ----------- | - | ---- | -
|                                                       |  |      |             |   |      |  
|Cash flows from operating activities                   |  |      |             |   |      |  
|Net loss                                               |  | $    | (15,237,685 | ) |      | $
|Adjustments:                                           |  |      |             |   |      |  
|Amortization                                           |  |      | 7,167       |   |      |  
|Stock-based compensation                               |  |      | 85,335      |   |      |  
|Decrease in equity in undistributed loss of subsidiary |  |      | 14,822,958  |   |      |  
|(Increase) decrease in other assets                    |  |      | 215,453     |   |      |  
|Increase (decrease) in other liabilities               |  |      | 437,662     |   |      |  
|Net cash used by operating activities                  |  |      | 330,890     |   |      |  
|                                                       |  |      |             |   |      |  
|Cash flows from investing activities                   |  |      |             |   |      |  
|Proceeds from advances from subsidiaries               |  |      | 100,000     |   |      |  
|Net cash used by investing activities                  |  |      | 100,000     |   |      |  
|                                                       |  |      |             |   |      |  
|Cash flows from financing activities                   |  |      |             |   |      |  
|Net proceeds from (repayment of) short-term debt       |  |      | (100,000    | ) |      |  
|Issuance of stock and redemption of fractional shares  |  |      | -           |   |      |  
|Net cash provided  by financing activities             |  |      | (100,000    | ) |      |  
|Increase (decrease) in cash and due from banks         |  |      | 330,890     |   |      |  
|                                                       |  |      |             |   |      |  
|Cash and cash equivalents, beginning                   |  |      | 130,175     |   |      |  
|Cash and cash equivalents, ending                      |  | $    | 461,065     |   |      | $



87







Item 9 –
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure



None.



ITEM 9A – CONTROLS AND PROCEDURES



Our management, under
the supervision and with the participation of our principal executive officer and principal financial officer, has evaluated
the effectiveness of the design and operation of our disclosure controls and procedures in accordance with Rule 13a-15(e) of
the Securities Exchange Act of 1934 (the “Exchange Act”). Our management, including our principal executive
officer and principal financial officer concluded that, as of December 31, 2010, our disclosure controls and procedures were
not effective in ensuring that the information we are required to disclose in the reports we file or submit under the Act is
(i) accumulated and communicated to our management (including the principal executive officer and principal financial
officer) to allow timely decisions regarding required disclosure, and (ii) recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and forms. This conclusion is based on the fact that the Company
had a material weakness with respect to its process for identifying and reviewing non-routine transactions, as described below.



As of December 31, 2010, management
assessed the effectiveness of the Company’s internal control over financial reporting based on the criteria for effective
internal control over financial reporting established in “Internal Control - Integrated Framework,” issued by
the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission. This assessment included controls over
the preparation of the schedules equivalent to the basic financial statements in accordance with the instructions for the Consolidated
Financial Statements for Bank Holding Companies (Form FR Y-9C) to meet the reporting requirements of Section 112 of the
Federal Deposit Insurance Corporation Improvement Act. During its assessment, management concluded that the Company had a material
weakness with respect to its process for identifying and reviewing non-routine transactions, as described below.



Due to uncertainty related to a complex transaction
involving the sale of non-performing assets, the purchase of a home equity line of credit (HELOC) pool, and the sale of preferred
stock referenced in Note 2 of the consolidated financial statements, the Company was unable to finalize the financial statements
for 2010 in a timely manner.



The Company was unable to complete
the filing of the 2010 Form 10-K or the March 31, 2011, June 30, 2011 or September 30, 2011 Forms 10-Q in a timely manner pending
the resolution of this transaction.



In connection with the above evaluation
of our disclosure controls and procedures, a change in our internal control over financial reporting was identified that occurred
during the quarter ended December 31, 2010 that has materially affected, or is reasonably likely to materially affect, our internal
controls over financial reporting. The Company is taking steps to remediate the material
weaknesses, including designing and implementing additional control procedures, and implementing additional review processes over
these controls.



Management identified the steps necessary
to remediate the material weakness and is in the process implementing a number of actions, including the following:





| | • | document to standards established by senior accounting personnel and the chief financial officer the review, analysis and related
conclusions with respect to non-routine transactions;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | interview outside accounting consultants to assist on an ongoing basis with the accounting of non-routine transactions;
| | - | -----------------------------------------------------------------------------------------------------------------------



| | • | involve both internal personnel and outside accounting consultants, as needed, early in a non-routine transaction to obtain
additional guidance as to the application of generally accepted accounting principles to such a proposed transaction; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Require senior accounting personnel and the Chief Financial Officer to review non-routine transactions to evaluate and approve
the accounting treatment for such transactions.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



88







ANNUAL REPORT

ON INTERNAL CONTROL OVER FINANCIAL
REPORTING



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



All internal control systems, no matter
how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable
assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may be inadequate due to changes in conditions, or that the degree of compliance
with policies or procedures may deteriorate.



The Company’s management
assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010. In
making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control—Integrated Framework. Based on this assessment and as more fully described
above, the Company’s management has concluded that, as of December 31, 2010, the Company’s internal control over
financial reporting was not effective based on that framework.



This annual report does not include
an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to an
exemption from that requirement provide to smaller reporting companies such as the Company.



ITEM 9B – OTHER INFORMATION



There was no information required to be disclosed by the
Company in a report on form 8-K during the fourth quarter of 2010 that was not so disclosed.



Part
III



Item
10 – Directors, Executive Officers AND CORPORATE GOVERNANCE



Directors



The following table lists information
about each of the Company’s current directors, including a description of his or her principal occupation and business experience.
There are no family relationships among directors and executive officers of the Company. No director is a director of any other
company with a class of securities registered pursuant to section 12 of the Securities Exchange Act of 1934 (the “Exchange
Act”) or subject to the requirements of section 15(d) of the Exchange Act, or any company registered as an investment company
under the Investment Company Act of 1940.



89







|Name and Age                           |  | Position(s)
    Held                                                          |  | Director
    Since(1) |  | Principal Occupation and
Business Experience                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-------------------------------------- |  | ----------------------------------------------------------------------------- |  | --------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                       |  |                                                                               |  |                       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Murchison B. Biggs (57)                |  | Director                                                                      |  | 1997                  |  | Certified
        Public Accountant; Chief Financial Officer, Comptroller/Secretary-Treasurer and Director, K.M. Biggs, Inc. (farming and commercial
        real estate management), Lumberton, NC; Chief Financial Officer, Secretary-Treasurer and Director, Biggs Park, Inc. (shopping center),
        Lumberton, NC                                                                                                                                                                                  
|Brian D. Campbell (43)                 |  | Director                                                                      |  | 2007                  |  | Chief
        Operating Officer, Campbell Oil Company, Elizabethtown, NC; Chief Operating Officer, Cape Fear Transport, Inc., Elizabethtown,
        NC; Chairman, Bladen County Economic Development Corporation                                                                                                                                                                                                                                                                                          
|Dr. Maudie M. Davis (59)               |  | Director                                                                      |  | 1997                  |  | Assistant
        Principal, Green Sea Floyds High School, Green Sea, SC (Horry County), 2007–Present; Principal, South Columbus High School,
        Tabor City, NC, 1990–2007                                                                                                                                                                                                                                                                                                                            
|Crawford Monroe Enzor
        III (47) |  | Director                                                                      |  | 1997                  |  | Real
        Estate Broker with Coldwell Banker Sea Coast Realty, 2010–Present; Sunset Properties, Ocean Isle Beach, NC, 2009–2010;
        Prudential Laney Real Estate, Ocean Isle Beach, NC, 2009; and Coldwell Banker, 2005–2008; Owner, The Salt Aire Group, Holden
        Beach, NC                                                                                                                                                                                                                 
|Alan W. Thompson (48)                  |  | Director, Chairman of the Board of Directors, Interim Chief Executive Officer |  | 1997                  |  | Interim
        Chief Executive Officer, Waccamaw Bankshares, Inc., and Waccamaw Bank, Whiteville, NC; President, Thompson, Price, Scott, Adams
        & Co., P.A. (certified public accountants), Whiteville, NC; President, Medical Billing Organization, Inc. (medical billing
        company), Whiteville, NC; Manager, TSA Rentals, LLC (rental real estate), Whiteville, NC; A & M Investments, LLC (real estate),
        Whiteville, NC; Manager, Dominion Wealth Management, LLC, Whiteville, NC
|R. Dale Ward (61)                      |  | Director                                                                      |  | 1997                  |  | President,
        J. D. Wright Roofing Co., Inc., Tabor City, NC; Partner, Crown Investments, LLC (real estate), Tabor City, NC; Owner, Ward Farms
        (farming operation), Tabor City, NC                                                                                                                                                                                                                                                                                                            
|J. Densil Worthington
        (57)     |  | Director                                                                      |  | 1997                  |  | President, Worthington Funeral Home, Inc., Chadbourn, NC; Secretary/Treasurer, Independent Medical Supplies, Inc., Chadbourn, NC; Member, Worthington Enterprises, LLC, Chadbourn, NC; Member, EWT, LLC, Chadbourn, NC                                                                                                                                                                                                                                                                                     












| | (1) | Includes service as a director of Waccamaw Bank, which reorganized into the bank holding company
form of organization in 2001. Each director also serves as a director of Waccamaw Bank.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Qualifications of Directors



A description of the
specific experience, qualifications, attributes, or skills that led to the conclusion that each of the directors should serve as
a director of the Company is presented below. Each of these directors brings a unique perspective and set of qualifications to
the board. Many of the Company’s directors have either attended or are planning to attend the North Carolina Bank Directors’
College, a program initiated by the North Carolina Office of the Commissioner of Banks to keep bank directors current on key banking
issues.





90









Murchison
B. Biggs.Mr. Biggs is a certified public accountant and serves as the chief financial
officer/secretary-treasurer as well as a director of K. M. Biggs, Inc., a farming and commercial real estate management
company in Lumberton, North Carolina. Mr. Biggs also serves as chief financial officer/secretary-treasurer and director of
Biggs Park, Inc., a shopping mall in Lumberton, North Carolina. He graduated from North Carolina State University with a
degree in business and accounting. Prior to his involvement in the family business, he worked as a public accountant with a
local firm in Lumberton for several years before becoming a member-in-industry CPA as the CFO of his family’s
businesses. He has extensive accounting experience in the retail and agricultural businesses and has served as treasurer for
several civic and related trade associations. Mr. Biggs has been a director of the Bank since 1997 and of the Company since
2001.



Brian D. Campbell.
Mr. Campbell has been chief operating officer of Campbell Oil Company and chief operating officer of Cape Fear Transport, Inc.,
since 1990. Mr. Campbell serves as a director of his family entities including BWC Investments, LLC; Campbell Brothers Investments,
LLC; Campbell Brothers, Inc.; Campbell Investments, Inc.; Campbell Oil Company of Clinton, Inc.; Campbell Oil of Raleigh, Inc.;
Campbell Oil of Whiteville, Inc.; Campbell Oil Company, Inc.; Campbell Rentals, LLC; Executive Aircraft Services, Inc.; Lindsey
Campbell Oil Company, Inc.; The Gas Mart, Inc.; and C3 Enterprises, LLC. He also owns Cape Fear Transport, Inc. (transportation
of petroleum products), and Cape Fear Mini Storage & Rentals, Inc. (mini storage and portable storage buildings) and is part
owner/co-founder of First Capital Ventures (investment property). Mr. Campbell acts as chairman of the Bladen County Economic Development
Corporation and serves on the advisory boards of Methodist College and the North Carolina Department of Transportation Division
of Aviation. He has a financial background and experience in the management of multiple related companies. Mr. Campbell has been
a director of the Company since 2007 and has attended the North Carolina Bank Directors’ College.



Dr. Maudie M.
Davis. Dr. Davis has been an assistant principal at Green Sea Floyds High School since 2007 in Green Sea, South Carolina.
Prior to that Dr. Davis was principal at South Columbus High School from 1990 to 2007 in Tabor City, North Carolina. Dr. Davis
has been a director of the Bank since 1997 and of the Company since 2001 and has attended the North Carolina Bank Directors’
College.



Crawford Monroe
Enzor III. Mr. Enzor is a real estate broker with Coldwell Banker Sea Coast Realty and owner of The Salt Aire Group (real
estate brokerage). He worked as a real estate broker with Sunset Properties, Ocean Isle Beach, North Carolina, during 2010 and
with Prudential Laney Real Estate during 2009 and with Coldwell Banker from 2005 to 2008. Mr. Enzor was the owner of Monroe Enzor
III Farms and president of Enzor Farms, Inc., from 1986 to 2005. He has experience in real estate and agriculture. Mr. Enzor has
been a director of the Bank since 1997 and of the Company since 2001 and has attended the North Carolina Bank Directors’
College.



Alan W. Thompson.
Mr. Thompson currently serves as interim chief executive officer of the Company and the Bank and has been president of Thompson,
Price, Scott, Adams & Co., P.A. (CPA firm) in Whiteville, North Carolina, since 1993. Mr. Thompson has also served as president
of Medical Billing Organization, Inc. (medical billing company) since 2002, manager of Dominion Wealth Management, LLC (financial
services), since 2002, manager of TSA Rentals, LLC (rental real estate), since 2002, and manager of A & M Investments, LLC
(real estate), all in Whiteville, North Carolina. He has extensive accounting experience. Mr. Thompson has been a director of the
Bank since 1997 and of the Company since 2001 and has attended the North Carolina Bank Directors’ College.



R. Dale Ward.
Mr. Ward is president of J. D. Wright Roofing Co., Inc., in Tabor City, North Carolina. He is also a partner in Crown Investments,
LLC (real estate), and owns Ward Farms (farming operation) in Tabor City, North Carolina. He has experience in business management
and real estate. Mr. Ward has been a director of the Bank since 1997 and of the Company since 2001 and has attended the North Carolina
Bank Directors’ College.



J. Densil Worthington.Mr.
Worthington is president of Worthington Funeral Home in Chadbourn, North Carolina. He serves as secretary/treasurer of Independent
Medical Supplies (medical supply provider of oxygen and other equipment for homebound patients) in Chadbourn, North Carolina, and
is a member of Worthington Enterprises, LLC in Chadbourn, North Carolina. Mr. Worthington has been a director of the Bank since
1997 and of the Company since 2001 and has attended the North Carolina Bank Directors’ College.



91







Executive Officers



Set forth below is certain information
regarding the Company’s executive officers.



|Name                |  | Age |  | Position with Company                                                                  |  | Business Experience                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|------------------- |  | --- |  | -------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                    |  |     |  |                                                                                        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|Alan W. Thompson    |  | 48  |  | Interim Chief Executive Officer of the Company and Waccamaw Bank                       |  | Interim Chief Executive Officer, Waccamaw Bankshares, Inc., Whiteville, NC, and Waccamaw Bank, Whiteville, NC, March 2011–present; President, Thompson, Price, Scott, Adams & Co., P.A. (certified public accountants), Whiteville, NC; President, Medical Billing Organization, Inc. (medical billing company), Whiteville, NC; Manager, TSA Rentals, LLC (rental real estate), Whiteville, NC; A & M Investments, LLC (real estate), Whiteville, NC; Manager, Dominion Wealth Management, LLC, Whiteville, NC                                                                                                
|                    |  |     |  |                                                                                        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|Geoffrey R. Hopkins |  | 38  |  | President of the Company and Waccamaw Bank                                             |  | President, Waccamaw Bankshares, Inc., Whiteville, NC, and Waccamaw Bank, Whiteville, NC, January 2011–present;Senior Vice President and Senior Commercial Lender, Waccamaw Bankshares, Inc., Whiteville, NC, and Waccamaw Bank, Whiteville, NC, May 2008–December 2010; prior to that, Vice President and Area Executive for Columbus and Bladen counties supervising the commercial lending function for that area; joined Waccamaw Bank in January 2003; prior to that, commercial banker, BB&T, March 2000–January 2003; prior to that, Market Manager, Anchor Bank, Little River, SC, June 1996–March 2000.
|                    |  |     |  |                                                                                        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|Freda H. Gore       |  | 50  |  | Senior Vice President and  Chief Operations Officer of  the Company and  Waccamaw Bank |  | Senior Vice President and Chief Operations Officer, Waccamaw Bankshares, Inc., Whiteville, NC, 2001–present and Waccamaw Bank, Whiteville, NC, 1997–present.                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                    |  |     |  |                                                                                        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|David A. Godwin     |  | 54  |  | Senior Vice President and  Chief Financial Officer of  the Company and Waccamaw Bank   |  | Senior Vice President and Chief Financial Officer of Waccamaw Bankshares, Inc., Whiteville, NC, 2001–present and Waccamaw Bank, Whiteville, NC, 2001–present; prior to that, Comptroller, Four Seasons Screen Printing Co., Conway, SC, February 2001–July 2001; prior to that Chief Financial Officer/Comptroller, Jones Stores, Inc., Tabor City, NC, 1995–2001 (retail variety stores).                                                                                                                                                                                                                     



92







|Name              |  | Age |  | Position with Company                                                                                   |  | Business Experience                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|----------------- |  | --- |  | ------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                  |  |     |  |                                                                                                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|Richard C. Norris |  | 46  |  | Senior Vice President and
        Chief Credit Officer
        of the Company and
        Waccamaw Bank |  | SeniorVice President and Chief Credit Officer, Waccamaw Bankshares, Inc., Whiteville, NC, 2003–present and Waccamaw Bank, Whiteville,
        NC, 2003–present; prior to that, Senior Business Underwriter, First Citizens Bank, Raleigh, NC, 1996–2003.                                                                                                                                                                                                                                                            
|                  |  |     |  |                                                                                                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|Kim T. Hutchens   |  | 56  |  | Senior Vice President and
        Human Resources Officer of the Company
        and Waccamaw Bank      |  | Senior Vice President and Human
Resources Officer, Waccamaw Bankshares, Inc., Whiteville, NC, 2010–present and Waccamaw Bank, Whiteville, NC, 2010–present;
prior to that, SeniorVice President andChief AdministrativeOfficer, Waccamaw Bankshares, Inc., Whiteville, NC, 2005–2010 and Waccamaw Bank, Whiteville, 2005–2010; prior to that,
Campaign Director/Advisor for various congressional campaigns; prior to that, Senior Vice President of Human Resources, Bank of
Granite, Granite Falls, NC, 1987–2003.
|                  |  |     |  |                                                                                                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|Lynn T. Murray    |  | 56  |  | Senior Vice President,
        Retail Banking and Marketing, of the
        Company and Waccamaw Bank   |  | Senior Vice President, Retail
Banking and Marketing, Waccamaw Bankshares, Inc., Whiteville, NC and Waccamaw Bank, Whiteville, NC, November 2010–present;
prior to that Executive Vice President, Retail Banking and Marketing, Woodlands Bank, Bluffton, SC, March 2007–August
2010; prior to that Senior Vice President, Deposit Marketing, Coastal Federal Bank , Myrtle Beach, SC, March 2007–October
2003.                                                                                                      



Section 16(a) Beneficial Ownership
Reporting Compliance



Directors and executive officers of
the Company are required by federal law to file reports with the Securities and Exchange Commission regarding the amount of and
changes in their beneficial ownership of the Company’s common stock. Management of the Company is not currently aware of
any directors or executive officers who, during 2010, failed to report shares beneficially owned or failed to timely file a required
report.



Code of Ethics



The Company’s board of directors
has adopted a code of ethics that applies to its directors and to all of its executive officers, including without limitation its
principal executive officer and principal financial officer. A copy of the Company’s code of ethics is provided at the Company’s
website: www.waccamawbank.com.



93







Audit Committee



The Company’s
board of directors has a standing audit committee. The audit committee of the Company
is responsible for receiving and reviewing the annual audit report of the Company’s independent auditors and reports of examinations
by bank regulatory agencies, and helps formulate, implement, and review the Company’s internal audit program. The audit
committee assesses the performance and independence of the Company’s independent auditors and recommends their appointment
and retention. The audit committee has in place policies and procedures that involve an
assessment of the performance and independence of the Company’s independent auditors, an evaluation of any conflicts of interest
that may impair the independence of the independent auditors and pre-approval of an engagement letter that outlines all services
to be rendered by the independent auditors.



The current members
of the audit committee are Murchison B. Biggs, Brian D. Campbell, Maudie M. Davis, and J. Densil Worthington. The board of directors
has determined that Murchison B. Biggs meets the requirements adopted by the SEC for qualification as an “audit committee
financial expert.” Mr. Biggs is a certified public accountant and serves as treasurer of several closely held family businesses.
An audit committee financial expert is defined as a person who has the following attributes: (i) an understanding of generally
accepted accounting principles (“GAAP”) and financial statements; (ii) the ability to assess the general application
of GAAP in connection with the accounting for estimates, accruals and reserves; (iii) experience preparing, auditing, analyzing
or evaluating financial statements that are of the same level of complexity that can be expected in the Company’s financial
statements, or experience supervising people engaged in such activities; (iv) an understanding of internal controls and procedures
for financial reporting; and (v) an understanding of audit committee functions.



Item
11 – Executive Compensation



The following table
shows all cash and non-cash compensation paid to or received or deferred by James G. Graham, Geoffrey R. Hopkins, Freda H. Gore,
David A. Godwin, and Kim T. Hutchens, (the “Named Executive Officers”) for services rendered in all capacities during
the fiscal years ended December 31, 2010 and 2009. Cash consideration consisted of base salary. Equity-based incentive compensation
typically consists of incentive stock option awards, however, no such awards were granted to the Named Executive Officers during
the fiscal years ended December 31, 2010 and 2009.



SUMMARY COMPENSATION
TABLE



|Name and
    Principal Position                    |  | Year |  |  | Salary |         |  | Bonus |  |   | Option
    Awards |  |  | Nonequity
    Incentive Plan Compensation |  |  | Nonqualified 
    Deferred  Compensation Earnings(1) |   |  | All Other 
    Compensation(2) |   |         | Total | 
|-------------------------------------------------- |  | ---- |  |  | ------ | ------- |  | ----- |  | - | ----------------- |  |  | ----------------------------------------- |  |  | ---------------------------------------------------- | - |  | ------------------------------ | - | ------- | ----- | 
|James G. Graham,                                   |  | 2010 |  |  | $      | 232,368 |  |       |  | — |                   |  |  | —                                         |  |  |                                                      | — |  |                                |   | —       |       | 
|Former Director, President                         |  | 2009 |  |  |        | 243,000 |  |       |  | — |                   |  |  | —                                         |  |  |                                                      | — |  |                                | $ | 143,565 |       | 
|and Chief Executive Officer(3)                     |  |      |  |  |        |         |  |       |  |   |                   |  |  |                                           |  |  |                                                      |   |  |                                |   |         |       | 
|                                                   |  |      |  |  |        |         |  |       |  |   |                   |  |  |                                           |  |  |                                                      |   |  |                                |   |         |       | 
|Geoffrey R. Hopkins,                               |  | 2010 |  |  | $      | 130,500 |  |       |  | — |                   |  |  | —                                         |  |  |                                                      | — |  |                                |   | —       |       | 
|President(4)                                       |  | 2009 |  |  |        | 130,500 |  |       |  | — |                   |  |  | —                                         |  |  |                                                      | — |  |                                | $ | 3,207   |       | 
|                                                   |  |      |  |  |        |         |  |       |  |   |                   |  |  |                                           |  |  |                                                      |   |  |                                |   |         |       | 
|Freda H. Gore,                                     |  | 2010 |  |  | $      | 124,265 |  |       |  | — |                   |  |  | —                                         |  |  |                                                      | — |  |                                |   | —       |       | 
|Senior Vice President and Chief Operations Officer |  | 2009 |  |  |        | 117,486 |  |       |  | — |                   |  |  | —                                         |  |  |                                                      | — |  |                                | $ | 15,883  |       | 
|                                                   |  |      |  |  |        |         |  |       |  |   |                   |  |  |                                           |  |  |                                                      |   |  |                                |   |         |       | 
|David A. Godwin,                                   |  | 2010 |  |  | $      | 117,486 |  |       |  | — |                   |  |  | —                                         |  |  |                                                      | — |  |                                |   | —       |       | 
|Senior Vice President and Chief Financial Officer  |  | 2009 |  |  |        | 117,486 |  |       |  | — |                   |  |  | —                                         |  |  |                                                      | — |  |                                | $ | 28,169  |       | 
|                                                   |  |      |  |  |        |         |  |       |  |   |                   |  |  |                                           |  |  |                                                      |   |  |                                |   |         |       | 
|Kim T. Hutchens,                                   |  | 2010 |  |  | $      | 117,486 |  |       |  | — |                   |  |  | —                                         |  |  |                                                      | — |  |                                |   | —       |       | 
|Senior Vice President                              |  | 2009 |  |  |        | 117,486 |  |       |  | — |                   |  |  | —                                         |  |  |                                                      | — |  |                                | $ | 35,909  |       | 
|and Human Resources                                |  |      |  |  |        |         |  |       |  |   |                   |  |  |                                           |  |  |                                                      |   |  |                                |   |         |       | 
|Officer                                            |  |      |  |  |        |         |  |       |  |   |                   |  |  |                                           |  |  |                                                      |   |  |                                |   |         |       | 



94














| | (1) | Amounts reported for 2009 include change in pension value, which is no longer required to be reported
in this column.
| | --- | ---------------------------------------------------------------------------------------------------------------------



| | (2) | Includes the dollar value of insurance premiums paid on behalf of the named officers for group
term life, health, dental, and disability insurance and, for 2009, 401(k) matching contributions.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | Mr. Graham retired from his position as president of the Company and the Bank effective January
1, 2011. He retired from his position as chief executive officer of the Company and the Bank effective March 1, 2011, and retired
from as a director of the Company and the Bank effective April 13, 2011. Amounts included for 2010 and 2009 reflect compensation
paid to Mr. Graham in his former capacity as president and chief executive officer.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (4) | Mr. Hopkins was appointed president of the Company and the Bank effective January 1, 2011. Amounts
included for 2010 and 2009 reflect compensation paid to Mr. Hopkins in his former capacity as senior vice president and senior
commercial lender.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Employment Agreement.
The Company and Bank entered into an employment agreement with the president and chief executive officer of the Company and the
Bank, James G. Graham. This agreement was in effect during the year ended December 31, 2010. As described below, the Company has
since announced Mr. Graham’s retirement and entered into an independent contractor service agreement and a retirement agreement
with Mr. Graham. Mr. Graham’s employment agreement provided for a three-year term, which renewed automatically for an
additional year on each anniversary of the agreement, except that the agreement was set to terminate upon his attainment of age
65. The agreement provided for a base salary of $250,000 and perquisites customary for his title and position including the payment
of country club dues and a car allowance. If Mr. Graham’s employment terminated due to disability, he was entitled to
receive his then-current salary for a period of 12 months plus the other perquisites granted under the agreement, including a pro
rata portion of any bonus accrued for Mr. Graham as of the date his employment was terminated for such disability. In the
event he was terminated without cause, Mr. Graham was entitled to receive his salary and benefits for the balance of the remaining
term left under his employment agreement at the time of his termination. Mr. Graham was entitled to a Change in Control benefit
equal to 299% of his “base amount,” as that term is defined in section 280G of the Internal Revenue Code. Mr. Graham
was also entitled to receive a tax gross-up on this Change in Control benefit to compensate him for any excise taxes owing under
section 280G of the Internal Revenue Code. In the event benefits under Mr. Graham’s employment agreement were contested
following a Change in Control, Mr. Graham was entitled to receive legal fee reimbursements up to $500,000. As of December
31, 2010, the value of the lump sum payment that would have been payable to Mr. Graham upon the occurrence of a Change in Control
followed by a termination event would have been approximately $743,034.



Mr. Graham is
subject to a confidentiality provision as well as a non-competition provision both of which survive termination of the agreement.
The non-compete provision requires that Mr. Graham not compete with the Bank within Bladen, Brunswick, Columbus and New Hanover
Counties, North Carolina and within Horry and Lancaster Counties, South Carolina or within a 25-mile radius of any full-service
office of the Bank for (i) the balance of the remaining term of the agreement if Mr. Graham’s employment is terminated
without cause or (ii) for 12 months if the agreement is terminated by Mr. Graham for any reason.



Retirement of James
G. Graham.On January 6, 2011, the Company announced the retirement of James G. Graham from his positions as president
and chief executive officer of the Company and the Bank. Mr. Graham also retired as a director of the Company and the Bank effective
April 13, 2011. The Company entered into two agreements with Mr. Graham in connection with his retirement—an independent
contractor service agreement and a retirement agreement. The term of the independent contractor service agreement began following
Mr. Graham’s retirement from his position as chief executive officer on March 1, 2011, and will run for four months
unless sooner terminated. Under the terms of the independent contractor agreement, Mr. Graham will assist with management
transition, strategic initiatives, and investor relations, as required by the Company. In consideration of the performance of these
services, the Company will pay Mr. Graham $125.00 per hour worked.



95







Under the terms of the retirement agreement,
Mr. Graham is entitled to all rights under his existing employment agreement, executive supplemental retirement plan agreement,
and director supplemental retirement plan agreement. He is also entitled to reimbursement for the cost of his continuing health
insurance in an amount equal to $1,450.00 per month during the four months following his retirement. Mr. Graham will retain
any vested but unexercised stock options as of his retirement date. Mr. Graham, the Company, and the Bank mutually released
one another from any claims as of Mr. Graham’s retirement date.



Change in Control
Agreements. The Company and the Bank have entered into Change in Control agreements with each of Geoffrey R. Hopkins, president,
David A. Godwin, senior vice president and chief financial officer, Freda H. Gore, senior vice president and chief operations officer,
and Kim T. Hutchens, senior vice president and human resources officer. Each agreement provides that, if the officer’s employment
is terminated without cause or voluntarily after suffering a “termination event,” such as a reduction in salary, diminution
in title, duties or responsibilities, or an office relocation, within 12 months of a Change in Control, he or she will be entitled
to a Change in Control payment equal to 299% of his or her “base amount” as defined by section 280G of the Internal
Revenue Code. At December 31, 2010, the approximate value of the lump sum payment that would have been payable to each of these
officers upon the occurrence of a Change in Control followed by a termination event would have been as follows:



|Geoffrey R. Hopkins |  | $ | 353,591 | 
|------------------- |  | - | ------- | 
|David A. Godwin     |  |   | 351,379 | 
|Freda H. Gore       |  |   | 352,676 | 
|Kim T. Hutchens     |  |   | 346,765 | 



Federal banking regulations
prohibit certain payments to bank and bank holding company officers in the event of the termination of the officer’s employment.
In the event these regulations are applicable to the agreements discussed above, the Company and the Bank may be prohibited from
paying these benefits.



Supplemental Executive Retirement
Plan Agreements.



General.The Bank entered into
Supplemental Executive Retirement Plan (“SERP”) Agreements with each of Messrs. Graham, Hopkins, Godwin, and Hutchens
and Ms. Gore in 2007. The purpose of the SERP Agreements is to provide selected key employees with a supplemental retirement income.
Effective September 30, 2010, the Bank and each of the executives agreed to amend and modify the terms of their SERP Agreements.
Under these amendments, the balance accrued for each executive’s retirement benefit has been indefinitely frozen. No further
liability accruals will be made unless the Bank and the executives agree otherwise in the future. Additional details of the September
2010 amendments are described below.



Normal Retirement Age Benefits.The agreements previously provided that executives serving until age sixty-five would receive an annual retirement benefit
in cash for life commencing upon their attainment of age sixty-five. The annual retirement benefit was equal to $130,000 per year
(less applicable social security payments) in the case of Mr. Graham and $80,000 per year (less applicable social security
payments), in the case of Ms. Gore and Messrs. Godwin, Hutchens and Hopkins. Under the terms of the September 2010 amendments,
the executives who remain employed by the Bank until age sixty-five will not receive an annual retirement benefit, but will instead
receive a single lump sum payment following their attainment of age sixty-five. This lump sum payment will be equal to the balance
accrued for their normal retirement benefit. As noted above, the accrual balance has been indefinitely frozen and no further accruals
will be made.



Termination Before Age Sixty-Five.Under the original agreements, if the executive voluntarily resigned or was discharged by the Bank without cause before reaching
age sixty-five, the executive was entitled to receive an annual benefit equal to the balance accrued for his retirement as of the
date of termination. If the executive had not yet been employed by the Bank for ten years prior to the effective date of the original
agreement, then the executive would only be entitled to receive a percentage of his accrual balance amount. Rather than providing
an ongoing annual benefit, the 2010 amendments entitle the executives to a single lump sum equal to the accrual balance amount
as of the date of termination. The amendments retain the feature that the executive is only entitled to a percentage of the accrual
balance amount if he had not been employed by the Bank for ten years prior to the date of the original agreement.



96







Death.Originally, if
the executive died while there was a balance accrued for his retirement benefit, his designated beneficiaries were entitled to
receive a single lump sum equal to the executive’s age sixty-five accrual balance or the net at risk, whichever amount was
lower. The 2010 amendments provide that if the executive dies while employed by the Bank and while there is a balance accrued for
his retirement benefits, his beneficiaries will be entitled to a single lump sum equal to the balance accrued for the executive’s
retirement benefit as of the date of death.



Change in Control.Under
the terms of the original agreements, Ms. Gore and Messrs. Hutchens, and Hopkins would each be entitled to receive, in a single
lump sum payment, an amount equal to the their normal retirement age benefit, $80,000 per year for life, without discount for the
time value of money, if they resigned for “good reason” within two years following a “change in control,”
as those terms are defined in the original agreements. For Messrs. Graham and Godwin, they would be entitled to receive, in a single
lump sum payment, an amount equal to their normal retirement age benefit, $130,000 per year for life for Mr. Graham and $80,000
per year for life for Mr. Godwin, without discount for the time value of money, upon the occurrence of a change in control.
The 2010 amendments entitle all of the executives to receive a single lump sum payment equal to the balance accrued for their retirement
benefit upon a change in control that occurs while the executive remains employed by the Bank but before the executive reaches
age sixty-five. Under the 2010 amendments, Ms. Gore and Messrs. Hutchens, and Hopkins are no longer required to resign for
good reason following a change in control in order to become entitled to the change in control benefit. At December 31, 2010, the
approximate value of the lump sum payment that would have been payable to each of these executives upon the occurrence of a change
in control would have been as follows:



|James G. Graham     |  | $ | 266,461 | 
|------------------- |  | - | ------- | 
|Geoffrey R. Hopkins |  |   | 3,207   | 
|David A. Godwin     |  |   | 52,771  | 
|Freda H. Gore       |  |   | 31,404  | 
|Kim T. Hutchens     |  |   | 66,654  | 



Federal banking regulations
prohibit certain payments to bank and bank holding company officers in the event of the termination of the officer’s employment.
In the event these regulations are applicable to the agreements discussed above, the Company and the Bank may be prohibited from
paying these benefits.



The aggregate Change
in Control benefit that could be payable to each of these officers under all scenarios described above, would be approximately
as follows:



|James G. Graham     |  | $ | 1,009,495 | 
|------------------- |  | - | --------- | 
|Geoffrey R. Hopkins |  |   | 356,798   | 
|David A. Godwin     |  |   | 404,150   | 
|Freda H. Gore       |  |   | 384,080   | 
|Kim T. Hutchens     |  |   | 413,419   | 



Federal banking regulations
prohibit certain payments to bank and bank holding company officers in the event of the termination of the officer’s employment.
In the event these regulations are applicable to the agreements discussed above, the Company and the Bank may be prohibited from
paying these benefits.



97







Bank-Owned Life
Insurance. In 2004, the Bank purchased life insurance policies on certain of its directors and key employees, including Mr.
Graham, Ms. Gore, Mr. Godwin and certain of the Company’s directors. The policies were purchased with one-time premiums paid
during the fiscal year ended December 31, 2004. The Bank purchased additional policies on certain directors and key employees during
2007, with one-time premiums paid during the fiscal year ended December 31, 2007. Benefits under the policies are governed by split-dollar
arrangements, which provide that the majority of the death benefit will be paid to the Bank with the remaining percentage paid
to the insured (typically 30-40% of the total benefit). The policies were purchased primarily as a Bank asset, with the secondary
purpose of providing benefits to the insured directors and key employees. The Bank purchased additional policies during 2008, with
one-time premiums paid during the fiscal year ended December 31, 2008. Benefits under these policies are payable only to the Bank
and are not governed by split-dollar arrangements. No bank-owned life insurance was purchased on directors or Named Executive Officers
during 2009 or 2010.



1998 Incentive
Stock Option Plan. The shareholders previously approved the 1998 Incentive Stock Option Plan (the “Incentive Option Plan”)
pursuant to which options are available for issuance to officers and key employees of the Company and any of its subsidiaries.
In connection with the reorganization of the Bank into the holding company form of organization, which resulted in the creation
of the Company, the Incentive Option Plan was adopted by the Company and options under such plan are now options of the Company.
At the 2005 annual meeting of shareholders, the shareholders approved an amendment to the Incentive Stock Option Plan authorizing
stock options covering an additional 138,136 shares of the Company’s common stock.



All stock options
under the Incentive Option Plan have been granted with a per share exercise price equal to 100% of the fair market value of the
Company’s common stock. The per share exercise price is adjusted in response to certain corporate actions, such as stock
dividends and stock splits. For example, the option exercise prices in the table below have been adjusted for the effect of 6-for-5
stock splits effected in 2004 and 2003, a 2-for-1 stock split effected in 2004 and an 11-for-10 stock split effected in 2007. No
additional options may be granted under the 1998 Incentive Stock Option Plan.



2008 Omnibus Stock
Ownership and Long-Term Incentive Plan.The shareholders of the Company approved the 2008 Omnibus Stock Ownership and Long-Term
Incentive Plan (the “2008 Omnibus Plan”) at the 2008 annual meeting of shareholders to replace the previously approved
stock option plans of the Company. The 2008 Omnibus Plan authorizes the issuance of awards covering 705,973 shares of the Company’s
common stock. The awards may be issued in the form of incentive stock option grants, non-qualified stock option grants, restricted
stock grants, long-term incentive compensation units, or stock appreciation rights. No such awards were granted to our executive
officers in 2010.



98







The following table
sets forth information regarding vested and unvested incentive stock options as of December 31, 2010. The options set forth in
the table below were granted under the Company’s 1998 Incentive Stock Option Plan or the Company’s 2008 Omnibus Stock
Ownership and Long-Term Incentive Plan. There were no option awards or exercises in 2010.



OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END





|Name                |  | No. of
    Securities Underlying Unexercised Options Exercisable |        |  | No. of Securities
    Underlying  Unexercised Options Unexercisable |  |       | Equity
    Incentive Plan Awards: No. of Securities Underlying Unexercised Unearned Options |  |  | Option
    Exercise Price |  |  | Option
Expiration Date |       |  | No. of
    Shares or Units of Stock That Have Not Vested |               |  | Market
    Value of Shares or Units of Stock That Have Not Vested |  |   | Equity
    Incentive Plan Awards: No. of Unearned Shares, Units or Other Rights That Have 
    NotVested |  |  | Equity
    Incentive Plan Awards; Market or Payout Value of Unearned Shares, Units or
    Other Rights  That Have Not Vested | 
|------------------- |  | ---------------------------------------------------------------- | ------ |  | ------------------------------------------------------------------- |  | ----- | ------------------------------------------------------------------------------------------- |  |  | ------------------------- |  |  | ---------------------- | ----- |  | -------------------------------------------------------- | ------------- |  | ----------------------------------------------------------------- |  | - | -------------------------------------------------------------------------------------------------------- |  |  | ---------------------------------------------------------------------------------------------------------------------------- | 
|                    |  |                                                                  |        |  |                                                                     |  |       |                                                                                             |  |  |                           |  |  |                        |       |  |                                                          |               |  |                                                                   |  |   |                                                                                                          |  |  |                                                                                                                              | 
|James G. Graham     |  |                                                                  | 1,650  |  |                                                                     |  | -0-   |                                                                                             |  |  | -0-                       |  |  | $                      | 17.95 |  |                                                          | Dec. 17, 2014 |  |                                                                   |  | — |                                                                                                          |  |  | —                                                                                                                            | 
|                    |  |                                                                  | 38,500 |  |                                                                     |  | -0-   |                                                                                             |  |  | -0-                       |  |  |                        | 16.00 |  |                                                          | June 16, 2015 |  |                                                                   |  |   |                                                                                                          |  |  |                                                                                                                              | 
|                    |  |                                                                  | 9,900  |  |                                                                     |  | -0-   |                                                                                             |  |  | -0-                       |  |  |                        | 16.00 |  |                                                          | June 16, 2015 |  |                                                                   |  |   |                                                                                                          |  |  |                                                                                                                              | 
|                    |  |                                                                  |        |  |                                                                     |  |       |                                                                                             |  |  |                           |  |  |                        |       |  |                                                          |               |  |                                                                   |  |   |                                                                                                          |  |  |                                                                                                                              | 
|Geoffrey R. Hopkins |  |                                                                  | 4,000  |  |                                                                     |  | 6,000 | (2)                                                                                         |  |  | -0-                       |  |  |                        | 10.60 |  |                                                          | June 19, 2018 |  |                                                                   |  | — |                                                                                                          |  |  | —                                                                                                                            | 
|                    |  |                                                                  | 8,250  |  |                                                                     |  | -0-   |                                                                                             |  |  | -0-                       |  |  |                        | 16.00 |  |                                                          | June 16, 2005 |  |                                                                   |  |   |                                                                                                          |  |  |                                                                                                                              | 
|                    |  |                                                                  | 1,267  |  |                                                                     |  | -0-   |                                                                                             |  |  | -0-                       |  |  |                        | 5.68  |  |                                                          | Dec. 31, 2012 |  |                                                                   |  |   |                                                                                                          |  |  |                                                                                                                              | 
|                    |  |                                                                  |        |  |                                                                     |  |       |                                                                                             |  |  |                           |  |  |                        |       |  |                                                          |               |  |                                                                   |  |   |                                                                                                          |  |  |                                                                                                                              | 
|Freda H. Gore       |  |                                                                  | 11,000 |  |                                                                     |  | -0-   |                                                                                             |  |  | -0-                       |  |  |                        | 16.00 |  |                                                          | June 16, 2015 |  |                                                                   |  | — |                                                                                                          |  |  | —                                                                                                                            | 
|                    |  |                                                                  |        |  |                                                                     |  |       |                                                                                             |  |  |                           |  |  |                        |       |  |                                                          |               |  |                                                                   |  |   |                                                                                                          |  |  |                                                                                                                              | 
|David A. Godwin     |  |                                                                  | 11,000 |  |                                                                     |  | -0-   |                                                                                             |  |  | -0-                       |  |  |                        | 16.00 |  |                                                          | June 16, 2015 |  |                                                                   |  | — |                                                                                                          |  |  | —                                                                                                                            | 
|                    |  |                                                                  |        |  |                                                                     |  |       |                                                                                             |  |  |                           |  |  |                        |       |  |                                                          |               |  |                                                                   |  |   |                                                                                                          |  |  |                                                                                                                              | 
|Kim T. Hutchens     |  |                                                                  | 5,500  |  |                                                                     |  | -0-   |                                                                                             |  |  | -0-                       |  |  |                        | 16.36 |  |                                                          | Nov. 17, 2015 |  |                                                                   |  | — |                                                                                                          |  |  | —                                                                                                                            | 
|                    |  |                                                                  | 4,000  |  |                                                                     |  | 6,000 | (1)                                                                                         |  |  | -0-                       |  |  |                        | 10.00 |  |                                                          | Feb. 22, 2018 |  |                                                                   |  |   |                                                                                                          |  |  |                                                                                                                              | 












| | (1) | Two thousand of the unexercisable options are scheduled to
become exercisable on each of February 22, 2011, 2012 and 2013.
| | --- | --------------------------------------------------------------------------------------------------------------------------



| | (2) | Two thousand of the remaining unexercisable options are scheduled
to become exercisable on each of June 19, 2011, 2012, and 2013.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------



Director Compensation



Board Fees.
Beginning in the fourth quarter of 2008, the Company indefinitely suspended payment of cash fees to directors for their service
on the board and its committees.



Director Supplemental
Retirement Plan. On October 30, 2007, the Company entered into a supplemental retirement plan with its directors. The
plan provides that directors serving until their normal retirement age, 70, shall receive a retirement benefit of $10,000 per year
for ten years following their retirement from the board of directors. In the event they retire from the board before age 70, or
retire due to a disability, they are entitled to receive reduced retirement benefits, based on years served, for ten years following
their early retirement. Also, the balance accrued on behalf of a participating director will be paid in a single lump sum (i) to
the director upon the occurrence of a Change in Control of the Company or (ii) to the participating director’s beneficiaries
upon the director’s death.



99







1998 Nonstatutory
Stock Option Plan. The shareholders of the Bank previously approved the 1998 Nonstatutory Stock Option Plan pursuant to which
options are available for issuance to members of the Company’s board of directors
and the board of any subsidiary of the Company. In connection with the reorganization of the
Bank into the holding company form of organization, which resulted in the creation of the Company, the Nonstatutory Stock Option
Plan was adopted by the Company and options under such plan are now options of the Company. During the fiscal year ended December
31, 2004, each director of the Company was granted 1,500 options under the Nonstatutory Stock Option Plan, which options were granted
at fair market value. At the 2005 annual meeting of shareholders, the shareholders approved an amendment to the Nonstatutory Stock
Option Plan authorizing stock options covering an additional 138,136 shares of the Company’s common stock. Following this
approval by the shareholders, each director of the Company was granted an option, effective as of June 16, 2005, to purchase 9,000
shares of the Company’s common stock at an exercise price of $17.60 per share, which price represented the fair market value
of the Company’s common stock at the time of grant.



All stock options
under the Nonstatutory Stock Option Plan have been granted with a per share exercise price equal to 100% of the fair market value
of the Company’s common stock. The per share exercise price and the number of shares of the Company’s common stock
subject to the plan and each option granted under the plan is adjusted in response to certain corporate actions, such as stock
dividends and stock splits. For example, the option exercise prices for options outstanding under the Nonstatutory Stock Option
Plan have been adjusted for the effect of 6-for-5 stock splits effected in 2004 and 2003, a 2-for-1 stock split effected in 2004
and an 11-for-10 stock split effected in 2007. No additional options may be granted under the 1998 Nonstatutory Stock Option Plan.



2008 Omnibus Stock
Ownership and Long-Term Incentive Plan.The shareholders of the Company approved the 2008 Omnibus Stock Ownership and Long-Term
Incentive Plan (the “2008 Omnibus Plan”) at the 2008 annual meeting of shareholders to replace the previously approved
stock option plans of the Company, which expired in 2008. The 2008 Omnibus Plan authorizes the issuance of awards covering 705,973
shares of the Company’s common stock. The awards may be issued in the form of incentive stock option grants, non-qualified
stock option grants, restricted stock grants, long-term incentive compensation units, or stock appreciation rights. In 2010, no
awards were granted to the Company’s Named Executive Officers under the 2008 Omnibus Plan.



Since the Company’s directors did not receive any cash
compensation or awards of stock options in 2010, no director compensation table has been presented.



Item 12 –
Security Ownership of Certain Beneficial Owners and Management AND RELATED STOCKHOLDER MATTERS



Beneficial
Ownership of Voting Securities



As
of June 30, 2011, no shareholder known to management owned more than 5% of the Company’s common stock, except as listed below.





|Name and Address of 
    Beneficial Owner                  |  | Amount and
    Nature of Beneficial  Ownership(1)(2)(3) |         |  | Percent  of Class(4) | 
|---------------------------------------------------------- |  | ------------------------------------------------------- | ------- |  | -------------------- | 
|                                                           |  |                                                         |         |  |                      | 
|James G. Graham 1114 Pinckney Street Whiteville, NC  28472 |  |                                                         | 400,881 |  |                      | 









100







As
of December 31, 2011, the beneficial ownership of the Company’s common stock by directors and executive officers individually,
and by directors and executive officers as a group, is set forth in the following table.





|Name and Address of
    Beneficial Owner                                |  | Amount and
    Nature of Beneficial Ownership(1)(2)(3) |         |     | Percent of Class(4) | 
|----------------------------------------------------------------------- |  | ------------------------------------------------------ | ------- | --- | ------------------- | 
|                                                                        |  |                                                        |         |     |                     | 
|Murchison B. Biggs Lumberton, NC                                        |  |                                                        | 53,869  |     |                     | 
|                                                                        |  |                                                        |         |     |                     | 
|Brian D. Campbell Elizabethtown, NC                                     |  |                                                        | 43,738  |     |                     | 
|                                                                        |  |                                                        |         |     |                     | 
|Dr. Maudie M. Davis Tabor City, NC                                      |  |                                                        | 54,693  |     |                     | 
|                                                                        |  |                                                        |         |     |                     | 
|Crawford Monroe Enzor III Shallotte, NC                                 |  |                                                        | 61,516  |     |                     | 
|                                                                        |  |                                                        |         |     |                     | 
|David A. Godwin Whiteville, NC                                          |  |                                                        | 11,000  |     |                     | 
|                                                                        |  |                                                        |         |     |                     | 
|Freda H. Gore Whiteville, NC                                            |  |                                                        | 30,034  | (5) |                     | 
|                                                                        |  |                                                        |         |     |                     | 
|Geoffrey R. Hopkins Chadbourn, NC                                       |  |                                                        | 20,129  | (6) |                     | 
|                                                                        |  |                                                        |         |     |                     | 
|Kim T. Hutchens Whiteville, NC                                          |  |                                                        | 13,591  |     |                     | 
|                                                                        |  |                                                        |         |     |                     | 
|Alan W. Thompson Whiteville, NC                                         |  |                                                        | 249,875 | (7) |                     | 
|                                                                        |  |                                                        |         |     |                     | 
|R. Dale Ward Whiteville, NC                                             |  |                                                        | 120,009 |     |                     | 
|                                                                        |  |                                                        |         |     |                     | 
|J. Densil Worthington Chadbourn, NC                                     |  |                                                        | 216,837 | (8) |                     | 
|                                                                        |  |                                                        |         |     |                     | 
|All Nominees, Directors and Executive Officers as a group  (11 persons) |  |                                                        | 954,136 | (9) |                     | 








*	Less
than 1 % of the total shares outstanding



| | (1) | Except as otherwise noted, to the best knowledge of the Company’s management, the
above individuals and group exercise sole voting and investment power with respect to all shares shown as beneficially owned other
than the following shares as to which such powers are shared with the individual’s spouse: Ms. Gore – 18,726 shares;
Mr. Graham – 6,924 shares; and Mr. Ward – 832 shares.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





101







| | (2) | Included in the beneficial ownership tabulations are the following
options to purchase shares of common stock of the Company exercisable within 60 days of June 30, 2011: Mr. Biggs – 11,550
shares; Dr. Davis – 11,550 shares; Mr. Enzor – 11,550 shares; Mr. Godwin – 11,000 shares; Ms. Gore – 11,000
shares; Mr. Graham – 50,050 shares; Mr. Hopkins – 15,517 shares; Mr. Hutchens – 9,500 shares; Mr. Thompson –
11,550 shares; Mr. Ward – 11,550 shares; and Mr. Worthington – 11,550 shares.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | Included in the beneficial ownership tabulations are the following
warrants to purchase shares of common stock of the Company exercisable within 60 days of June 30, 2011: Mr. Biggs – 2,750
shares; Mr. Enzor – 2,750 shares; Ms. Gore – 19 shares (held as custodian); Mr. Thompson – 550 shares; and Mr.
Worthington – 6,600 shares.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (4) | The calculation of the percentage of class beneficially owned
by each individual and the group is based, in each case, on the sum of (1) 7,466,224 outstanding shares of common stock; and (2)
options and warrants to purchase common stock capable of being exercised by the individual or group within 60 days of June 30,
2011.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (5) | Includes 289 shares and 19 warrants held by Ms. Gore as custodian.
| | --- | ------------------------------------------------------------------



| | (6) | Includes 266 shares owned by Mr. Hopkins’s spouse individually.
| | --- | ---------------------------------------------------------------



| | (7) | Includes 7,150 shares held by Mr. Thompson as custodian and
32,746 shares owned by Mr. Thompson’s spouse individually.
| | --- | ----------------------------------------------------------------------------------------------------------------------



| | (8) | Includes 12,513 shares held by Mr. Worthington as custodian.
| | --- | ------------------------------------------------------------



| | (9) | Includes 78,845 shares held in the Company’s 401(k)
plan with respect to which the Company’s chief financial officer exercises voting power.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------



Securities Authorized for Issuance
Under Equity Compensation Plans



Set forth below is certain information
regarding the Company’s various stock option plans as of December 31, 2010.





|Plan Category                                              |  | Number of securities to be issued upon exercise of outstanding options, warrants, and rights (a) |         |  | Weighted-average exercise price of outstanding options, warrants, and rights (b) |   |       | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) | 
|---------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------ | ------- |  | -------------------------------------------------------------------------------- | - | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------- | 
|                                                           |  |                                                                                                  |         |  |                                                                                  |   |       |                                                                                                                                                 | 
|Equity compensation plans approved by security holders     |  |                                                                                                  | 571,938 |  |                                                                                  | $ | 18.29 |                                                                                                                                                 | 
|Equity compensation plans not approved by security holders |  |                                                                                                  | None    |  |                                                                                  |   | None  |                                                                                                                                                 | 
|Total                                                      |  |                                                                                                  | 571,938 |  |                                                                                  | $ | 18.29 |                                                                                                                                                 | 









102







Item 13 – Certain
Relationships and Related Transactions, AND DIRECTOR INDEPENDENCE



Related Person Transactions



The Company has had, and
expects to have in the future, banking transactions in the ordinary course of business with certain of its current directors, nominees
for director, executive officers and their associates. All loans included in such transactions will be made on substantially the
same terms, including interest rates, repayment terms and collateral, as those prevailing at the time such loans were made for
comparable transactions with other persons, and will not involve more than the normal risk of collectibility or present other unfavorable
features.



Loans made by the Bank to
directors and executive officers are subject to the requirements of Regulation O of the Board of Governors of the Federal Reserve
System. Regulation O requires, among other things, prior approval of the board of directors
with any “interested director” not participating, dollar limitations on amounts of certain loans, and prohibits any
favorable treatment being extended to any director or executive officer in any of the Bank’s lending matters.



Director Independence



With the exception of Mr. Thompson, each member
of the Company’s board of directors is “independent” as defined by Nasdaq listing standards and the regulations
promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”). In addition to the specific Nasdaq criteria,
in determining the independence of each director, the board considers whether it believes transactions that are disclosable in
our proxy statements as “related person transactions” or any other transactions, relationships, arrangements, or factors
could impair a director’s ability to exercise independent judgment. In its determination of director independence, those
other factors considered by the board of directors included the Bank’s lending relationships with directors who are loan
customers.



ITEM
14 – PRINCIPAL ACCOUNTANT FEES AND SERVICES



Elliott
Davis LLC has served as the Company’s principal accountant for each of the last two fiscal years. In 2010, the Company paid
Elliott Davis fees in connection with its assistance with the Company’s annual audit and review of the Company’s financial
statements. From time to time, the Company also engages Elliott Davis to assist in other areas of financial planning. During 2009,
the Company also engaged Elliott Davis to assist with the preparation of SEC registration statements and prospectuses in connection
with a contemplated rights offering to existing shareholders and public offering of the Company’s securities. The following
table sets forth the fees billed to the Company in various categories by Elliott Davis in 2010 and 2009.



|Category            |  | 2010
    Amount Billed |         |     | 2009
    Amount Billed |  
|------------------- |  | ---------------------- | ------- | --- | ---------------------- | -
|                    |  |                        |         |     |                        |  
|Audit Fees:         |  | $                      | 125,000 |     |                        | $
|Audit-Related Fees: |  |                        | 23,000  | (1) |                        |  
|Tax Fees:           |  |                        | 14,196  | (2) |                        |  
|All Other Fees:     |  |                        | 98,870  | (3) |                        |  
|Total Fees Paid:    |  | $                      | 261,066 |     |                        | $



103







| | (1) | 2010 and 2009 Audit-Related Fees.Audit-related fees
for 2010 and 2009 consisted primarily of services relating to regulatory issues and other accounting issues.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | 2010 and 2009 Tax Fees.Tax fees for 2010 and 2009
consisted primarily of the preparation of the 2010 and 2009 tax returns for the Company, Waccamaw Statutory Trust I, and Waccamaw
Statutory Trust II. The statutory trusts were formed for the sole purpose of issuing trust preferred securities. General tax consultations
are also included in tax fees for 2010 and 2009.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | 2010 and 2009 All Other Fees.All other fees for 2010
and 2009 consisted of services related to the issuance of comfort letters and review of offering documents in connection with a
contemplated rights offering to existing shareholders and public offering of the Company’s securities.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



All services
rendered by Elliott Davis in 2010 and 2009 were subject to pre-approval by the audit committee.



104







PART
IV



ITEM 15 – EXHIBITS AND FINANCIAL STATEMENT SCHEDULES



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



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



Consolidated balance sheets at December
31, 2010 and 2009



Consolidated statements of operations
for the years ended December 31, 2010 and 2009



Consolidated statements of changes in stockholders’
equity for the years ended December 31, 2010 and 2009



Consolidated statements of cash flows
for the years ended December 31, 2010 and 2009



Notes to consolidated financial statements



Report of independent registered public
accounting firm



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



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



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



| | 3.2 | Articles of Amendment dated May 28, 2010, increasing the amount of authorized common stock (incorporated
by reference from Exhibit 3.2 of Pre-effective Amendment No. 4 to Registrant’s Registration Statement on Form S-1, Registration
No. 333-160435, as filed with the Commission on June 16, 2010)
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3.3 | Articles of Amendment dated March 11, 2011, designating the Registrant’s series B preferred
stock (incorporated by reference from Exhibit 3.1 of Registrant’s Current Report on Form 8-K, as filed with the Commission
on March 17, 2011)
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3.4 | Bylaws of Registrant (incorporated by reference from Exhibit 3.02 of Registrant’s Current
Report on Form 8-K, as filed with the Commission on May 3, 2011)
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.1 | Form of Common Stock Certificate (incorporated by reference from Exhibit 4 to Registrant’s
Annual Report on Form 10-KSB for the year ended December 31, 2001, as filed with the Commission on March 29, 2002)
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.2 | Form of certificate for series B preferred stock (incorporated by reference from Exhibit 4.1 to
Registrant’s Current Report on Form 8-K, as filed with the Commission on July 14, 2011)
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



105







| | 4.3 | Warrant to purchase common stock of Registrant, dated May 17, 2011 (incorporated by reference from
Exhibit 4.2 to Registrant’s Current Report on Form 8-K, as filed with the Commission on July 14, 2011)
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.4 | Form of warrant certificate (2006 warrants) (incorporated by reference from Exhibit 4.1 to Registrant’s
Current Report on Form 8-K, as filed with the Commission on September 25, 2006)
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.5 | Form of warrant agreement (2006 warrants) (incorporated by reference from Exhibit 4.2 to Registrant’s
Current Report on Form 8-K, as filed with the Commission on September 25, 2006)
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.6 | Form of addendum to warrant certificate (incorporated by reference from Exhibit 4.1 to Registrant’s
Current Report on Form 8-K, as filed with the Commission on September 25, 2009)
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4.7 | Form of addendum to warrant agreement (incorporated by reference from Exhibit 10.1 to Registrant’s
Current Report on Form 8-K, as filed with the Commission on September 25, 2009)
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| | 10.2 | Independent Contractor Service Agreement with Bank Solutions, LLC (incorporated by reference from
Exhibit 10.1 to Registrant’s Current Report on Form 8-K, as filed with the Commission on January 6, 2011)
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 10.3 | Retirement Agreement with James G. Graham (incorporated by reference from Exhibit 10.2 to Registrant’s
Current Report on Form 8-K, as filed with the Commission on January 6, 2011)
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



| | 10.6 | Amendment to Executive Supplemental Retirement Plan (incorporated by reference from Exhibit 99.1
to Registrant’s Current Report on Form 8-K, as filed with the Commission on November 4, 2010)
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| | 10.8 | Director Supplemental Retirement Plan Agreement (incorporated by reference from Exhibit 10.7 to
Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2008, as filed with the Commission on
August 14, 2008)*
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



106







| | 10.9 | 2008 Omnibus Stock Ownership and Long Term Incentive Plan (incorporated by reference from Exhibit
99.1 to Registrant’s Registration Statement on Form S-8, Registration No. 333-153327, as filed with the Commission on September
4, 2008)
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 10.10 | Amended and Restated Declaration of Trust of Waccamaw Statutory Trust I (incorporated by reference
from Exhibit 99 to Registrant’s Current Report on Form 8-K, as filed with the Commission on January 29, 2009)
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 10.11 | Amended and Restated Trust Agreement of Waccamaw Statutory Trust II (incorporated by reference
from Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2008, as filed with
the Commission on August 14, 2008)
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 10.12 | Guarantee Agreement (incorporated by reference from Exhibit 10.2 to Registrant’s Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 2008, as filed with the Commission on August 14, 2008)
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 10.13 | Indenture (incorporated by reference from Exhibit 4.1 to Registrant’s Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 2008, as filed with the Commission on August 14, 2008)
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 10.14 | Written agreement by and among Waccamaw Bankshares, Inc., Waccamaw Bank, the Federal Reserve Bank
of Richmond, and the State of North Carolina Office of the Commissioner of Banks, dated June 14, 2010 (incorporated by reference
from Exhibit 10 to Registrant’s Quarterly Report on Form 10-Q, as filed with the Commission on August 16, 2010)
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 21 | Subsidiaries of Registrant (filed herewith)
| | -- | -------------------------------------------



| | 23 | Consent of Elliott Davis, PLLC (filed herewith)
| | -- | -----------------------------------------------



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



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



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



_________________________



| | * | Management contract or compensatory plan or arrangement
| | - | -------------------------------------------------------



107







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



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



108







SIGNATURES



In accordance with Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized



|                  | WACCAMAW BANKSHARES, INC. | 
|----------------- | ------------------------- | 
|                  |                           | 
|February 29, 2012 | /s/ Geoffrey R. Hopkins   | 
|Date              | Geoffrey R. Hopkins       | 
|                  | President                 | 



Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.



|Signature               |  | Title                              |  | Date             
|----------------------- |  | ---------------------------------- |  | -----------------
|                        |  |                                    |  |                  
|/s/ Geoffrey R. Hopkins |  | President                          |  | February 29, 2012
|Geoffrey R. Hopkins     |  |                                    |  |                  
|                        |  |                                    |  |                  
|/s/ M. B. “Bo” Biggs    |  | Director                           |  | February 29, 2012
|M. B. “Bo” Biggs        |  |                                    |  |                  
|                        |  |                                    |  |                  
|/s/ Dr. Maudie M. Davis |  | Director                           |  | February 29, 2012
|Dr. Maudie M. Davis     |  |                                    |  |                  
|                        |  |                                    |  |                  
|/s/ Monroe Enzor, III   |  | Director                           |  | February 29, 2012
|Monroe Enzor, III       |  |                                    |  |                  
|                        |  |                                    |  |                  
|/s/ Alan W. Thompson    |  | Interim Chief Executive Officer,   |  | February 29, 2012
|Alan W. Thompson        |  | Director and Chairman of the Board |  |                  
|                        |  |                                    |  |                  
|/s/ Dale Ward           |  | Director                           |  | February 29, 2012
|Dale Ward               |  |                                    |  |                  



109







|/s/ J. Densil Worthington |  | Director                      |  | February 29, 2012
|------------------------- |  | ----------------------------- |  | -----------------
|J. Densil Worthington     |  |                               |  |                  
|                          |  |                               |  |                  
|/s/ Brian Campbell        |  | Director                      |  | February 29, 2012
|Brian Campbell            |  |                               |  |                  
|                          |  |                               |  |                  
|/s/ David A. Godwin       |  | Chief Financial and Principal |  | February 29, 2012
|David A. Godwin           |  | Accounting Officer            |  |                  



110







EXHIBIT INDEX



|Exhibit No. |       | Description of Exhibit
|----------- | ----- | ----------------------
|            |       |                       
|            | 3.1   |                       
|            |       |                       
|            | 3.2   |                       
|            |       |                       
|            | 3.3   |                       
|            |       |                       
|            | 3.4   |                       
|            |       |                       
|            | 4.1   |                       
|            |       |                       
|            | 4.2   |                       
|            |       |                       
|            | 4.3   |                       
|            |       |                       
|            | 4.4   |                       
|            |       |                       
|            | 4.5   |                       
|            |       |                       
|            | 4.6   |                       
|            |       |                       
|            | 4.7   |                       
|            |       |                       
|            | 10.1  |                       
|            |       |                       
|            | 10.2  |                       
|            |       |                       
|            | 10.3  |                       
|            |       |                       
|            | 10.4  |                       
|            |       |                       
|            | 10.5  |                       
|            |       |                       
|            | 10.6  |                       
|            |       |                       
|            | 10.7  |                       
|            |       |                       
|            | 10.8  |                       
|            |       |                       
|            | 10.9  |                       
|            |       |                       
|            | 10.10 |                       
|            |       |                       
|            | 10.11 |                       
|            |       |                       
|            | 10.12 |                       
|            |       |                       
|            | 10.13 |                       



111







| | 10.14 |  | Written agreement by and among Waccamaw Bankshares, Inc., Waccamaw Bank, the Federal Reserve Bank of Richmond, and the State of North Carolina Office of the Commissioner of Banks, dated June 14, 2010*
| | ----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |       |  |                                                                                                                                                                                                         
| | 21    |  | Subsidiaries of Registrant (filed herewith)                                                                                                                                                             
| |       |  |                                                                                                                                                                                                         
| | 23    |  | Consent of Elliott Davis, PLLC (filed herewith)                                                                                                                                                         
| |       |  |                                                                                                                                                                                                         
| | 31.1  |  | Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes- Oxley Act (filed herewith)                                                                                        
| |       |  |                                                                                                                                                                                                         
| | 31.2  |  | Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes- Oxley Act (filed herewith)                                                                                        
| |       |  |                                                                                                                                                                                                         
| | 32    |  | Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act (filed herewith)                                                                                                                       



---

| | * | Incorporated by reference
| | - | -------------------------



112