UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-K





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





For the
fiscal year ended December 31, 2008





OR





 ̈  TRANSITIONAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE


ACT
OF 1934





For the
transition period from _______ to _______.





COMMISSION FILE NUMBER 000-32985





WACCAMAW BANKSHARES,
INC.


(Exact
name of registrant as specified in its charter)





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





110
      NORTH J. K. POWELL BOULEVARDWHITEVILLE,
      NORTH CAROLINA
                        
                        28472(Address
      of Principal Executive Offices)
                        
                        (Zip
      Code)





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





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





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.  ̈ Yes    x  No





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.  ̈ Yes    x  No





Note –
Checking the box above will not relieve any registrant required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act from their
obligations under those Sections.





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


x
Yes     ̈  No





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





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







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





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


 ̈  Yes   x  No





The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant, based on the closing sales price of the
Registrant’s Common Stock reported on the NASDAQ Global Select Market on June
30, 2008 was $42,488,115. Solely
for purposes of this calculation, the term “affiliate” includes all directors
and executive officers of the Registrant and all beneficial owners of more than
5% of the Registrant’s voting securities.





As of
March 20, 2009, the Registrant had outstanding 5,523,549 shares of
Common Stock.





Documents
Incorporated by Reference.


The
Registrant’s Annual Report to stockholders for the fiscal year ended December
31, 2008


Registrant’s
Proxy Statement for the 2009 Annual Meeting of Stockholders









FORM 10-K
CROSS-REFERENCE INDEX


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




1


PART
1





ITEM
1 – BUSINESS





General





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





Waccamaw
Bank was organized and incorporated under the laws of the State of North
Carolina on August 28, 1997 and commenced operations on September 2,
1997.  The Bank currently serves Columbus County, North Carolina and
surrounding areas through three banking offices, Brunswick County through seven
banking offices, New Hanover County through one banking office, Bladen County
through one banking office, 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 Commissioner of Banks and the Federal
Reserve.





Location
and Service Area





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





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





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





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





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





Lancaster
County is located near the mid part of the state near the North Carolina border
and approximately 40 miles south of Charlotte, NC 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
principle components of the economy are manufacturing, agriculture and
tourism.  Manufacturing employment is concentrated in the wood
products and textile industries.  The primary agriculture products are
tobacco and hogs.





Competition





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




2




Banking
is a highly competitive industry.   The principal areas and
methods of competition in the banking industry are the services that are
offered, the pricing of those services, the convenience and availability of the
services and the degree of expertise and personal manner with which those
services are offered.  The Bank encounters strong competition from
other commercial banks, including the largest North Carolina banks, operating in
the Bank’s market area.  There are 14 offices of 5 other commercial
banks operating in Columbus County, 44 offices of 11 other commercial banks
operating in Brunswick County, 77 offices of 17 other commercial banks operating
in New Hanover County, 8 offices of 5 other commercial banks operating in Bladen
County, 8 offices of 4 other commercial banks operating in Lancaster County and
104 offices of 18 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, interstate 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"), enacted in 1991,
numerous additional regulatory requirements have been placed on the banking
industry in the past five years, and additional changes have been proposed. The
operations of the Company and the Bank may be affected by legislative changes
and the policies of various regulatory authorities. The Company is unable to
predict the nature or the extent of the effect on its business and earnings that
fiscal or monetary policies, economic control, or new federal or state
legislation may have in the future.





Federal
Bank Holding Company Regulation (Financial Holding Company
Regulations)





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





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





Under the
GLB Act, the Federal Reserve serves as the primary "umbrella" regulator of
financial holding companies, with supervisory authority over each parent company
and limited authority over its subsidiaries. Expanded financial activities of
financial holding companies generally will be regulated according to the type of
such financial activity, banking activities by banking regulators, securities
activities by securities regulators and insurance activities by insurance
regulators. The GLB Act also imposes additional restrictions and heightened
disclosure requirements regarding information collected by financial
institutions.





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





3




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





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





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





The
Bank





The
Company is the holding company for the Bank, which is a North Carolina banking
corporation.  Substantially all Company revenues are earned through
the operations of the Bank. The Bank is subject to examination and supervision
by the Federal Reserve and the North Carolina Commissioner of Banks (the
“Commissioner”).  The Federal Reserve monitors the Bank’s compliance
with several federal statutes such as the Community Reinvestment Act of 1977 and
the 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 Tier 1 capital to
adjusted average quarterly assets (leverage ratio) equal to 3.0%, plus an
additional cushion of one to two percent if the Bank has less than the highest
regulatory rating.  The Bank is not permitted to engage in any
activity not permitted for a national bank unless (i) it is in compliance with
its capital requirement and (ii) the FDIC determines that the activity would not
pose a risk to the deposit insurance fund.  With certain exceptions,
the Bank also is not permitted to acquire equity investments of a type, or in an
amount, not permitted for a national bank.





4




Federal
banking law requires the federal banking agencies to take “prompt corrective
action” in respect of insured depository institutions that do not meet minimum
capital requirements.  There are five tiers: “well capitalized”,
“adequately capitalized”, “undercapitalized”, “significantly undercapitalized”
and “critically undercapitalized”, as defined by regulations promulgated by the
FDIC and the other federal depository institution regulatory
agencies.  A depository institution is well capitalized if it
significantly exceeds the minimum level required by regulation for each relevant
capital measure, adequately capitalized if it meets each such measure,
undercapitalized if it fails to meet any such measure, significantly
undercapitalized if it is below such measures, and critically undercapitalized
if it fails to meet any critical capital level set forth in the
regulations.  The critical capital level must be a level of tangible
equity capital equal to not more than 65.0% of the minimum leverage ratio
prescribed by regulation.  A depository institution may be deemed to
be in a capitalization category that is lower than is indicated by its actual
capital position if it receives an unsatisfactory examination
rating.





The Bank
is required to pay deposit insurance assessments set by the
FDIC.  Under the current assessment rate schedule, the Bank assessment
will range from .05% to .43% of the Bank’s average deposit base, with the exact
assessment determined by the Bank’s capital and the FDIC’s supervisory opinion
of the Bank’s operations.    The insurance assessments rate
may change periodically.  Changes in the assessment rate may have a
material effect on the Bank’s operating results.  The FDIC has the
authority to terminate deposit insurance.





Under
regulations effective January 1, 2007, the Federal Deposit Insurance Corporation
adopted a new risk-based premium system that provides for quarterly assessments
based on an insured institution’s ranking in one of four risk categories based
upon supervisory and capital evaluations.  Institutions are assessed at
annual rates ranging from 5 to 43 basis points, respectively, depending on each
institution’s risk of default as measured by regulatory capital ratios and other
supervisory measures.  Under a proposal announced by the Federal
Deposit Insurance Corporation on October 7, 2008, the assessment rate schedule
would be raised uniformly by seven basis points (annualized) beginning on
January 1, 2009. Beginning with the second quarter of 2009, base assessment
rates before adjustments would range from 10 to 45 basis points, and further
changes would be made to the deposit insurance assessment system, including
requiring riskier institutions to pay a larger share.  The proposal
would impose higher assessment rates on institutions with a significant reliance
on secured liabilities and on institutions which rely significantly on brokered
deposits (but, for well-managed and well-capitalized institutions, only when
accompanied by rapid asset growth).  The proposal would reduce
assessment rates for institutions that hold long-term unsecured debt and, for
smaller institutions, high levels of Tier 1 (defined below)
capital.





On
February 27, 2009 the FDIC voted to amend the restoration of the Deposit
Insurance Fund. The Board took action by imposing a special assessment on
insured institutions of 20 basis points, implementing changes to the risk- based
assessment system, and increased regular premium rates for 2009, which banks
must pay on top of the special assessment. The 20 basis point special assessment
on the industry will be as of June 30, 2009, payable September 30, 2009. As a
result of the special assessment and increased regular assessments the Company
projects it will experience an increase in FDIC assessment by approximately $1.0
million from 2008 to 2009. The 20 basis point special assessment represents
$928,000 of this increase.





On March
5, 2009, the FDIC Chairman announced that the FDIC intends to lower the special
assessment from 20 basis points to 10 basis points. The approval of the cutback
is contingent on whether Congress clears legislation that would expand the
FDIC’s line of credit with the Treasury to $100 billion. Legislation to increase
the FDIC’s borrowing authority on a permanent basis is also expected to advance
to Congress, which should aid in reducing the burden on the industry. The
assessment rates, including the special assessment, are subject to change at the
discretion of the Board of Directors of the FDIC.





The
earnings of the Bank are affected significantly by the policies of the Federal
Reserve Board, a federal agency which regulates the money supply in order to
mitigate recessionary and inflationary pressures.  Among the
techniques used to implement these objectives are open market transactions in
United States government securities, changes in the rate paid by banks on bank
borrowings, and changes in reserve 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.


5


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





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





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





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





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





Material
Customers





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





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





Rights





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





Environmental
Laws





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





Employees





The
Company had no compensated employees.  The Bank presently has 148
full-time equivalent employees consisting of 140 full-time employees and 16
part-time employees.


6


ITEM
1A – RISK FACTORS





Not
applicable due to smaller reporting company





ITEM
1B – UNRESOLVED STAFF COMMENTS





Not
applicable





ITEM
2 - PROPERTIES





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





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





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





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





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





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





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





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





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





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





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


7





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





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





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





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





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





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





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





ITEM
3 – LEGAL PROCEEDINGS





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





Currently,
the Bank is a party to a legal proceeding arising out of a contract between
Eastwood Homes Coastal Carolina, LLC, a home builder, and Landcraft Management,
LLC, a developer.  According to the lawsuit filed September 19, 2008,
in the United States Bankruptcy Court for the Eastern District of North
Carolina, Eastwood claims Landcraft did not act in a forthright manner and
breached the terms of the contract.  Therefore, Eastwood asserts that
certain letters of credit it provided should be nullified and that it should be
awarded both actual and punitive damages.  The Bank has been named as
a party to this suit due to a loan it provided to Landcraft.  Although
there is no assurance that this matter will be resolved favorably and that the
Bank’s financial statements will not be adversely affected, management currently
expects that there will be no material adverse effect on its financial condition
or results of operations resulting from the resolution of this or any other
pending legal proceeding.





ITEM
4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS





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


8


PART II





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





The
Company’s articles of incorporation authorize it to issue up to 25,000,000
shares of common stock, no par value, of which 5,523,549
shares were issued and outstanding as of March 20, 2009.  The stock is
listed on the NASDAQ Global Market under the symbol “WBNK”.





The
approximate number of holders of the Company’s shares of common stock as of
March 20, 2009 is 1,900.  There were 28,184
shares issued and outstanding of the Company’s Series A convertible preferred
stock as of March 20, 2009.





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





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





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





2008
                
                
                2007
                
                
                2006High
                
                
                Low
                
                
                High
                
                
                Low
                
                
                High
                
                
                LowFirst
      Quarter
                
                $
                11.00
                
                
                $
                9.25
                
                
                $
                15.90
                
                
                $
                14.00
                
                
                $
                17.27
                
                
                $
                15.91Second
      Quarter
                
                
                9.99
                
                
                
                8.70
                
                
                
                14.75
                
                
                
                12.91
                
                
                
                16.12
                
                
                
                14.77Third
      Quarter
                
                
                9.94
                
                
                
                6.11
                
                
                
                13.86
                
                
                
                11.69
                
                
                
                16.58
                
                
                
                13.81Fourth
      Quarter
                
                
                9.08
                
                
                
                5.00
                
                
                
                14.00
                
                
                
                10.25
                
                
                
                16.36
                
                
                
                13.75





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





On
December 20, 2006, the Company sold 65,111 units, each consisting of one share
of the Company’s Series A Preferred Stock and one warrant to purchase one share
of common stock at $21.82 per share (adjusted for 11 for 10 stock split in
2007). The units were sold for $17.00 each for an aggregate offering price of
$1,006,264. The units were privately placed in accordance with, and in a
transaction exempt from registration under the Securities Act of 1933 by,
Section 4(2) of the Securities Act, Regulation D and Rule 506 hereunder. The
units were sold to 20 individuals or entities, inclusive of accredited and
non-accredited investors as those terms are defined by Regulation
D.





The
Series A Preferred Stock, issued in connection with the unit placement, are
convertible to shares of common stock of the Company at the election of the
holder of the Series A Preferred Stock on a date which is not before one year
and one day after the units were first issued or at the election of the Company
if the holders of the Preferred Stock would be afforded any voting rights under
North Carolina law.  The warrants may be converted into shares of
common stock upon the payment by the holder of the exercise price of $21.82 per
share (adjusted for 11 for 10 stock split in 2007).  The warrants may
be exercised at any time before 5:00 p.m., Eastern Standard Time, September 30,
2009.


9




ITEM
6 – SELECTED FINANCIAL DATA
 
 2008
                                  
                                  
                                  2007
                                  
                                  
                                  2006
                                  
                                  
                                  2005
                                  
                                  
                                  2004(thousands,
      except share data and ratios)Summary
      of Operations:Interest
      income
                                  
                                  $
                                  30,485
                                  
                                  
                                  $
                                  31,637
                                  
                                  
                                  $
                                  25,379
                                  
                                  
                                  $
                                  18,228
                                  
                                  
                                  $
                                  11,450Interest
      expense
                                  
                                  
                                  16,934
                                  
                                  
                                  
                                  16,296
                                  
                                  
                                  
                                  11,226
                                  
                                  
                                  
                                  7,536
                                  
                                  
                                  
                                  3,766Net
      interest income
                                  
                                  
                                  13,551
                                  
                                  
                                  
                                  15,341
                                  
                                  
                                  
                                  14,153
                                  
                                  
                                  
                                  10,692
                                  
                                  
                                  
                                  7,684Provision
      for loan losses
                                  
                                  
                                  2,990
                                  
                                  
                                  
                                  386
                                  
                                  
                                  
                                  1,450
                                  
                                  
                                  
                                  1,370
                                  
                                  
                                  
                                  819Net
      interest income after provisionfor
      loan losses
                                  
                                  
                                  10,561
                                  
                                  
                                  
                                  14,955
                                  
                                  
                                  
                                  12,703
                                  
                                  
                                  
                                  9,322
                                  
                                  
                                  
                                  6,865Total
      non-interest income
                                  
                                  
                                  966
                                  
                                  
                                  
                                  3,443
                                  
                                  
                                  
                                  2,581
                                  
                                  
                                  
                                  2,269
                                  
                                  
                                  
                                  2,445Total
      non-interest expense
                                  
                                  
                                  15,397
                                  
                                  
                                  
                                  12,440
                                  
                                  
                                  
                                  9,422
                                  
                                  
                                  
                                  6,967
                                  
                                  
                                  
                                  5,687Income
      (loss) before income taxes
                                  
                                  
                                  (3,870
                                  )
                                  
                                  
                                  5,958
                                  
                                  
                                  
                                  5,862
                                  
                                  
                                  
                                  4,624
                                  
                                  
                                  
                                  3,623Income
      tax (expense) benefit
                                  
                                  
                                  1,827
                                  
                                  
                                  
                                  (2,049
                                  )
                                  
                                  
                                  (2,210
                                  )
                                  
                                  
                                  (1,589
                                  )
                                  
                                  
                                  (1,209
                                  )Net
      income (loss)
                                  
                                  $
                                  (2,043
                                  )
                                  
                                  $
                                  3,909
                                  
                                  
                                  $
                                  3,652
                                  
                                  
                                  $
                                  3,035
                                  
                                  
                                  $
                                  2,414Per
      Common Share Data: 1Basic
      income (loss) per share
                                  
                                  $
                                  (.37
                                  )
                                  
                                  $
                                  .73
                                  
                                  
                                  $
                                  .71
                                  
                                  
                                  $
                                  .61
                                  
                                  
                                  $
                                  .49Diluted
      income (loss) per share
                                  
                                  
                                  (.37
                                  )
                                  
                                  
                                  .72
                                  
                                  
                                  
                                  .69
                                  
                                  
                                  
                                  .58
                                  
                                  
                                  
                                  .47Market
      PriceHigh
                                  
                                  
                                  11.00
                                  
                                  
                                  
                                  15.90
                                  
                                  
                                  
                                  17.27
                                  
                                  
                                  
                                  18.86
                                  
                                  
                                  
                                  24.68Low
                                  
                                  
                                  5.00
                                  
                                  
                                  
                                  10.25
                                  
                                  
                                  
                                  13.75
                                  
                                  
                                  
                                  15.68
                                  
                                  
                                  
                                  9.85Close
                                  
                                  
                                  5.01
                                  
                                  
                                  
                                  10.50
                                  
                                  
                                  
                                  14.88
                                  
                                  
                                  
                                  16.14
                                  
                                  
                                  
                                  16.36Book
      value
                                  
                                  
                                  5.04
                                  
                                  
                                  
                                  6.44
                                  
                                  
                                  
                                  5.77
                                  
                                  
                                  
                                  4.48
                                  
                                  
                                  
                                  3.99Selected
      Average Balances:Total
      assets
                                  
                                  $
                                  539,468
                                  
                                  
                                  $
                                  438,579
                                  
                                  
                                  $
                                  356,675
                                  
                                  
                                  $
                                  302,381
                                  
                                  
                                  $
                                  217,035Loans,
      net
                                  
                                  
                                  376,747
                                  
                                  
                                  
                                  332,451
                                  
                                  
                                  
                                  279,625
                                  
                                  
                                  
                                  238,579
                                  
                                  
                                  
                                  168,757Securities
                                  
                                  
                                  105,819
                                  
                                  
                                  
                                  65,454
                                  
                                  
                                  
                                  46,561
                                  
                                  
                                  
                                  31,257
                                  
                                  
                                  
                                  29,068Interest-earning
      assets
                                  
                                  
                                  490,883
                                  
                                  
                                  
                                  404,329
                                  
                                  
                                  
                                  331,713
                                  
                                  
                                  
                                  284,320
                                  
                                  
                                  
                                  200,982Deposits
                                  
                                  
                                  415,711
                                  
                                  
                                  
                                  354,512
                                  
                                  
                                  
                                  298,324
                                  
                                  
                                  
                                  252,994
                                  
                                  
                                  
                                  169,162Interest-bearing
      liabilities
                                  
                                  
                                  469,829
                                  
                                  
                                  
                                  366,266
                                  
                                  
                                  
                                  295,596
                                  
                                  
                                  
                                  256,492
                                  
                                  
                                  
                                  179,696Stockholders’
      equity
                                  
                                  
                                  33,460
                                  
                                  
                                  
                                  33,501
                                  
                                  
                                  
                                  25,945
                                  
                                  
                                  
                                  20,254
                                  
                                  
                                  
                                  17,941Selected
      Year-End Balance Sheet Data:Total
      assets
                                  
                                  $
                                  537,450
                                  
                                  
                                  $
                                  508,368
                                  
                                  
                                  $
                                  399,581
                                  
                                  
                                  $
                                  322,792
                                  
                                  
                                  $
                                  258,412Loans,
      net
                                  
                                  
                                  378,883
                                  
                                  
                                  
                                  355,138
                                  
                                  
                                  
                                  312,253
                                  
                                  
                                  
                                  257,575
                                  
                                  
                                  
                                  206,666Securities
                                  
                                  
                                  91,535
                                  
                                  
                                  
                                  102,644
                                  
                                  
                                  
                                  52,986
                                  
                                  
                                  
                                  35,214
                                  
                                  
                                  
                                  30,232Interest-earning
      assets
                                  
                                  
                                  495,218
                                  
                                  
                                  
                                  458,695
                                  
                                  
                                  
                                  374,047
                                  
                                  
                                  
                                  306,987
                                  
                                  
                                  
                                  247,432Deposits
                                  
                                  
                                  418,580
                                  
                                  
                                  
                                  378,179
                                  
                                  
                                  
                                  327,352
                                  
                                  
                                  
                                  271,035
                                  
                                  
                                  
                                  207,642Interest-bearing
      liabilities
                                  
                                  
                                  471,122
                                  
                                  
                                  
                                  437,207
                                  
                                  
                                  
                                  315,346
                                  
                                  
                                  
                                  273,171
                                  
                                  
                                  
                                  218,592Stockholders’
      equity
                                  
                                  
                                  27,844
                                  
                                  
                                  
                                  35,023
                                  
                                  
                                  
                                  31,703
                                  
                                  
                                  
                                  22,499
                                  
                                  
                                  
                                  19,899Selected
      Performance Ratios:Return
      on average assets
                                  
                                  
                                  (.38
                                  )
      %
                                  
                                  
                                  .89
                                  %
                                  
                                  
                                  1.02
                                  %
                                  
                                  
                                  1.00
                                  %
                                  
                                  
                                  1.11
                                  %Return
      on average equity
                                  
                                  
                                  (6.11
                                  )
      %
                                  
                                  
                                  11.67
                                  %
                                  
                                  
                                  14.07
                                  %
                                  
                                  
                                  14.98
                                  %
                                  
                                  
                                  13.46
                                  %Net
      interest margin
                                  
                                  
                                  2.76
                                  %
                                  
                                  
                                  3.79
                                  %
                                  
                                  
                                  4.27
                                  %
                                  
                                  
                                  3.76
                                  %
                                  
                                  
                                  3.82
                                  %Asset
      Quality Ratios:Nonperforming
      loans to period-end loans
                                  
                                  
                                  4.67
                                  %
                                  
                                  
                                  1.24
                                  %
                                  
                                  
                                  .49
                                  %
                                  
                                  
                                  80
                                  %
                                  
                                  
                                  1.16
                                  %Allowance
      for loan losses to period-end loans
                                  
                                  
                                  1.86
                                  %
                                  
                                  
                                  1.49
                                  %
                                  
                                  
                                  1.54
                                  %
                                  
                                  
                                  1.50
                                  %
                                  
                                  
                                  1.33
                                  %Net
      loan charge-offs to average loans
                                  
                                  
                                  .32
                                  %
                                  
                                  
                                  (.03
                                  )
      %
                                  
                                  
                                  .20
                                  %
                                  
                                  
                                  .09
                                  %
                                  
                                  
                                  0.15
                                  %Capital
      Ratios:Total
      risk-based capital
                                  
                                  
                                  11.68
                                  %
                                  
                                  
                                  10.88
                                  %
                                  
                                  
                                  11.82
                                  %
                                  
                                  
                                  12.36
                                  %
                                  
                                  
                                  13.64
                                  %Tier
      1 risk-based capital
                                  
                                  
                                  9.76
                                  %
                                  
                                  
                                  9.63
                                  %
                                  
                                  
                                  10.57
                                  %
                                  
                                  
                                  11.11
                                  %
                                  
                                  
                                  10.53
                                  %Leverage
      ratio
                                  
                                  
                                  8.00
                                  %
                                  
                                  
                                  8.70
                                  %
                                  
                                  
                                  9.61
                                  %
                                  
                                  
                                  9.37
                                  %
                                  
                                  
                                  9.44
                                  %Equity
      to assets ratio
                                  
                                  
                                  5.18
                                  %
                                  
                                  
                                  6.89
                                  %
                                  
                                  
                                  7.93
                                  %
                                  
                                  
                                  6.97
                                  %
                                  
                                  
                                  7.70
                                  %Capital
      Ratios:Number of banking offices
                                  
                                  
                                  17
                                  
                                  
                                  
                                  16
                                  
                                  
                                  
                                  11
                                  
                                  
                                  
                                  8
                                  
                                  
                                  
                                  6Number
      of full time equivalent employees
                                  
                                  
                                  148
                                  
                                  
                                  
                                  150
                                  
                                  
                                  
                                  109
                                  
                                  
                                  
                                  85
                                  
                                  
                                  
                                  73
  1
                Adjusted
      for the effects of 6 for 5 stock splits in 2004, 2 for 1 stock split in
      2004 and 11 for 10 stock split in
2007.
  10




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





The
information required by this item is incorporated by reference to the Company’s
2008 annual report to stockholders.





ITEM
7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





The
Company’s profitability is dependent to a large extent upon its net interest
income, which is the difference between its interest income on interest-bearing
assets, such as loans and investments, and its interest expense on
interest-bearing liabilities, such as deposits and borrowings. The Company’s
primary market risk is interest rate risk, which is the result of differing
maturities or re-pricing intervals of interest-earning assets and
interest-bearing liabilities with the goals of minimizing interest rate
fluctuations in its net interest income. The Company does not maintain a trading
account, nor is it subject to currency exchange risk or commodity price
risk.





The
Company’s Asset/Liability Committee (“ALCO”) meets on a monthly basis in order
to assess interest rate risk, liquidity, capital and overall balance sheet
management through rate shock analysis measuring various interest rate scenarios
over the future 12 months. Through ALCO, the Company is able to determine
fluctuations to net interest income from changes in the Prime lending rate of up
to 300 basis points up or down during a 12-month period. ALCO also reviews
policies and procedures related to funds management and interest rate risk based
on local, national and global economic conditions along with funding strategies
and balance sheet management to minimize the potential impact of earnings and
liquidity from interest rate movements.





The
following table presents information about the contractual maturities, average
interest rates and estimated fair values of the Company’s financial instruments
that are considered market risk sensitive.





Expected
Maturities of Market Sensitive Instruments Held at December 31,
2008


($
in thousands)





Average
                        
                        
                        Estimated1-3
                        
                        
                        4-12
                        
                        
                        13-60
                        
                        
                        Over 60
                        
                        
                        
                        
                        
                        Interest
                        
                        
                        FairMonths
                        
                        
                        Months
                        
                        
                        Months
                        
                        
                        Months
                        
                        
                        Total
                        
                        
                        Rate
                        
                        
                        ValueEarning
      Assets:Loans
                        
                        $
                        160,464
                        
                        
                        $
                        47,818
                        
                        
                        $
                        126,100
                        
                        
                        $
                        51,689
                        
                        
                        $
                        386,071
                        
                        
                        
                        6.39
                        %
                        
                        $
                        388,586Investments
                        
                        
                        1,153
                        
                        
                        
                        2,030
                        
                        
                        
                        1,130
                        
                        
                        
                        87,222
                        
                        
                        
                        91,535
                        
                        
                        
                        5.98
                        %
                        
                        
                        91,535Federal
      funds sold
                        
                        
                        4,281
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        4,281
                        
                        
                        
                        1.11
                        %
                        
                        
                        4,281Deposits
      with banks
                        
                        
                        2,685
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        2,685
                        
                        
                        
                        1.60
                        %
                        
                        
                        2,685Total
                        
                        
                        168,583
                        
                        
                        
                        49,848
                        
                        
                        
                        127,230
                        
                        
                        
                        138,911
                        
                        
                        
                        484,572
                        
                        
                        
                        6.21
                        %
                        
                        
                        487,087Interest-bearing
      liabilities:Demand
      accounts
                        
                        
                        31,567
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        31,567
                        
                        
                        
                        .61
                        %
                        
                        
                        31,567Savings
      and money market
                        
                        
                        82,459
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        82,459
                        
                        
                        
                        2.41
                        %
                        
                        
                        82,459Time
      deposits
                        
                        
                        90,235
                        
                        
                        
                        135,017
                        
                        
                        
                        40,818
                        
                        
                        
                        2,325
                        
                        
                        
                        268,395
                        
                        
                        
                        4.16
                        %
                        
                        
                        268,482Repurchase
      agreements and Purchased funds
                        
                        
                        3,830
                        
                        
                        
                        -
                        
                        
                        
                        20,000
                        
                        
                        
                        -
                        
                        
                        
                        23,830
                        
                        
                        
                        3.28
                        %
                        
                        
                        23,830Short-term
      borrowings
                        
                        
                        6,000
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        6,000
                        
                        
                        
                        4.33
                        %
                        
                        
                        6,000Long-term
      debt
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        33,500
                        
                        
                        
                        13,000
                        
                        
                        
                        46,500
                        
                        
                        
                        3.72
                        %
                        
                        
                        43,867Subordinated
      debentures
                        
                        
                        12,372
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        12,372
                        
                        
                        
                        6.31
                        %
                        
                        
                        7,793Total
                        
                        $
                        226,463
                        
                        
                        $
                        135,017
                        
                        
                        $
                        94,318
                        
                        
                        $
                        15,325
                        
                        
                        $
                        471,123
                        
                        
                        
                        3.60
                        %
                        
                        $
                        463,998


11


ITEM
8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





The
following financial statements of the Company and the Report of independent
registered public accounting firm set forth on pages 14 through 46 of the
Company’s 2008 Annual Report to Stockholders are incorporated herein by
reference:





1.
            Consolidated
      Balance Sheets as of December 31, 2008 and
2007





2.
            Consolidated
      Statements of Income for the years ended December 31, 2008, 2007 and
      2006





3.
            Consolidated
      Statements of Stockholders’ Equity for the years ended December 31, 2008,
      2007 and 2006





4.
            Consolidated
      Statements of Cash Flows for the years ended December 31, 2008, 2007 and
      2006





5.
            Notes
      to Consolidated Financial
Statements





6.
            Report
      of Independent Registered Public Accounting
Firm




ITEM
9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE




None.





Item
      9A(T).
            Controls
      and Procedures




Our
management, under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the design and operation of our disclosure controls and procedures in
accordance with Rule 13a-15 of the Securities Exchange Act of 1934 (the
“Exchange Act”). Our management, including our Chief Executive Officer and Chief
Financial Officer, identified a material weakness in our internal control over
financial reporting that existed as of year-end 2008, as more fully described
below in “Management’s Annual Report on Internal Control over Financial
Reporting.” Solely as a result of the material weakness, our Chief Executive
Officer and Chief Financial Officer concluded that, as of the end of the period
covered by this report, our disclosure controls and procedures were not
effective in enabling us to provide reasonable assurance that we are able to
record, process, summarize and report in a timely manner the information
required to be disclosed in reports we file under the Exchange Act. Nonetheless,
this material weakness identified as of year end 2008 did not result in a
material misstatement of any of the Company’s financial statements, including
the annual and interim financial statements for 2008.




In
connection with the above evaluation of our disclosure controls and procedures,
no change in our internal control over financial reporting was identified that
occurred during our fourth quarter of 2008 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting. However, our management, including our Chief Executive Officer and
Chief Financial Officer, is taking remedial measures to address this material
weakness, as described below in “Management’s Annual Report on Internal Control
over Financial Reporting.” We anticipate completion of our implementation of
such remedial measures prior to the time of our next periodic
filing.




MANAGEMENT’S
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. 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.


12




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. A material weakness is a deficiency, or
combination of deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material misstatement of the
Company’s annual or interim financial statements will not be prevented or
detected on a timely basis.




The
Company’s management assessed the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2008. 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. As of December 31, 2008, the Company determined that its
process for determining and reporting the fair value of certain investment
securities available for sale, as well as its process for effectively analyzing
certain securities for other than temporary impairment, resulted in a material
weakness. This material weakness was the result of not identifying securities
that were being carried at par rather than fair value, coupled with a lack of
proper documentation and analysis in conjunction with our other than temporary
impairment evaluation for certain securities. While the fair value of our
investment securities and our conclusions as to other than temporary impairment
are materially correct as reported at December 31, 2008, this material weakness,
if not detected and corrected, could have impacted these determinations in the
future periods.




The
Company is taking steps to remediate the material weakness, including designing
and implementing additional control procedures to ensure that the Company’s
determination of investment fair value is performed as necessary and to properly
document and evaluate other than temporary impairment as necessary.




This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management’s report
in this annual report.





ITEM
9B – OTHER INFORMATION





None.


13





PART
III





ITEM
10 – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE





The
information required by this item is incorporated by reference to the Company’s
proxy statement for the 2009 Annual Meeting of Stockholders, pages 4-9, 13-14 and
19-20.





Code
of Ethics





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





ITEM
11 – EXECUTIVE COMPENSATION





The
information required by this item is incorporated by reference to the Company’s
proxy statement for the 2009 Annual Meeting of Stockholders, pages
10-18.





ITEM
12 – SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS





Certain
information required by this item is incorporated by reference to the Company’s
proxy statement for the 2009 Annual Meeting of Stockholders, pages
3-4.





Set forth
below is certain information regarding the Company’s various stock option
plans.





Plan Category
                          
                          Number of securities to
                            be issued upon exercise
                            of outstanding options,
                            warrants, and rights
                            
                            (a)
                          
                          
                          Weighted-average
                            exercise price of
                            outstanding options,
                            warrants, and rights
                            
                            (b)
                          
                          
                          Number of securities
                            remaining available for
                            future issuance under
                            equity compensation
                            plans (excluding
                            securities reflected in
                            column (a))
                            
                            (c)Equity
      compensation plans approved by security holders
                          
                          
                          329,489
                          
                          
                          $
                          14.64
                          
                          
                          
                          679,473Equity
      compensation plans not approved by security holders
                          
                          None
                          
                          
                          None
                          
                          
                          NoneTotal
                          
                          
                          329,489
                          
                          
                          $
                          14.64
                          
                          
                          
                          679,473





ITEM
13 – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE





The
information required by this item is incorporated by reference to the Company’s
proxy statement for the 2009 Annual Meeting of Stockholders, pages 6 and
9.





ITEM
14 – PRINCIPAL ACCOUNTING FEES AND SERVICES





The
information required by this item is incorporated by reference to the Company’s
proxy statement for the 2009 Annual Meeting of Stockholders, page
19.


14





PART
IV





ITEM
15 – EXHIBITS, FINANCIAL STATEMENT SCHEDULES





(a)
            Index
      to Exhibits





EXHIBITNUMBER
                
                DESCRIPTION OF EXHIBIT3.1
                
                Registrant’s
      Articles of Incorporation*3.2
                
                Registrant’s
      Bylaws*4.1
                
                Specimen
      Stock Certificate**10.1
                
                Employment
      Agreement of James G. Graham***10.2
                
                Waccamaw
      Bank 1998 Incentive Stock Option Plan***10.3
                
                Waccamaw
      Bank 1998 Nonstatutory Stock Option Plan***13
                
                Annual
      Report to Stockholders (Filed herewith)21
                
                Subsidiaries
      of Registrant (Filed herewith)23.1
                
                Consent
      of Dixon Hughes PLLC23.2
                
                Consent
      of Elliott Davis, PLLC31(i)
                
                Certification
      of Principal Executive Officer Pursuant to Section 302 of the Sarbanes
      Oxley Act (Filed herewith)31(ii)
                
                Certification
      of Principal Accounting Officer Pursuant to Section 302 of the Sarbanes
      Oxley Act (Filed herewith)32
                
                Certification
      Pursuant to Section 906 of the Sarbanes Oxley Act (Filed
      herewith)99
                
                Registrant’s
      Definitive Proxy
Statement****





*
            Incorporated
      by reference from exhibits 3(i) and 3(ii) to Registrant’s Current Report
      on Form 8-K12g3, as filed with the Commission on July 1,
    2001.





**
            Incorporated
      by reference from exhibit 4.1 to Registrant’s Annual Report on Form 10-KSB
      for the year ended December 31,
2001.





***
            Incorporated
      by reference from Exhibits 10.2, 10.3 and 10.4 to Annual Report on Form
      10-KSB of Waccamaw Bank, as filed with the
FDIC.





****
              Filed
      with the Commission pursuant to Rule
14a-6.


15


SIGNATURES





In
accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on behalf by the undersigned,
thereunto duly authorized





WACCAMAW
      BANKSHARES, INC.March
      31, 2009
                      
                      /s/
      James G. GrahamDate
                      
                      James
      G. GrahamPresident
      and Chief Executive
Officer





In
accordance with the Exchange Act, this report has to be signed below by the
following persons on behalf of the registrant and in the capacity and on the
dates indicated.





Signature
                                    
                                    Title
                                    
                                    Date/s/
      James G. GrahamPresident
      and
                                    
                                    March 31, 2009James
      G. Graham
                                    
                                    Chief
      Executive Officer/s/
      Neil C. Bender, IIDirector
                                    
                                    March 31, 2009Neil
      C. Bender/s/
      M. B. “Bo” BiggsDirector
                                    
                                    March 31, 2009M.
      B. “Bo” Biggs/s/
      Dr. Maudie M. DavisDirector
                                    
                                    March 31, 2009Dr.
      Maudie M. Davis/s/
      Monroe Enzor, IIIDirector
                                    
                                    March 31, 2009Monroe
      Enzor, III/s/
      James E. Hill, Jr.Director
                                    
                                    March 31, 2009James
      E. Hill, Jr./s/
      Alan W. ThompsonDirector,
      Chairman
                                    
                                    March 31, 2009Alan
      W. Thompson
                                    
                                    of
      the Board/s/
      Dale WardDirector
                                    
                                    March 31, 2009Dale
      Ward/s/
      J. Densil WorthingtonDirector
                                    
                                    March 31, 2009J.
      Densil Worthington/s/
      Brian CampbellDirector
                                    
                                    March 31, 2009Brian
      Campbell


16


EXHIBIT
INDEX





EXHIBITNUMBER
              
              DESCRIPTION OF EXHIBIT3.1
              
              Registrant’s
      Articles of Incorporation*3.2
              
              Registrant’s
      Bylaws*4.1
              
              Specimen
      Stock Certificate**10.1
              
              Employment
      Agreement of James G. Graham***10.2
              
              Waccamaw
      Bank 1998 Incentive Stock Option Plan***10.3
              
              Waccamaw
      Bank 1998 Nonstatutory Stock Option Plan***13
              
              Annual
      Report to Stockholders (Filed herewith)21
              
              Subsidiaries
      of Registrant (Filed herewith)23.1
              
              Consent
      of Dixon Hughes PLLC23.2
              
              Consent
      of Elliott Davis, PLLC31.1
              
              Certification
      of Principal Executive Officer Pursuant to Section 302 of the Sarbanes
      Oxley Act (Filed herewith)31.2
              
              Certification
      of Principal Accounting Officer Pursuant to Section 302 of the Sarbanes
      Oxley Act (Filed herewith)32.1
              
              Certification
      Pursuant to Section 906 of the Sarbanes Oxley Act (Filed
      herewith)99
              
              Registrant’s
      Definitive Proxy Statement***





*
            Incorporated
      by reference from exhibits 3(i) and 3(ii) to Registrant’s Current Report
      on Form 8-K12g3, as filed with the Commission on July 1,
    2001.





**
            Incorporated
      by reference from exhibit 4.1 to Registrant’s Annual Report on Form 10-KSB
      for the year ended December 31,
2001.





***
            Incorporated
      by reference from Exhibits 10.2, 10.3 and 10.4 to Annual Report on Form
      10-KSB of Waccamaw Bank, as filed with the
FDIC.





****
            Filed
      with the Commission pursuant to Rule
14a-6.


17




INTRODUCTION





Table
of Contents





Introduction
              1Statement
      of Mission
              2Significant
      Trends
              3Financial
      Highlights
              4Shareholder
      Letter
              5-6Consolidated
      Balance Sheets
              7Consolidated
      Statements of Income
              8Consolidated
      Statements of Changes in Stockholders' Equity
              9Consolidated
      Statements of Cash Flows
              10-11Notes
      to Consolidated Financial Statements
              12Report
      of Independent Registered Public Accounting Firms
              41-42Management’s
      Discussion and Analysis
              43Stockholder
      Information
              62




1


STATEMENT
OF MISSION





Waccamaw
Bank serves a principled mission:


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


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


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


• to be a
good corporate neighbor within our communities;


• to
maintain safety, soundness and profitability;


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


2










Significant
Trends





















3







Financial
Highlights Summary1









2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004Summary
      of OperationsInterest
      income
                
                $
                30,485
                
                
                $
                31,637
                
                
                $
                25,379
                
                
                $
                18,228
                
                
                $
                11,450Interest
      expense
                
                
                (16,934
                )
                
                
                (16,296
                )
                
                
                (11,226
                )
                
                
                (7,536
                )
                
                
                (3,766
                )Net
      interest income
                
                
                13,551
                
                
                
                15,341
                
                
                
                14,153
                
                
                
                10,692
                
                
                
                7,684Provision
      for loan losses
                
                
                (2,990
                )
                
                
                (386
                )
                
                
                (1,450
                )
                
                
                (1,370
                )
                
                
                (819
                )Other
      income
                
                
                966
                
                
                
                3,443
                
                
                
                2,581
                
                
                
                2,269
                
                
                
                2,445Other
      expense
                
                
                (15,397
                )
                
                
                (12,440
                )
                
                
                (9,422
                )
                
                
                (6,967
                )
                
                
                (5,687
                )Income
      tax (expense) benefit
                
                
                1,827
                
                
                
                (2,049
                )
                
                
                (2,210
                )
                
                
                (1,589
                )
                
                
                (1,209
                )Net
      income (loss)
                
                $
                (2,043
                )
                
                $
                3,909
                
                
                $
                3,652
                
                
                $
                3,035
                
                
                $
                2,414Per
      Share Data2Basic
      income (loss) per share
                
                $
                (.37
                )
                
                $
                .73
                
                
                $
                .71
                
                
                $
                .61
                
                
                $
                .49Diluted
      income (loss) per share
                
                
                (.37
                )
                
                
                .72
                
                
                
                .69
                
                
                
                .58
                
                
                
                .47Book
      value
                
                
                5.04
                
                
                
                6.44
                
                
                
                5.77
                
                
                
                4.48
                
                
                
                3.99Average
      Balance Sheet SummaryLoans,
      net
                
                $
                376,747
                
                
                $
                332,451
                
                
                $
                279,625
                
                
                $
                238,579
                
                
                $
                168,757Securities
                
                
                105,819
                
                
                
                65,454
                
                
                
                46,561
                
                
                
                31,257
                
                
                
                29,068Total
      assets
                
                
                539,468
                
                
                
                438,579
                
                
                
                356,675
                
                
                
                302,381
                
                
                
                217,035Deposits
                
                
                415,711
                
                
                
                354,512
                
                
                
                298,324
                
                
                
                252,994
                
                
                
                169,162Stockholders’
      equity
                
                
                33,460
                
                
                
                33,501
                
                
                
                25,945
                
                
                
                20,254
                
                
                
                17,941Selected
      RatiosAverage
      equity to average assets
                
                
                6.20
                %
                
                
                7.64
                %
                
                
                7.27
                %
                
                
                6.70
                %
                
                
                8.27
                %Return
      on average assets
                
                
                (.38
                )%
                
                
                .89
                %
                
                
                1.02
                %
                
                
                1.00
                %
                
                
                1.11
                %Return
      on average equity
                
                
                (6.11
                )%
                
                
                11.67
                %
                
                
                14.07
                %
                
                
                14.98
                %
                
                
                13.46
                %







1
            In
      thousands of dollars, except per share
data.


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





4




Shareholder
Letter









Dear
Shareholders, Clients, and Friends:





To state
that the year of 2008 will long be remembered is certainly an
understatement.  This past year was as one of the most unprecedented
years of economic turmoil in the lifetime of most active Americans. Our nation
has witnessed economic events which would have been unthinkable only twelve
months prior with some of the best known financial companies in America ceasing
to exist as independent entities.  Therefore, the financial results
reported herein deviate from our nine year record of consecutive annual
increases in profitability. While our financial results compare favorably to
some banks in our trade area, Waccamaw Bankshares is reporting a net loss for
the year. Despite these economic issues Waccamaw Bankshares, Inc., and its
subsidiary Waccamaw Bank, remain quite sound and well capitalized as we look
forward to putting the turmoil of 2008 behind us.





At year
end, our total assets stood at $537 million and the Company is reporting an
after tax net loss of $2,043,030. The Federal Government placed the Federal
National Mortgage Association (Fannie Mae-FNMA), a Government Sponsored
Enterprise (GSE), into conservatorship on September 7, 2008. Waccamaw owned $2
million of FNMA’s Securities, and therefore, the entire investment was
considered impaired by accounting standards and was written off.  Yet
as of December 31, 2008, the Federal National Mortgage Association had not
drawn upon one penny of the “rescue” line of credit established to “save” this
Government Sponsored Enterprise.  At year end another $1,383,688 of
trust preferred investment securities was considered impaired due to the market
value being lower than book value or Waccamaw Bank’s purchase price for a period
of time and was written off as well.  While recovery of all principle
is possible, this action is the recognition of “Mark to Market Accounting” (MTM)
standards and as a result, we will attempt to illustrate the impact of MTM for
your understanding.  For example, you decide to sell your house and
set a price at the same time your neighbor decided to sell their
home.  After a period of time when no buyers were in the market, so
under Mark to Market Accounting, the value of your home is zero.  Does
this seem logical?  If you answered no, you now understand Mark to
Market Accounting.





During
the year, the bank expensed $2.9 million for provisional loan losses and
believes the risks in the bank’s portfolio have been adequately addressed. We
remain diligent in maintaining a strong credit quality as possible during these
difficult times. During the year, America experienced historic interest rate
reductions with prime rate falling from 7.25% to 3.25% during the
year.  Quite simply, our cost of funds could not be reduced quickly
enough to maintain an adequate interest rate spread between the rates we charged
on our loans and the cost of our deposits, therefore, the bank’s net interest
margin suffered.





The five
new offices which opened in 2007 and our newest office located in Little River,
South Carolina which opened in 2008, are progressing toward profitability.
However, profitability was not possible for any of these offices given the
economic challenges of the year. Although these offices operated at a loss in
2008, we remained convinced that these offices will provide significant earnings
performance in the years to come.


An
expense reduction effort began in early 2008 and continued throughout the year
reflecting the lower than anticipated business volume in our
market.  No incentive pay was received by any officer level staff as a
result of 2008 performance, executive pay was reduced, and director fees were
eliminated during the year just to mention a few of the expense
reductions.  Further this effort will continue into 2009 and
significant results will be achieved.





Waccamaw
is very pleased to report other meaningful issues that will be reflected in the
2009 performance.  Obvious to all, interest rates are no longer falling and
our cost of funds are improving daily as rates paid on interest bearing accounts
fall and deposits are renewed at increasingly lower rates.  Also many of
our floating rate loans have now reached their minimum rate level and our net
interest margin is now improving.  One of the most significant events
during the year was the results gained through the bank’s High Performance
Checking (HPC) initiative which began in September of 2007. High Performance
Checking has been a tremendous success since its inception with service charge
income increasing nearly 60% as the bank increased the number of checking
accounts by 22%. Waccamaw has gained a business relationship with nearly 3,500
households as a result.  This initiative has created an opportunity to
build long lasting relationships to benefit the bank for many years to
come.




During
the third quarter, Waccamaw Bank and Waccamaw Bankshares increased regulatory
capital by $8 million through a series of non-dilutive capital offerings which
provided an advantageous cost of capital to support the bank’s
growth.  Since these offerings were accomplished, the
bank’s capital base is significantly stronger without selling
additional shares of stock and diluting the earnings base of our
shareholders.  We have positioned the bank to withstand the current
economic challenges and to take advantage of the opportunities that lie ahead as
economic conditions improve.


5





Shareholder
Letter




As
mentioned earlier, the bank's seventeenth office was opened on U.S. 17
North in Little River, South Carolina during August with a robust welcome
from the community. This office experienced one of the best openings our bank
has enjoyed in many years and we are pleased with the initial response of the
Little River community. Waccamaw now operates five South Carolina
offices with four in fast growing Horry County and one in Lancaster County
southeast of Charlotte.  This new office provides a location to connect our
seven office locations in Brunswick with our South Carolina offices while making
our services more convenient for those clients in the Highway 90 and Highway 9
corridors connecting with Tabor City.





Our
company has invested heavily in our branch structure and has built a franchise
unlike any other of our community bank competitors.  The strategic value of
our expansion was not anticipated to result in increased profitability in the
short term or in anticipation of the economic situation we now find
ourselves.  These new offices are located in some of the fastest growing
areas of our nation and profits from these offices will benefit this bank for
many years to come.





We look
forward to 2009 with optimism as our new offices become stronger, the interest
rate environment stabilizes, and our nation works though the current
recession.  Our staff is well positioned, well trained, and focused on
delivering the highest quality service of any bank in our market.  Our bank
remains well capitalized and financially strong and is an active lender in the
communities we serve. It is with these facts in mind, we look forward to
presenting improved financial performance to you in the years to
come.





Sincerely,





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




6


---

Consolidated
Balance Sheets


December
31, 2008 and 2007





2008
                      
                      
                      2007AssetsCash
      and due from banks
                      
                      $
                      8,947,752
                      
                      
                      $
                      11,809,251Interest-bearing
      deposits with banks
                      
                      
                      2,684,741
                      
                      
                      
                      912,195Total
      cash and cash equivalents
                      
                      
                      11,632,493
                      
                      
                      
                      12,721,446Federal
      funds sold
                      
                      
                      4,281,000
                      
                      
                      
                      -Investment
      securities, available for sale
                      
                      
                      87,402,799
                      
                      
                      
                      99,302,322Restricted
      equity securities
                      
                      
                      4,131,906
                      
                      
                      
                      3,342,006Loans,
      net of allowance for loan losses of  $7,187,981  in
      2008 and $5,385,782 in 2007
                      
                      
                      378,882,889
                      
                      
                      
                      355,138,167Property
      and equipment, net
                      
                      
                      17,597,502
                      
                      
                      
                      14,537,739Goodwill
                      
                      
                      2,727,152
                      
                      
                      
                      2,727,152Intangible
      assets, net
                      
                      
                      416,194
                      
                      
                      
                      673,374Accrued
      income
                      
                      
                      2,448,477
                      
                      
                      
                      2,939,264Bank
      owned life insurance
                      
                      
                      17,834,763
                      
                      
                      
                      11,777,361Other
      assets
                      
                      
                      10,095,259
                      
                      
                      
                      5,209,088Total
      assets
                      
                      $
                      537,450,434
                      
                      
                      $
                      508,367,919Liabilities
      and Stockholders' EquityLiabilitiesNoninterest-bearing
      deposits
                      
                      $
                      36,159,809
                      
                      
                      $
                      32,371,173Interest-bearing
      deposits
                      
                      
                      382,420,080
                      
                      
                      
                      345,808,162Total
      deposits
                      
                      
                      418,579,889
                      
                      
                      
                      378,179,335Securities
      sold under agreements to repurchase
                      
                      
                      23,830,000
                      
                      
                      
                      29,222,000Federal
      funds purchased
                      
                      
                      -
                      
                      
                      
                      15,429,300Other
      short-term borrowings
                      
                      
                      10,000,000
                      
                      
                      
                      13,000,000Long-term
      debt
                      
                      
                      42,500,000
                      
                      
                      
                      25,500,000Junior
      subordinated debentures
                      
                      
                      12,372,000
                      
                      
                      
                      8,248,000Accrued
      interest payable
                      
                      
                      1,328,976
                      
                      
                      
                      2,125,673Other
      liabilities
                      
                      
                      995,414
                      
                      
                      
                      1,640,470Total
      liabilities
                      
                      
                      509,606,279
                      
                      
                      
                      473,344,778Commitments
      and contingenciesStockholders’
      equityPreferred
      stock, Series A, non-cumulative, non-voting, no par value; 1,000,000
      shares authorized;28,184
      and 48,178 issued and outstanding at December 31, 2008 and 2007,
      respectively
                      
                      
                      464,476
                      
                      
                      
                      793,967Common
      stock, no par; 25,000,000 shares authorized;5,523,549
      and 5,434,770 shares issued and outstanding at December 31, 2008 and 2007,
      respectively
                      
                      
                      24,591,884
                      
                      
                      
                      23,785,199Retained
      earnings
                      
                      
                      8,907,591
                      
                      
                      
                      11,124,589Accumulated
      other comprehensive loss
                      
                      
                      (6,119,796
                      )
                      
                      
                      (680,614
                      )Total
      stockholders’ equity
                      
                      
                      27,844,155
                      
                      
                      
                      35,023,141Total
      liabilities and stockholders’ equity
                      
                      $
                      537,450,434
                      
                      
                      $
                      508,367,919




See
Notes to Consolidated Financial Statements
  7




---



Consolidated
Statements of Income


Years
ended December 31, 2008, 2007, and 2006





2008
                    
                    
                    2007
                    
                    
                    2006Interest
      incomeLoans
      and fees on loans
                    
                    $
                    24,056,784
                    
                    
                    $
                    27,492,792
                    
                    
                    $
                    22,584,611Investment
      securities, taxable
                    
                    
                    5,612,932
                    
                    
                    
                    3,231,060
                    
                    
                    
                    2,195,843Investment
      securities, nontaxable
                    
                    
                    714,011
                    
                    
                    
                    574,181
                    
                    
                    
                    330,656Federal
      funds sold
                    
                    
                    69,850
                    
                    
                    
                    289,740
                    
                    
                    
                    226,152Deposits
      with banks
                    
                    
                    31,745
                    
                    
                    
                    48,892
                    
                    
                    
                    42,205Total
      interest income
                    
                    
                    30,485,322
                    
                    
                    
                    31,636,665
                    
                    
                    
                    25,379,467Interest
      expenseDeposits
                    
                    
                    13,502,304
                    
                    
                    
                    13,669,795
                    
                    
                    
                    9,488,101Federal
      funds purchased and securities sold under agreements to
      repurchase
                    
                    
                    1,103,935
                    
                    
                    
                    468,792
                    
                    
                    
                    225,725Other
      borrowed funds
                    
                    
                    2,328,430
                    
                    
                    
                    2,157,460
                    
                    
                    
                    1,512,314Total
      interest expense
                    
                    
                    16,934,669
                    
                    
                    
                    16,296,047
                    
                    
                    
                    11,226,140Net
      interest income
                    
                    
                    13,550,653
                    
                    
                    
                    15,340,618
                    
                    
                    
                    14,153,327Provision
      for loan losses
                    
                    
                    2,990,096
                    
                    
                    
                    385,864
                    
                    
                    
                    1,450,000Net
      interest income after provision for loan losses
                    
                    
                    10,560,557
                    
                    
                    
                    14,954,754
                    
                    
                    
                    12,703,327Noninterest
      incomeService
      charges on deposit accounts
                    
                    
                    2,115,172
                    
                    
                    
                    1,325,296
                    
                    
                    
                    1,100,378ATM
      and check cashing fees
                    
                    
                    755,029
                    
                    
                    
                    537,750
                    
                    
                    
                    438,538Mortgage
      origination income
                    
                    
                    352,929
                    
                    
                    
                    467,089
                    
                    
                    
                    373,726Income
      from financial services
                    
                    
                    264,201
                    
                    
                    
                    304,383
                    
                    
                    
                    289,958Earnings
      on bank owned life insurance
                    
                    
                    547,952
                    
                    
                    
                    390,160
                    
                    
                    
                    239,998Net
      realized (losses) gains on sale or maturity of investment
      securities
                    
                    
                    98,207
                    
                    
                    
                    246,128
                    
                    
                    
                    (890
                    )Impairment
      on investment securities available for sale
                    
                    
                    (3,348,460
                    )
                    
                    
                    -
                    
                    
                    
                    -Net
      realized gains on sale of interestin mortgage banking
      investee
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    44,094Other
      operating income
                    
                    
                    181,442
                    
                    
                    
                    172,344
                    
                    
                    
                    95,368Total
      noninterest income
                    
                    
                    966,472
                    
                    
                    
                    3,443,150
                    
                    
                    
                    2,581,170Noninterest
      expenseSalaries
      and employee benefits
                    
                    
                    8,196,516
                    
                    
                    
                    6,856,453
                    
                    
                    
                    5,274,052Occupancy
      and equipment
                    
                    
                    2,012,137
                    
                    
                    
                    1,513,300
                    
                    
                    
                    1,105,461Data
      processing
                    
                    
                    1,306,998
                    
                    
                    
                    1,000,694
                    
                    
                    
                    809,187Advertising
                    
                    
                    705,462
                    
                    
                    
                    593,279
                    
                    
                    
                    308,423Regulatory
      agency expense
                    
                    
                    389,327
                    
                    
                    
                    264,869
                    
                    
                    
                    62,877Professional
      services
                    
                    
                    489,537
                    
                    
                    
                    315,358
                    
                    
                    
                    292,866Other
      expense
                    
                    
                    2,297,312
                    
                    
                    
                    1,896,262
                    
                    
                    
                    1,569,229Total
      noninterest expense
                    
                    
                    15,397,289
                    
                    
                    
                    12,440,215
                    
                    
                    
                    9,422,095Income
      (loss) before income taxes
                    
                    
                    (3,870,260
                    )
                    
                    
                    5,957,689
                    
                    
                    
                    5,862,402Income
      tax expense (benefit)
                    
                    
                    (1,827,230
                    )
                    
                    
                    2,048,741
                    
                    
                    
                    2,210,386Net
      income (loss)
                    
                    $
                    (2,043,030
                    )
                    
                    $
                    3,908,948
                    
                    
                    $
                    3,652,016Basic
      income (loss) per share
                    
                    $
                    (.37
                    )
                    
                    $
                    .73
                    
                    
                    $
                    .71Diluted
      income (loss) per share
                    
                    $
                    (.37
                    )
                    
                    $
                    .72
                    
                    
                    $
                    .69Weighted
      average common shares outstanding
                    
                    
                    5,490,982
                    
                    
                    
                    5,365,617
                    
                    
                    
                    5,127,107Weighted
      average dilutive common shares outstanding
                    
                    
                    5,490,982
                    
                    
                    
                    5,463,633
                    
                    
                    
                    5,319,464




See
Notes to Consolidated Financial Statements


8


---

Consolidated
Statements of Changes in Stockholders' Equity


Years
ended December 31, 2008, 2007 and 2006





AccumulatedOtherPreferred
                  
                  
                  Common
                  
                  
                  Retained
                  
                  
                  ComprehensiveStock
                  
                  
                  Stock
                  
                  
                  Earnings
                  
                  
                  Income (Loss)
                  
                  
                  TotalDecember
      31, 2005
                  
                  $
                  -
                  
                  
                  $
                  13,256,961
                  
                  
                  $
                  9,564,875
                  
                  
                  $
                  (323,192
                  )
                  
                  $
                  22,498,644Comprehensive
      incomeNet
      income
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,652,016
                  
                  
                  
                  -
                  
                  
                  
                  3,652,016Net
      change in unrealized appreciation on investment securities available for
      sale, net of income taxes of $245,728
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  477,001
                  
                  
                  
                  477,001Reclassification
      adjustment, net of income taxes of $303
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  587
                  
                  
                  
                  587Total
      comprehensive income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  4,129,604Issuance
      of common stock
                  
                  
                  -
                  
                  
                  
                  3,582,019
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,582,019Issuance
      of preferred stock
                  
                  
                  1,006,264
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,006,264Stock
      based compensation
                  
                  
                  -
                  
                  
                  
                  88,063
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  88,063Exercise
      of stock options
                  
                  
                  -
                  
                  
                  
                  255,654
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  255,654Excess
      tax benefits from stock-based compensation
                  
                  
                  -
                  
                  
                  
                  201,151
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  201,151Stock
      issuance costs
                  
                  
                  (13,152
                  )
                  
                  
                  (45,617
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (58,769
                  )December
      31, 2006
                  
                  
                  993,112
                  
                  
                  
                  17,338,231
                  
                  
                  
                  13,216,891
                  
                  
                  
                  154,396
                  
                  
                  
                  31,702,630Comprehensive
      incomeNet
      income
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,908,948
                  
                  
                  
                  -
                  
                  
                  
                  3,908,948Net
      change in unrealized appreciation on investment securities available for
      sale, net of income taxes of  ($346,473)
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (672,565
                  )
                  
                  
                  (672,565
                  )Reclassification
      adjustment,net of income taxes of
      ($83,683)
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (162,445
                  )
                  
                  
                  (162,445
                  )Total
      comprehensive income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3,073,938Effect
      of 10% common stock dividend
                  
                  
                  -
                  
                  
                  
                  5,921,341
                  
                  
                  
                  (5,921,341
                  )
                  
                  
                  -
                  
                  
                  
                  -Effect
      of 10% preferred stock dividend
                  
                  
                  79,909
                  
                  
                  
                  -
                  
                  
                  
                  (79,909
                  )
                  
                  
                  -
                  
                  
                  
                  -Stock
      based compensation
                  
                  
                  -
                  
                  
                  
                  98,729
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  98,729Exercise
      of stock options
                  
                  
                  -
                  
                  
                  
                  97,979
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  97,979Excess
      tax benefits from stock-based compensation
                  
                  
                  -
                  
                  
                  
                  60,029
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  60,029Conversion
      of preferred stock to common stock
                  
                  
                  (279,054
                  )
                  
                  
                  279,054
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Redemption
      of fractional shares
                  
                  
                  -
                  
                  
                  
                  (10,164
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (10,164
                  )December
      31, 2007
                  
                  
                  793,967
                  
                  
                  
                  23,785,199
                  
                  
                  
                  11,124,589
                  
                  
                  
                  (680,614
                  )
                  
                  
                  35,023,141Adoption
      of EITF 06-4
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (173,968
                  )
                  
                  
                  -
                  
                  
                  
                  (173,968
                  )Comprehensive
      lossNet
      loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (2,043,030
                  )
                  
                  
                  -
                  
                  
                  
                  (2,043,030
                  )Net
      change in unrealized loss on investment securities available for sale, net
      of income taxes of  ($2,714,873)
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (7,438,637
                  )
                  
                  
                  (7,438,637
                  )Reclassification
      adjustment of impairment in investments securities available for sale, net
      of income taxes of $1,290,965
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,057,495
                  
                  
                  
                  2,057,495Reclassification
      adjustment of gain recognizedin
      net of income taxes of ($40,167)
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (58,040
                  )
                  
                  
                  (58,040
                  )Total
      comprehensive loss
                  
                  
                  
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (5,438,182
                  )Stock
      based compensation
                  
                  
                  -
                  
                  
                  
                  127,409
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  127,409Exercise
      of stock options
                  
                  
                  -
                  
                  
                  
                  165,774
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  165,774Excess
      tax benefits from stock-based compensation
                  
                  
                  -
                  
                  
                  
                  184,011
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  184,011Conversion
      of preferred stock to common stock
                  
                  
                  (329,491
                  )
                  
                  
                  329,491
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -December
      31, 2008
                  
                  $
                  464,476
                  
                  
                  $
                  24,591,884
                  
                  
                  $
                  8,907,591
                  
                  
                  $
                  (6,119,796
                  )
                  
                  $
                  27,844,155




See
Notes to Consolidated Financial Statements


9


---

Consolidated
Statements of Cash Flows


Years
ended December 31, 2008, 2007 and 2006





2008
                
                
                2007
                
                
                2006Cash
      flows from operating activitiesNet
      income (loss)
                
                $
                (2,043,030
                )
                
                $
                3,908,948
                
                
                $
                3,652,016Adjustments
      to reconcile net income (loss) to net cash provided by
      operations:Depreciation
      and amortization
                
                
                1,011,671
                
                
                
                800,845
                
                
                
                630,247Stock-based
      compensation
                
                
                127,409
                
                
                
                98,729
                
                
                
                88,063Provision
      for loan losses
                
                
                2,990,096
                
                
                
                385,864
                
                
                
                1,450,000Amortization
      of unearned (discounts) premiums on investments, net
                
                
                (19,032
                )
                
                
                31,555
                
                
                
                72,027(Gain)
      loss on sale of investment securities
                
                
                (98,207
                )
                
                
                (246,128
                )
                
                
                890Gain
      on sale of investment in mortgage banking investee
                
                
                -
                
                
                
                -
                
                
                
                (44,094
                )Impairment
      of investment securities
                
                
                3,348,460
                
                
                
                -
                
                
                
                -Income
      from bank owned life insurance
                
                
                (547,952
                )
                
                
                (358,231
                )
                
                
                (210,201
                )Deferred
      taxes
                
                
                (1,881,102
                )
                
                
                (215,944
                )
                
                
                (307,088
                )Changes
      in assets and liabilities:Accrued
      income
                
                
                490,787
                
                
                
                (312,244
                )
                
                
                (984,604
                )Other
      assets
                
                
                559,531
                
                
                
                (1,195,987
                )
                
                
                (581,964
                )Accrued
      interest payable
                
                
                (796,697
                )
                
                
                713,373
                
                
                
                331,924Other
      liabilities
                
                
                (819,024
                )
                
                
                (316,126
                )
                
                
                1,278,502Net
      cash provided by operating activities
                
                
                2,322,910
                
                
                
                3,294,654
                
                
                
                5,375,718Cash
      flows from investing activitiesNet
      (increase) decrease in federal funds sold
                
                
                (4,281,000
                )
                
                
                2,598,000
                
                
                
                5,683,000Purchases
      of investment securities
                
                
                (38,148,849
                )
                
                
                (73,818,059
                )
                
                
                (15,946,980
                )Maturities
      of investment securities
                
                
                2,927,227
                
                
                
                6,061,233
                
                
                
                5,877,244Net
      increase in loans
                
                
                (27,373,415
                )
                
                
                (43,270,841
                )
                
                
                (51,516,853
                )Proceeds
      from sales of investment securities
                
                
                34,858,839
                
                
                
                17,048,272
                
                
                
                1,155,000Investment
      in bank owned life insurance
                
                
                (5,509,450
                )
                
                
                (6,000,000
                )
                
                
                -Purchases
      of property and equipment
                
                
                (3,814,254
                )
                
                
                (8,382,268
                )
                
                
                (3,359,954
                )Proceeds
      from sale of other real estate
                
                
                -
                
                
                
                -
                
                
                
                82,475Acquisition
      of The Bank of Heath Springs
                
                
                -
                
                
                
                -
                
                
                
                (1,627,132
                )Net
      cash used in investing activities
                
                
                (41,340,902
                )
                
                
                (105,763,663
                )
                
                
                (59,653,200
                )Cash
      flows from financing activitiesNet
      increase (decrease) in noninterest-bearing deposits
                
                
                3,788,636
                
                
                
                (16,792,124
                )
                
                
                19,792,936Net
      increase in interest-bearing deposits
                
                
                36,611,918
                
                
                
                67,619,692
                
                
                
                22,135,837Net
      increase (decrease) in securities sold under agreements to
      repurchase
                
                
                (5,392,000
                )
                
                
                23,812,000
                
                
                
                2,674,000Net
      increase (decrease) in federal funds purchased
                
                
                (15,429,300
                )
                
                
                15,429,300
                
                
                
                -Net
      increase in junior subordinated debentures
                
                
                4,000,000
                
                
                
                -
                
                
                
                -Net
      increase (decrease) in short-term borrowings
                
                
                (7,000,000
                )
                
                
                13,000,000
                
                
                
                (10,000,000
                )Net
      proceeds from long-term debt
                
                
                21,000,000
                
                
                
                2,000,000
                
                
                
                17,000,000Proceeds
      from issuance of common stock
                
                
                165,774
                
                
                
                97,979
                
                
                
                3,837,673Proceeds
      from issuance of preferred stock
                
                
                -
                
                
                
                -
                
                
                
                1,006,264Benefit
      of non-qualified stock option exercise
                
                
                184,011
                
                
                
                60,029
                
                
                
                201,151Stock
      issuance costs and redemption of fractional shares
                
                
                -
                
                
                
                (10,164
                )
                
                
                (58,769
                )Net
      cash provided by financing activities
                
                
                37,929,039
                
                
                
                105,216,712
                
                
                
                56,589,092Increase
      (decrease) in cash and cash equivalents
                
                
                (1,088,953
                )
                
                
                2,747,703
                
                
                
                2,311,610Cash
      and cash equivalents, beginning
                
                
                12,721,446
                
                
                
                9,973,743
                
                
                
                7,662,133Cash
      and cash equivalents, ending
                
                $
                11,632,493
                
                
                $
                12,721,446
                
                
                $
                9,973,743Supplemental
      disclosure of cash flow informationInterest
      paid
                
                $
                17,731,365
                
                
                $
                15,582,674
                
                
                $
                10,879,836Taxes
      paid
                
                $
                133,750
                
                
                $
                2,099,800
                
                
                $
                2,505,414Supplemental
      disclosure of noncash activitiesReal
      estate acquired in settlement of loans
                
                $
                638,597
                
                
                $
                301,824
                
                
                $
                68,146Issuance
      of stock in exchange for exercised stock options and stock already
      outstanding
                
                $
                -
                
                
                $
                271,101
                
                
                $
                -10%
      common stock dividend
                
                $
                -
                
                
                $
                5,921,341
                
                
                $
                -10%
      preferred stock dividend
                
                $
                -
                
                
                $
                79,909
                
                
                $
                -




See
Notes to Consolidated Financial Statements




10





Consolidated
Statements of Cash Flow, continued


For
the years ended December 31, 2008, 2007 and 2006





Schedule
of noncash investing transactions related to acquisition





2008
                          
                          
                          2007
                          
                          
                          2006Acquisition
      of The Bank of Heath SpringsAssets
      acquiredInvestment
      securities
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          8,206,775Loans,
      net of allowance forloan losses $45,942
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          4,516,371Property
      and equipment, net
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          302,351Other
      assets
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          37,939Goodwill
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          2,665,602Core
      deposit intangible
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          300,000-
                          
                          
                          
                          -
                          
                          
                          
                          16,029,038Liabilities
      assumedDeposits
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          14,387,526Other
      liabilities
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          14,380-
                          
                          
                          
                          -
                          
                          
                          
                          14,401,906Net
      noncash assets acquired
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          1,627,132Payment
      for net assets acquiredCash
      paid at closing
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          8,000,000Less
      cash acquired at closing
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          6,372,868Net
      cash paid
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          1,627,132Notes
      issued to stockholders of acquired corporation
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Stock
      issued to stockholders of acquired corporation
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -$
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          1,627,132


See
Notes to Consolidated Financial Statements
  11







Notes
to Consolidated Financial Statements


For
the years ended December 31, 2008, 2007 and 2006








Note
1.  Organization and Summary of Significant Accounting
Policies





Organization





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





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





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





Critical
Accounting Policies





We
believe our policies with respect to the methodology for our determination of
the allowance for loan losses, 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 disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting
period.  Actual results could differ from those
estimates.





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


12









Notes
to Consolidated Financial Statements


For
the years ended December 31, 2008, 2007 and 2006





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





Use
of Estimates, continued





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





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





Cash
and Cash Equivalents





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





Interest-Bearing
Deposits with Banks





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





Trading
Securities





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





Investment
Securities





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





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





Loans





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


13




Notes
to Consolidated Financial Statements
 For
the years ended December 31, 2008, 2007 and 2006





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





Loans,
continued





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





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





Allowance
for Loan Losses





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





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





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





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





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


14




Notes
to Consolidated Financial Statements
 For
the years ended December 31, 2008, 2007 and 2006





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





Property
and Equipment





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




YearsLeasehold
      improvements
                      
                      
                      5-30Automobile
                      
                      
                      5Furniture
      and equipment
                      
                      
                      3-10Buildings
                      
                      
                      10-40





Goodwill





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





Fair
value of the reporting unit in 2008 was determined using a discounted cash flow
model with estimated cash flows based on internal forecasts of net income. Our
goodwill impairment testing for 2008, which was updated at December 31,
2008 as a result of the recent decline in our common stock price and net
earnings, indicated that our goodwill was not impaired. As a result of the
recent decline in our stock price and operating results, the excess of the fair
value over carrying value narrowed in our assessment. If our stock price
continues to decline, and if the Company does not produce anticipated cash
flows, our goodwill may be impaired in the future.





Intangible
Assets





Intangible
assets consist primarily of purchased core deposit intangible assets and are
accounted for in accordance with Statement of Financial Accounting Standard
(“SFAS”) No. 142, Goodwill and
Other Intangible Assets.  The Company evaluates the remaining
useful life of each intangible asset that is being amortized to determine
whether events and circumstances warrant a revision to the remaining period of
amortization.  Intangible assets are currently being amortized over
estimated useful lives of 10 years.





Foreclosed
Assets





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





Transfers
of Financial Assets





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


15




Notes
to Consolidated Financial Statements
 For
the years ended December 31, 2008, 2007 and 2006


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





Stock
Compensation Plans





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





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





Advertising
Expense





The
Company expenses advertising costs as they are incurred.  Advertising
expense for the years ended December 31, 2008, 2007,
and 2006was approximately $705,000,
$593,000 and $308,000, respectively.





Income
Taxes





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





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





In 2006,
the FASB issued Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income
Taxes – an Interpretation of SFAS No. 109. FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprise’s
financial statements in accordance with SFAS No. 109, “Accounting for Income
Taxes.” FIN 48 also prescribes a recognition threshold and measurement of a tax
position taken or expected to be taken in an enterprise’s tax return. FIN 48 is
effective for fiscal years beginning after December 15, 2006. Accordingly, the
Company adopted FIN 48 effective January 1, 2007. The adoption of FIN 48 did not
have any impact on the Company’s consolidated financial
position.


16




Notes
to Consolidated Financial Statements
 For
the years ended December 31, 2008, 2007 and 2006





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





Comprehensive
Income





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





Basic
Earnings per Share





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





Diluted
Earnings per Share




The
computation of diluted earnings per share is similar to the computation of basic
earnings per share except that the denominator is increased to include the
number of additional common shares that would have been outstanding if dilutive
potential common shares had been issued. The numerator is adjusted for any
changes in income or loss that would result from the assumed conversion of those
potential common stock equivalents. Potential common stock equivalents include
the Company’s Series A convertible preferred stock and related outstanding
warrants and shares associated with stock-based compensation. Due to the net
loss in 2008, dilutive common stock equivalents have been excluded from the
computation of dilutive earnings per share as the result would be
anti-dilutive.





Financial
Instruments





Derivatives
that are used as part of the asset/liability management process are linked to
specific assets or liabilities and have high correlation between the contract
and the underlying item being hedged, both at inception and throughout the hedge
period.  In addition, forwards and option contracts must reduce the
risk attributed to a particular exposure, and for hedges of anticipatory
transactions, the significant terms and characteristics of the transaction must
be identified and the transactions must be probable of occurring.  All
derivative financial instruments held or issued by the Company are held or
issued for purposes other than trading. In December 2007, the Bank entered into
to structured repo obligation with Barclays Capital, Inc. in the amount of $20
million. Within the structured repo are embedded derivatives which will not have
a material effect on the results of operations.





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





Reclassification





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





Recent
Accounting Pronouncements





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


17




Notes
to Consolidated Financial Statements
 For
the years ended December 31, 2008, 2007 and 2006





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





Recent
Accounting Pronouncements, continued





In
March 2008, the FASB issued Statement of Financial Accounting Standards
No. 161, Disclosures
about Derivative Instruments and Hedging Activities (“SFAS 161”). SFAS
161 changes the disclosure requirements for derivative instruments and hedging
activities. Entities are required to provide disclosures about (a) how and
why an entity uses derivative instruments, (b) how derivative instruments
and related hedged items are accounted for under FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities, and its related interpretations, and
(c) how derivative instruments and related hedged items affect an entity’s
financial position, financial performance, and cash flows.  SFAS 161
is effective for fiscal years and interim periods beginning after
November 15, 2008 and requires comparative disclosures only for periods
subsequent to initial adoption. The adoption of the provisions of SFAS 161 is
not anticipated to materially impact the Company’s consolidated balance sheets
and results of operations.





In
June 2008, the FASB issued FASB Staff Position No. EITF 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions are Participating Securities,
(“FSP EITF 03-6-1”). FSP EITF 03-6-1 provides that unvested share-based payment
awards that contain nonforfeitable rights to dividends or dividend equivalents
are participating securities and must be included in the earnings per share
computation. FSP EITF 03-6-1 is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim periods within
those years. All prior-period earnings per share data presented must be adjusted
retrospectively. Early application is not permitted. The adoption of FSP EITF
03-6-1 is not expected to have an effect on the Company’s financial
statements.





In
October 2008, the FASB issued FASB Staff Position (“FSP”) Statement of Financial
Accounting Standards (“SFAS”) No. 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset is Not Active (“FSP SFAS
No. 157-3”). The new FSP clarifies the application of SFAS No. 157, Fair Value Measurements, in a
market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the
market for that financial asset is not active. This FSP was effective upon
issuance, including prior periods for which financial statements had not been
issued. The adoption of FSP SFAS No. 157-3 did not have a material impact on the
Company’s consolidated financial condition or results of
operations.




In
September 2006, the FASB ratified the consensuses reached by the FASB’s Emerging
Issues Task Force (“EITF”) relating to EITF 06-4, Accounting for the Deferred
Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life
Insurance Arrangements. EITF 06-4 states that an employer accounting for
endorsement split-dollar life insurance arrangements that provide a benefit to
an employee that extends to postretirement periods should recognize a liability
for future benefits in accordance with SFAS No. 106, Employers’ Accounting for
Postretirement Benefits Other Than Pensions, or Accounting Principles
Board (“APB”) Opinion No. 12, Omnibus Opinion—1967. The
Company adopted EITF 06-4 on January 1, 2008, and in connection therewith
recorded a liability of $173,968 as a reduction of retained
earnings.  Subsequent increases in this liability will be reflected as
an expense in determining operating results.




In
December 2007, FASB issued Statement of Financial Accounting Standard("SFAS") No. 141(R), Business Combinations,
("SFAS 141(R)") which replaces SFAS 141. SFAS 141(R) establishes
principles and requirements for how an acquirer in a business combination
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any controlling interest; recognizes and
measures goodwill acquired in the business combination or a gain from a bargain
purchase; and determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination. SFAS 141(R) is effective for acquisitions by the
Company taking place on or
after January 1, 2009. Early adoption is prohibited. Accordingly, a
calendar year-end company is required to record and disclose business
combinations following existing accounting guidance until January 1, 2009.
The Company will assess the impact of SFAS 141(R) if and when a future
acquisition occurs.




18




Notes
to Consolidated Financial Statements
 For
the years ended December 31, 2008, 2007 and 2006





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





Recent
Accounting Pronouncements, continued





FSP
EITF 99-20-1, Amendments
to the Impairment Guidance of EITF Issue No. 99-20, ("FSP
EITF 99-20-1") was issued in January 2009. Prior to the Staff Position,
other-than-temporary impairment (OTTI) was determined by using either EITF Issue
No. 99-20, Recognition of
Interest Income and Impairment on Purchased Beneficial Interests and Beneficial
Interests that Continue to be Held by a Transferor in Securitized Financial
Assets, ("EITF 99-20") or SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities, ("SFAS 115") depending on the type of
security. EITF 99-20 required the use of market participant assumptions
regarding future cash flows regarding the probability of collecting all cash
flows previously projected. SFAS 115 determined impairment to be other than
temporary if it was probable that the holder would be unable to collect all
amounts due according to the contractual terms. To achieve a more consistent
determination of OTTI, the Staff Position amends EITF 99-20 to determine
any OTTI based on the guidance in SFAS 115, allowing management to use more
judgment in determining any OTTI. The Staff Position is effective for interim
and annual reporting periods ending after December 15, 2008 and shall be
applied prospectively. Retroactive application is not permitted. Management has
reviewed the Company's security portfolio and evaluated the portfolio for any
OTTI as discussed in Note 4.





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





Note
2.  Business Combinations





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





The
acquisition was accounted for as a purchase transaction and accordingly the
results of operations attributable to the acquired company 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 acquisition is summarized as
follows:





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


19










Notes
to Consolidated Financial Statements


For
the years ended December 31, 2008, 2007 and 2006





Note
3.  Restrictions on Cash





To comply
with banking regulation, the Bank is required to maintain certain average cash
reserve balances. The daily average cash reserve requirement was approximately
$3,127,000 and $2,343,000 for the period including December 31, 2008 and 2007,
respectively.





Note
4.  Investment Securities





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





Amortized
                    
                    
                    Unrealized
                    
                    
                    Unrealized
                    
                    
                    FairCost
                    
                    
                    Gains
                    
                    
                    Losses
                    
                    
                    Value2008Government
      sponsored enterprises(FHLB,
      FHLMC, FNMA and FFCB)
                    
                    $
                    10,500,000
                    
                    
                    $
                    106,465
                    
                    
                    $
                    -
                    
                    
                    $
                    10,606,465Mortgage
      backed securities
                    
                    
                    40,090,699
                    
                    
                    
                    824,260
                    
                    
                    
                    4,582
                    
                    
                    
                    40,910,377Corporate
      securities
                    
                    
                    7,318,842
                    
                    
                    
                    19,675
                    
                    
                    
                    1,989,834
                    
                    
                    
                    5,348,683Equity
      securities
                    
                    
                    52,800
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    52,800Single
      issue trust preferred securities
                    
                    
                    21,565,751
                    
                    
                    
                    165,199
                    
                    
                    
                    6,157,683
                    
                    
                    
                    15,573,267Pooled
      trust preferred securities
                    
                    
                    570,058
                    
                    
                    
                    -
                    
                    
                    
                    430,384
                    
                    
                    
                    139,674Municipal
      securities
                    
                    
                    16,577,067
                    
                    
                    
                    12,741
                    
                    
                    
                    1,818,275
                    
                    
                    
                    14,771,533$
                    96,675,217
                    
                    
                    $
                    1,128,340
                    
                    
                    $
                    10,400,758
                    
                    
                    $
                    87,402,799





Amortized
                          
                          
                          Unrealized
                          
                          
                          Unrealized
                          
                          
                          FairCost
                          
                          
                          Gains
                          
                          
                          Losses
                          
                          
                          Value2007Government
      sponsored enterprises(FHLB,
      FHLMC, FNMA and FFCB)
                          
                          $
                          15,448,159
                          
                          
                          $
                          172,693
                          
                          
                          $
                          -
                          
                          
                          $
                          15,620,852Mortgage
      backed securities
                          
                          
                          40,691,655
                          
                          
                          
                          110,691
                          
                          
                          
                          187,341
                          
                          
                          
                          40,615,005Corporate
      securities, single issues trustpreferred
      securities, pooled trustpreferred
      securities
                          
                          
                          27,502,810
                          
                          
                          
                          287,451
                          
                          
                          
                          735,161
                          
                          
                          
                          27,055,100Municipal
      securities
                          
                          
                          16,690,931
                          
                          
                          
                          17,081
                          
                          
                          
                          696,647
                          
                          
                          
                          16,011,365$
                          100,333,555
                          
                          
                          $
                          587,916
                          
                          
                          $
                          1,619,149
                          
                          
                          $
                          99,302,322





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





Investment
securities with market values of $48,947,717 and $54,160,471 at December 31,
2008 and 2007, 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, 2008, 2007 and 2006 are as follows:





2008
                
                
                2007
                
                
                2006Realized
      gains
                
                $
                137,477
                
                
                $
                269,709
                
                
                $
                -Realized
      losses
                
                
                (39,270
                )
                
                
                (23,581
                )
                
                
                (890
                )$
                98,207
                
                
                $
                246,128
                
                
                $
                (890
                )





20










Notes
to Consolidated Financial Statements


For
the years ended December 31, 2008, 2007 and 2006





Note
4.  Investment Securities, continued





The
scheduled contractual maturities of securities (all available for sale) at
December 31, 2008 are as follows:





Amortized
                
                
                FairCost
                
                
                ValueDue
      in one year or less
                
                $
                3,213,907
                
                
                $
                3,183,493Due
      in one through five years
                
                
                2,575,000
                
                
                
                1,130,068Due
      in five through ten years
                
                
                4,502,600
                
                
                
                4,600,165Due
      after ten years
                
                
                86,383,710
                
                
                
                78,489,073$
                96,675,217
                
                
                $
                87,402,799





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, 2008 and
December 31, 2007.





December
      31, 2008
                  
                  Less Than 12 Months
                  
                  
                  12 Months or More
                  
                  
                  TotalFair
                  
                  
                  Unrealized
                  
                  
                  Fair
                  
                  
                  Unrealized
                  
                  
                  Fair
                  
                  
                  UnrealizedValue
                  
                  
                  Losses
                  
                  
                  Value
                  
                  
                  Losses
                  
                  
                  Value
                  
                  
                  LossesGovernment
      sponsored enterprises(FHLB,
      FHLMC and FFCB)
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -Mortgage
      backed securities
                  
                  
                  230,539
                  
                  
                  
                  (3,626
                  )
                  
                  
                  26,554
                  
                  
                  
                  (956
                  )
                  
                  
                  257,093
                  
                  
                  
                  (4,582
                  )Corporate
      securities
                  
                  
                  3,268,382
                  
                  
                  
                  (527,020
                  )
                  
                  
                  1,037,069
                  
                  
                  
                  (1,462,814
                  )
                  
                  
                  4,305,451
                  
                  
                  
                  (1,989,834
                  )Single
      issue trust preferred securities
                  
                  
                  12,424,063
                  
                  
                  
                  (6,056,874
                  )
                  
                  
                  904,060
                  
                  
                  
                  (100,808
                  )
                  
                  
                  13,328,123
                  
                  
                  
                  (6,157,683
                  )Pooled
      trust preferred securities
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  139,674
                  
                  
                  
                  (430,384
                  )
                  
                  
                  139,674
                  
                  
                  
                  (430,384
                  )Municipal
      securities
                  
                  
                  8,046,371
                  
                  
                  
                  (625,298
                  )
                  
                  
                  5,162,622
                  
                  
                  
                  (1,192,977
                  )
                  
                  
                  13,208,993
                  
                  
                  
                  (1,818,275
                  )Total
      temporarily impaired securities
                  
                  $
                  23,969,355
                  
                  
                  $
                  (7,212,818
                  )
                  
                  $
                  7,269,979
                  
                  
                  $
                  (3,187,939
                  )
                  
                  $
                  31,292,133
                  
                  
                  $
                  (10,400,758
                  )





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. Write-downs as of December 31, 2008 included a
single issue trust preferred security of $339,013, a pooled trust preferred
security of $1,044,675 and FNMA Preferred Stock of $1,964,772.





Unrealized
losses associated with the investment securities portfolio total $10.4 million.
Of that amount, $3.2 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. This
portfolio segment is not experiencing any credit problems at December 31,
2008 as the Company believes that all contractual cash flows will be received on
this portfolio.





21









Notes
to Consolidated Financial Statements


For
the years ended December 31, 2008, 2007 and 2006





Note
4.  Investment Securities, continued





Prices in
the two pooled trust preferred securities portfolio continue to decline due to
illiquidity and reduced demand for these securities. After cash flow testing of
these securities using default and loss assumptions derived from a third party
credit source with expertise in bank credit quality, one security failed the
model’s projected cash flow test. During 2008, the Company recognized that a
pooled trust preferred security was other-than-temporarily impaired and,
accordingly, this security has been written down to the fair value. The pooled
trust preferred securities portfolio was written down by $1,044,000 during 2008.
Additionally, there has been no primary issuance and little secondary market
trading for these types of securities. At December 31, 2008, the Company
believes that the credit quality of the remaining pooled trust preferred
security remains adequate to absorb further economic declines as they are
current as to interest and principal payments.





The
single-issue securities are trust-preferred issuances from some of the largest
banks in the nation and had a total market value of approximately
$15.7 million as of December 31, 2008, compared with their adjusted
cost basis of approximately $21.6 million. Management does not believe any
individual unrealized loss as of December 31, 2008, represents
other-than-temporary impairment. The Company has the ability to 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
5.  Loans Receivable





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





2008
                
                
                2007In
      thousandsCommercial
                
                $
                42,958
                
                
                $
                43,617Real
      estate:Construction
      and land development
                
                
                125,878
                
                
                
                121,760Residential,
      1-4 families
                
                
                83,734
                
                
                
                75,671Residential,
      5 or more families
                
                
                11,802
                
                
                
                3,670Farmland
                
                
                3,343
                
                
                
                3,806Nonfarm,
      nonresidential
                
                
                98,438
                
                
                
                93,222Agricultural
                
                
                654
                
                
                
                671Consumer
                
                
                17,217
                
                
                
                13,950Other
                
                
                2,432
                
                
                
                4,610386,456
                
                
                
                360,977Deferred
      loan fees, net of costs
                
                
                (385
                )
                
                
                (453
                )Allowance
      for loan losses
                
                
                (7,188
                )
                
                
                (5,386
                )$
                378,883
                
                
                $
                355,138





Approximately
$30,000,000 in 1-4 family residential loans, $43,000,000 in commercial real
estate loans and $23,000,000 in home equity line of credit loans were pledged as
collateral securing Federal Home Loan Bank advances included in long-term debt
at December 31, 2008.





22








Notes
to Consolidated Financial Statements


For
the years ended December 31, 2008, 2007 and 2006





Note
6.  Allowance for Loan Losses





Changes
in the allowance for loan losses are as follows:


2008
                
                
                2007
                
                
                2006Balance,
      beginning
                
                $
                5,385,782
                
                
                $
                4,885,992
                
                
                $
                3,939,002Provision
      charged to expense
                
                
                2,990,096
                
                
                
                385,864
                
                
                
                1,450,000Allowance
      acquired in purchase transaction
                
                
                -
                
                
                
                -
                
                
                
                45,942Recoveries
      of amounts charged off
                
                
                11,150
                
                
                
                401,717
                
                
                
                36,247Amounts
      charged off
                
                
                (1,199,047
                )
                
                
                (287,791
                )
                
                
                (585,199
                )Balance,
      ending
                
                $
                7,187,981
                
                
                $
                5,385,782
                
                
                $
                4,885,992





2008
                
                
                2007Impaired
      loans without a valuation allowance
                
                $
                2,384,963
                
                
                $
                2,504,192Impaired
      loans with a valuation allowance
                
                
                22,844,795
                
                
                
                -Total
      impaired loans
                
                $
                25,229,758
                
                
                $
                2,504,192Valuation
      allowance related to impaired loans
                
                $
                3,586,786
                
                
                $
                -Total
      nonaccrual loans
                
                $
                15,633,308
                
                
                $
                1,534,208Total
      loans past due ninety days or more and still accruing
    interest
                
                $
                1,451,040
                
                
                $
                2,608,432





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





2008
                
                
                2007
                
                
                2006Average
      investment in impaired loans
                
                $
                7,356,217
                
                
                $
                927,305
                
                
                $
                1,016,932Interest
      income recognized on impaired loans
                
                $
                1,109,854
                
                
                $
                206,057
                
                
                $
                236,913Interest
      income recognized on a cash basis on impaired loans
                
                $
                531,367
                
                
                $
                93,351
                
                
                $
                40,384





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





Note
7.  Property and Equipment





Components
of Property and Equipment





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





2008
                
                
                2007Land
                
                $
                3,374,095
                
                
                $
                2,384,393Buildings
                
                
                9,874,157
                
                
                
                7,021,830Construction
      in progress
                
                
                2,367,319
                
                
                
                3,205,990Leasehold
      improvements
                
                
                1,007,864
                
                
                
                908,454Automobiles
                
                
                55,818
                
                
                
                55,818Furniture
      and equipment
                
                
                3,902,459
                
                
                
                3,227,82420,581,712
                
                
                
                16,804,309Less
      accumulated depreciation
                
                
                2,984,210
                
                
                
                2,266,570$
                17,597,502
                
                
                $
                14,537,739





23




Notes
to Consolidated Financial Statements


For
the years ended December 31, 2008, 2007 and 2006





Note
7.  Property and Equipment, continued





Components
of Property and Equipment, continued Depreciation expense reported in net income
was approximately $754,000, $544,000, and $383,000 for the years ended December
31, 2008, 2007 and 2006, respectively.





Leases





The Bank
leases several banking facilities and its operations center under agreements
accounted for as operating leases.  Rent expense was approximately
$412,000, $378,000, and $260,000 in 2008, 2007, and 2006,
respectively.  Future minimum lease payments under non-cancelable
commitments are as follows.





2009
                  
                  $
                  366,0812010
                  
                  
                  258,6882011
                  
                  
                  151,3862012
                  
                  
                  132,5502013
                  
                  
                  104,100Thereafter
                  
                  
                  147,150$
                  1,159,955





Note
8.  Intangible Assets





The book
value of purchased intangible assets at December 31, 2008 and 2007 was $416,194
and $673,374, respectively.  Details are as follows:





As of December 31, 2008
                  
                  
                  As of December 31, 2007Gross
      Carrying
                  
                  
                  Accumulated
                  
                  
                  Gross
      Carrying
                  
                  
                  AccumulatedAmount
                  
                  
                  Amortization
                  
                  
                  Amount
                  
                  
                  AmortizationAmortized
      intangible assetsDeposit
      premium
                  
                  $
                  2,439,919
                  
                  
                  $
                  2,050,390
                  
                  
                  $
                  2,439,919
                  
                  
                  $
                  1,813,210Other
                  
                  
                  200,000
                  
                  
                  
                  173,335
                  
                  
                  
                  200,000
                  
                  
                  
                  153,335Total
                  
                  $
                  2,639,919
                  
                  
                  $
                  2,223,725
                  
                  
                  $
                  2,639,919
                  
                  
                  $
                  1,966,545Unamortized
      intangible assetsGoodwill
      from The Bank ofHeath
      Springs merger
                  
                  $
                  2,727,152
                  
                  
                  $
                  n/a
                  
                  
                  $
                  2,727,152
                  
                  
                  $
                  n/a





Amortization
expense is calculated on a straight-line basis over a period of ten years and
was approximately $257,000, $257,000, and $247,000 in 2008, 2007, and 2006,
respectively.  Management expects amortization expense to be
approximately $150,000 in each of the next two years.





Note
9.  Deposits





Time
deposits in denominations of $100,000 or more were $155.6 million and $142.5
million at December 31, 2008 and 2007, respectively. Interest expense on such
deposits aggregated approximately $7.0 million and $6.3 million in 2008 and
2007, respectively. Time deposits in denominations of $100,000 or more, maturing
subsequent to December 31, 2008 are as follows (amounts in
thousands):





24




Notes
to Consolidated Financial Statements


For
the years ended December 31, 2008, 2007 and 2006





Note
9.  Deposits, continued





Large
Time Deposit Maturities, (thousands)





2009
                
                $
                120,4352010
                
                
                32,8442011
                
                
                1,7542012
                
                
                4422013
                
                
                1,103Total
      time deposits of $100,000 or more
                
                $
                155,578





Note
10.  Borrowed Funds





Other
short-term borrowings





Securities
sold under agreements to repurchase and federal funds purchased generally mature
within one day to 12 months from the transaction date. Also included in other
short-term borrowings is one variable rate FHLB advance of $6,000,000 at
December 31, 2008.  There were three variable rate FHLB advances of
$5,000,000, $2,000,000 and $6,000,000 at December 31, 2007.  Also included in other
short-term borrowings were a $1,000,000 line of credit at the Prime lending rate
that will mature on July 1, 2010 and $3,000,000 of subordinated notes bearing
interest at 3-month LIBOR plus 350 basis points that will mature on July 1,
2015, both of which are funded by Nexity Bank.





The
Company’s loan agreement with Nexity Bank, for the two debt obligations noted
above, includes financial covenants requiring the Bank to maintain a minimum
weighted average return on assets of greater than 0.35% 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 2008, but obtained a waiver through
December 31, 2008.  As such, both debt obligations have been
classified in other short-term borrowings due to the covenant
violations.





Additional
information is summarized below:





2008
                
                
                2007Outstanding
      balance at December 31
                
                $
                10,000,000
                
                
                $
                28,429,300Year-end
      weighted average rate
                
                
                2.38
                %
                
                
                4.47
                %Daily
      average outstanding during the period
                
                $
                15,411,129
                
                
                $
                4,958,775Average
      rate for the year
                
                
                3.37
                %
                
                
                4.70
                %Maximum
      outstanding at any month-end during the period
                
                $
                35,015,000
                
                
                $
                32,257,300





Securities
sold under agreements to repurchase





In
December 2007, the Bank entered into to structured repo obligation with Barclays
Capital, Inc. in the amount of $20 million. Additional information is summarized
below:





2008
                
                
                2007Outstanding
      balance at December 31
                
                $
                23,380,000
                
                
                $
                29,222,000Year-end
      weighted average rate
                
                
                3.63
                %
                
                
                3.82
                %Daily
      average outstanding during the period
                
                $
                27,232,822
                
                
                $
                8,392,806Average
      rate for the year
                
                
                3.86
                %
                
                
                3.82
                %Maximum
      outstanding at any month-end during the period
                
                $
                28,095,000
                
                
                $
                25,394,000





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





25








Notes
to Consolidated Financial Statements


For
the years ended December 31, 2008, 2007 and 2006





Note
10.  Borrowed Funds, continued





Securities
sold under agreements to repurchase, continued





Securities
sold under agreements to repurchase (“repos”) include overnight and term
agreements. The overnight securities sold under agreements to repurchase are
collateralized financing transactions and are primarily executed with local Bank
customers. Overnight repos totaled $3.8 million and $9.2 million at
December 31, 2008 and 2007, respectively. We believe the decline in the
volume of overnight repos was primarily a result of our reduction of the
interest rates paid on these funds, as short-term market interest rates declined
during 2008.




Our term
repos totaled $20.0 million at both December 31, 2008 and 2007 and include
embedded derivatives. These structured repos consist of $10.0 million with a
fixed interest rate and a ten year term, $3.5 million with a fixed interest rate
and a ten year term, $3.5 million with a fixed interest rate and a ten year term
and $3.0 million with a  fixed interest rate and a two year term. The
Bank has the right to cancel the repurchase agreements totaling $13.5 million in
2009 and $3.5 million in 2010.





Unused
lines of credit





The Bank
has established credit facilities to provide additional liquidity if and as
needed.  These consist of unsecured lines of credit with correspondent
banks for $20,500,000.  In addition, the Bank has the ability to
borrow up to ten percent of total bank assets from the Federal Home Loan Bank of
Atlanta, subject to the pledging of specific bank assets as collateral. At
December 31, 2008 there were no amounts outstanding under these credit
facilities and at December 31, 2007 there was $15,429,300
outstanding.





Long-term
debt





At
December 31, 2008 and 2007, $42,500,000 and $25,500,000, respectively were
outstanding under Federal Home Loan Bank advances. Approximately $30,000,000 in
1-4 family residential loans, $43,000,000 in commercial real estate loans
$23,000,000 in home equity line of credit loans were pledged as collateral for
the FHLB advances at December 31, 2008.





Maturity Date
                    
                    Advance
                    
                    Rate02/10/10
                    
                    $
                    2,500,000
                    
                    Fixed
      at 5.85  Convertible by FHLB quarterly at 3 Mo LIBOR -
      ARC09/02/11
                    
                    
                    5,000,000
                    
                    Fixed
      at 3.76%07/12/12
                    
                    
                    9,000,000
                    
                    1
      Month LIBOR - .50%09/04/12
                    
                    
                    6,000,000
                    
                    Fixed
      at 4.00%09/03/13
                    
                    
                    6,000,000
                    
                    Fixed
      at 4.15%12/02/13
                    
                    
                    5,000,000
                    
                    3
      Month LIBOR - .50%09/29/15
                    
                    
                    4,000,000
                    
                    Fixed
      at 4.06%  Convertible by FHLB 9/29/09 at 3 Mo LIBOR -
      ARC04/22/19
                    
                    
                    5,000,000
                    
                    3
      Month LIBOR - .50% Convertible 4/22/09 at 4.75% Fixed
  Rate$
                    42,500,000





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





The
Company has issued $12.4 million of Junior Subordinated debentures to its wholly
owned capital 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 I
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 FIN 46R, 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





26





Notes
to Consolidated Financial Statements
 For
the years ended December 31, 2008, 2007 and 2006 
  Note
11.  Guaranteed Preferred Beneficial Interests in the Company’s Junior
Subordinated Debentures, continued





Interbank
Offered Rate (“LIBOR”), and the securities may be prepaid at par by the Trust at
any time after December 17, 2008.  The principal assets of the Trust
are $8.2 million of the Company’s junior subordinated debentures which mature on
December 17, 2033, and bear interest at a floating rate indexed to the 3-month
LIBOR, and which are callable by the Company after December 17,
2008.  All $248 thousand in aggregate liquidation amount of the
Trust’s common securities are held by the Company.





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





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





Note
12.  Fair Value of Financial Instruments





The
Company adopted Statements of Financial Accounting Standards No. 157 Fair Value Measurements
(“SFAS 157”), effective January 1, 2008. SFAS 157 defines fair
value, establishes a framework for measuring fair value in GAAP, and expands
disclosures about fair value measurements. The Company utilizes fair value
measurements to record fair value adjustments to certain assets and liabilities
and to determine fair value disclosures. Securities available-for-sale are
recorded at fair value on a recurring basis. From time to time, the Company may
be required to adjust at fair value other assets on a nonrecurring basis, such
as loans held for sale and other certain assets. These nonrecurring fair value
adjustments typically involve application of lower of cost or market accounting
write-downs of individual assets.





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





Investment Securities
Available-for-Sale


Investment
securities available-for-sale are recorded at fair value on a recurring basis.
Fair value measurement is based upon quoted prices, if available. If quoted
prices are not available, fair values are measured using independent pricing
models or other model-based valuation techniques such as present value of future
cash flows, adjusted for the security’s credit rating, prepayment assumptions
and other factors such as credit loss assumptions. Level 1 securities include
those traded on an active exchange, such as the New York Stock Exchange, U.S.
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




27


Notes
to Consolidated Financial Statements
 For
the years ended December 31, 2008, 2007 and 2006




Note
12.  Fair Value of Financial Instruments, continued





impaired.
Once a loan is identified as individually impaired, management measures
impairment in accordance with SFAS 114, Accounting by Creditors for
Impairment of Loans, (SFAS 114). 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, 2008, the Bank identified $25.2
million in impaired loans.  Of these impaired loans, $22.8 million
were identified to have impairment of $3.6 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.





The
following table summarizes quantitative disclosures about the fair value
measurement for each category of assets carried at fair value as of December 31,
2008.





(Dollars
      in thousands)
                        
                        
                        
                        
                        Quoted
      Prices in
                        
                        
                        Significant
      Other
                        
                        
                        SignificantActive
      Markets for
                        
                        
                        Observable
                        
                        
                        UnobservableDecember
      31,
                        
                        
                        Identical
      Assets
                        
                        
                        Inputs
                        
                        
                        InputsDescription
                        
                        2008
                        
                        
                        (Level
      1)
                        
                        
                        (Level
      2)
                        
                        
                        (Level
      3)Investment
      SecuritiesAvailable
      for Sale
                        
                        $
                        87,403
                        
                        
                        
                        -
                        
                        
                        $
                        83,464
                        
                        
                        $
                        3,939Impaired
      Loans
                        
                        $
                        19,258
                        
                        
                        
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        19,258





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





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





SFAS No. 107,
Disclosures about Fair Value
of Financial Instruments, 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, 2008 and 2007. 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.




28




Notes
to Consolidated Financial Statements
 For
the years ended December 31, 2008, 2007 and 2006




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





Note
12.  Fair Value of Financial Instruments, continued





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





INVESTMENT SECURITIES —
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 value of the restricted equity securities
approximates fair value based on the redemption provisions of the respective
issuer.





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.





SECURITIES SOLD UNDER AGREEMENTS TO
REPURCHASE, FEDERAL FUNDS PURCHASED AND OTHER SHORT-TERM
BORROWINGS — For these short-term liabilities, the carrying amount
is a reasonable estimate of fair value.





FHLB ADVANCES, LONG-TERM DEBT AND
JUNIOR SUBORDINATED DEBENTURES — 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 —As no significant credit exposure exists,
and because such fee income is not material to the Company’s financial
statements at December 31, 2008 and 2007, the fair value of these
commitments is not presented.





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





December
      31, 2008
                                
                                
                                December
      31, 2007Carrying
                                
                                
                                Fair
                                
                                
                                Carrying
                                
                                
                                FairAmount
                                
                                
                                Value
                                
                                
                                Amount
                                
                                
                                ValueFinancial
      AssetsCash
      and due from banks
                                
                                $
                                8,948
                                
                                
                                $
                                8,948
                                
                                
                                $
                                11,809
                                
                                
                                $
                                11,809Interest-bearing
      deposits with banks
                                
                                
                                2,685
                                
                                
                                
                                2,685
                                
                                
                                
                                912
                                
                                
                                
                                912Federal
      funds sold
                                
                                
                                4,281
                                
                                
                                
                                4,281
                                
                                
                                
                                -
                                
                                
                                
                                -Investment
      securities
                                
                                
                                87,403
                                
                                
                                
                                87,403
                                
                                
                                
                                99,302
                                
                                
                                
                                99,302Restricted
      equity securities
                                
                                
                                4,132
                                
                                
                                
                                4,132
                                
                                
                                
                                3,342
                                
                                
                                
                                3,342Loans,
      net of allowance for loan losses
                                
                                
                                378,883
                                
                                
                                
                                381,398
                                
                                
                                
                                355,138
                                
                                
                                
                                355,661Financial
      LiabilitiesDeposits
                                
                                
                                418,580
                                
                                
                                
                                418,815
                                
                                
                                
                                378,179
                                
                                
                                
                                378,783Securities
      sold under agreements torepurchase
      and federal funds purchased
                                
                                
                                23,830
                                
                                
                                
                                23,830
                                
                                
                                
                                44,651
                                
                                
                                
                                44,651Other
      short-term borrowings
                                
                                
                                10,000
                                
                                
                                
                                10,000
                                
                                
                                
                                13,000
                                
                                
                                
                                13,000Long-term
      debt
                                
                                
                                42,500
                                
                                
                                
                                40,375
                                
                                
                                
                                25,500
                                
                                
                                
                                24,698Junior
      subordinated debentures
                                
                                
                                12,372
                                
                                
                                
                                12,000
                                
                                
                                
                                8,248
                                
                                
                                
                                8,000




29




Notes
to Consolidated Financial Statements
 For
the years ended December 31, 2008, 2007 and 2006




Note
13.  Earnings per Share





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





2008
                            
                            
                            2007
                            
                            
                            2006Net
      income (loss)
                            
                            $
                            (2,043,030
                            )
                            
                            $
                            3,908,948
                            
                            
                            $
                            3,652,016Weighted
      average common shares outstanding
                            
                            
                            5,490,982
                            
                            
                            
                            5,365,617
                            
                            
                            
                            5,127,107Effect
      of dilutive securities, options
                            
                            
                            -
                            
                            
                            
                            33,719
                            
                            
                            
                            127,246Effect
      of dilutive securities, preferred stock
                            
                            
                            -
                            
                            
                            
                            64,297
                            
                            
                            
                            65,111Weighted
      average common shares outstanding, diluted
                            
                            
                            5,490,982
                            
                            
                            
                            5,463,633
                            
                            
                            
                            5,319,464Basic
      income (loss) per share
                            
                            $
                            (.37
                            )
                            
                            $
                            .73
                            
                            
                            $
                            .71Diluted
      income (loss) per share
                            
                            $
                            (.37
                            )
                            
                            $
                            .72
                            
                            
                            $
                            .69




At
December 31, 2008, 296,899 warrants were outstanding with a $21.82 per share
exercise price.  These warrants may be used to purchase one share of
the Company’s common stock at any time until September 30,
2009.  Exercise of these warrants, the Company’s convertible preferred
stock and 302,000 options are not assumed in computing 2008 diluted earnings per
share due to the net loss of for the year ended December 31, 2008. The Company’s
Series A convertible preferred stock and shares associated with stock-based
compensation have been excluded from the computation of dilutive EPS as the
result would be anti-dilutive.





Note
14.  Employment Agreements





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





Note
15.  Benefit Plans





Defined
Contribution Plan





The Bank
maintains a profit sharing plan pursuant to Section 401(k) of the Internal
Revenue Code.  The plan covers substantially all employees at least 21
years of age who have completed at least one month of
service.  Participants may contribute a percentage of compensation,
subject to a maximum allowed under the Code.  The bank contributes up
to 3% of an employee’s compensation who have completed at least twelve months of
service which vests over a five-year period.  The Bank’s aggregate
contribution was $110,000, $48,000 and $48,750 for the years ended December 31,
2008, 2007 and 2006, respectively.





Supplemental
Employment Retirement Plan





Supplemental
benefits have been approved by the Board of Directors for the directors and
certain executive officers of Waccamaw Bank. Certain funding is provided
informally and indirectly by life insurance policies. The cash surrender value
of the life insurance policies are recorded as a separate line item in the
accompanying balance sheets of $17,834,763 and $11,777,361 at December 31, 2008
and 2007, respectively. Income earned on these policies is reflected as a
separate line item in the Consolidated Statements of Income. The Company
recorded expenses of $240,675 and a liability of $242,444 related to these
benefits in 2008 and expenses and a liability of $71,264 in 2007.




30




Notes
to Consolidated Financial Statements
 For
the years ended December 31, 2008, 2007 and 2006




Note
15.  Benefit Plans, continued





Stock
Option Plans





The
Company’s Board of Directors has adopted the Waccamaw Bankshares, Inc. 2008
Omnibus Stock Ownership and Long Term Incentive Plan.  In
accordance with the Company’s plan, the Company may grant Incentive Stock
Options, Non-Qualified Stock Options, Restricted Stock, Stock Appreciation
Rights and/or Units and up to 705,973 shares of common stock may be issued
(adjusted for stock dividends).  Options granted under the plan expire
no more than 10 years from date of grant. Option exercise price under the plan
must be set by the Board of Directors at the date of grant and cannot be less
than 100% of fair market value of the related stock at the date of the
grant.





Under the
plan, vesting is determined by the specific option agreements.  It is
the Company’s policy to issue 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, effective January 1, 2006, the Company adopted SFAS No.
123(R) using the modified prospective application.  Under this
application, the Company is required to record compensation expense for all
rewards granted after the date of adoption and for the unvested portion of
previously granted awards that remain outstanding at the date of
adoption.  Compensation cost charged to income was approximately
$127,000, $99,000 and $88,000 for the years ended December 31, 2008, 2007 and
2006, 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:





2008
                      
                      
                      2007
                      
                      
                      2006Weighted
      average fair value of options grantedduring
      the year
                      
                      $
                      3.93
                      
                      
                      $
                      5.02
                      
                      
                      $
                      6.88Assumptions:Average
      risk free interest rate
                      
                      
                      3.80
                      %
                      
                      
                      4.76
                      %
                      
                      
                      6.25
                      %Average
      expected volatility
                      
                      
                      40.02
                      %
                      
                      
                      25.00
                      %
                      
                      
                      9.10
                      %Expected
      dividend rate
                      
                      
                      -
                      %
                      
                      
                      -
                      %
                      
                      
                      -
                      %Expected
      life in years
                      
                      
                      10
                      
                      
                      
                      10
                      
                      
                      
                      10





Cash
received from option exercises under the plans for the year ended December 31,
2008 and 2007 was $165,774 and $97,979, respectively.  The total
intrinsic value of options exercised during year ended December 31, 2008 and
2007 was $449,900 and $1,105,751, respectively. During 2007, 19,956 shares of
common stock with an average market value of approximately $13.58 per share were
exchanged to exercise 89,395 options with an average exercise price of
approximately $3.03 per option. No such exchanges were exercised during
2008.





In 2008,
the shareholders approved an equity compensation plan (the “2008 Omnibus Stock
Ownership and Long Term Incentive Plan (the “Omnibus Plan”)) providing for the
issuance of up to 705,973 options to purchase shares of the Company’s stock to
officers and directors which replaced the Company’s Employee Stock and Director
Stock Option Plans (the “Previous Plans”). 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 director 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.




31




Notes
to Consolidated Financial Statements
 For
the years ended December 31, 2008, 2007 and 2006




Note
15.  Benefit Plans, continued





Stock
Option Plans, continued





Activity
under the plan during the years ended December 31, 2008 is summarized
below:





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





A summary
of option activity under the plans as of and changes during the year ended
December 31, 2008 is presented below:




Weighted
                                  
                                  
                                  AverageAverage
                                  
                                  
                                  Remaining
                                  
                                  
                                  AggregateOptions
                                  
                                  
                                  Exercise
                                  
                                  
                                  Contractual
                                  
                                  
                                  IntrinsicOutstanding
                                  
                                  
                                  Price
                                  
                                  
                                  Term
                                  
                                  
                                  ValueOutstanding
      at December 31, 2007
                                  
                                  
                                  367,656
                                  
                                  
                                  $
                                  12.72Granted
                                  
                                  
                                  44,500
                                  
                                  
                                  $
                                  8.88Forfeited
                                  
                                  
                                  (4,752
                                  )
                                  
                                  $
                                  12.43Exercised
                                  
                                  
                                  (68,786
                                  )
                                  
                                  $
                                  2.41Expired
                                  
                                  
                                  (9,129
                                  )
                                  
                                  $
                                  2.41Outstanding
      at December 31, 2008
                                  
                                  
                                  329,489
                                  
                                  
                                  $
                                  14.64
                                  
                                  
                                  6.8
      years
                                  
                                  
                                  $
                                  3,733Exercisable
      at December 31, 2008
                                  
                                  
                                  256,251
                                  
                                  
                                  $
                                  15.57
                                  
                                  
                                  6.3
      years
                                  
                                  
                                  $
                                  3,733





The total
fair value of options that were contractually vested during 2008 and 2007 was
$97,147 and $98,729, respectively.





As of
December 31, 2008, the Company had unamortized compensation expense related to
unvested stock options of $309,848, 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:





2009
                        
                        $
                        120,4362010
                        
                        
                        78,6312011
                        
                        
                        60,7772012
                        
                        
                        39,6032013
                        
                        
                        10,401Total
                        
                        $
                        309,848




32


Notes
to Consolidated Financial Statements
 For
the years ended December 31, 2008, 2007 and 2006


Note
16.  Income Taxes
 
 Current
and Deferred Income Tax Components
 
 The
components of income tax expense are as follows:
 
 2008
                        
                        
                        2007
                        
                        
                        2006Current
                        
                        $
                        53,872
                        
                        
                        $
                        2,264,685
                        
                        
                        $
                        2,517,474Deferred
                        
                        
                        (1,881,102
                        )
                        
                        
                        (215,944
                        )
                        
                        
                        (307,088
                        )Income
      tax expense (benefit)
                        
                        $
                        (1,827,230
                        )
                        
                        $
                        2,048,741
                        
                        
                        $
                        2,210,386
 
 Rate
Reconciliation
 
 A
reconciliation of income tax expense computed at the statutory federal income
tax rate included in the statement of income follows:
  2008
                          
                          
                          2007
                          
                          
                          2006Tax
      at statutory federal rate
                          
                          $
                          (1,315,888
                          )
                          
                          $
                          2,025,614
                          
                          
                          $
                          1,993,217Tax
      exempt interest
                          
                          
                          (213,861
                          )
                          
                          
                          (205,562
                          )
                          
                          
                          (123,480
                          )Tax
      exempt income from bank owned life insurance
                          
                          
                          (186,304
                          )
                          
                          
                          (132,654
                          )
                          
                          
                          (81,599
                          )State
      income tax, net of federal benefit
                          
                          
                          (184,509
                          )
                          
                          
                          228,551
                          
                          
                          
                          276,276Other
                          
                          
                          73,332
                          
                          
                          
                          132,792
                          
                          
                          
                          145,972Income
      tax expense (benefit)
                          
                          $
                          (1,827,230
                          )
                          
                          $
                          2,048,741
                          
                          
                          $
                          2,210,386
 
 Deferred
Income Tax Analysis
 
 The
components of net deferred federal and state tax assets (included in other
assets on the balance sheet) are summarized as follows:
 
 2008
                              
                              
                              2007Deferred
      tax assetsAllowance
      for loan losses
                              
                              $
                              2,625,492
                              
                              
                              $
                              1,914,477OTTI
      on investments
                              
                              
                              1,290,965
                              
                              
                              
                              -Employment
      benefit liability
                              
                              
                              93,472
                              
                              
                              
                              32,468Deposit
      premium amortization
                              
                              
                              326,737
                              
                              
                              
                              285,977Deferred
      loan fees
                              
                              
                              148,482
                              
                              
                              
                              174,717Other
                              
                              
                              848
                              
                              
                              
                              -Unrealized
      loss on securities available for sale
                              
                              
                              3,152,622
                              
                              
                              
                              397,582Deferred
      tax assets
                              
                              
                              7,638,618
                              
                              
                              
                              2,805,221Deferred
      tax liabilitiesDepreciation
                              
                              
                              (559,247
                              )
                              
                              
                              (382,880
                              )Accretion
      of bond discount
                              
                              
                              (85,533
                              )
                              
                              
                              (64,645
                              )Deferred tax liabilities
                              
                              
                              (644,780
                              )
                              
                              
                              (447,525
                              )Net
      deferred tax asset
                              
                              $
                              6,993,838
                              
                              
                              $
                              2,357,696
 
 The
Company does not maintain a valuation allowance.  Based on historical
and budgeted earnings, management believes it is more likely than not the
Company will realize the expense of its deferred tax asset.
 
 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
in accordance with FIN 48 for year ending December 31, 2007. The Company’s
federal and state income tax returns are open and subject to examination from
the 2005 tax return year and forward.
  33


Notes
to Consolidated Financial Statements


For
the years ended December 31, 2008, 2007 and 2006





Note
17.  Commitments and Contingencies





Litigation





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





Financial
Instruments with Off-Balance-Sheet Risk





To meet
the financing needs of its customers, the Bank is party to financial instruments
with off-balance-sheet risk in the normal course of business.  These
financial instruments include commitments to extend credit and standby letters
of credit.  These instruments involve, to varying degrees, credit risk
in excess of the amount recognized in the balance sheet.





The
Bank's exposure to credit loss in the event of nonperformance by the other party
to the financial instrument for commitments to extend credit and standby letters
of credit is represented by the contractual amount of those
instruments.  The Bank uses the same credit policies in making
commitments and conditional obligations as for on-balance-sheet
instruments.  A summary of the Bank's commitments are as
follows:





2008
                
                
                2007Commitments
      to extend credit
                
                $
                41,067,000
                
                
                $
                48,600,000Stand-by
      letters of credit
                
                
                3,194,000
                
                
                
                4,509,000$
                44,261,000
                
                
                $
                53,109,000





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





Standby
letters of credit are conditional commitments issued by the Bank to guarantee
the performance of a customer to





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





Concentrations
of Credit Risk





Substantially
all of the Bank's loans and commitments to extend credit have been granted to
customers in the Bank's market area and such customers are generally depositors
of the Bank.  The concentrations of credit by type of loan are set
forth in Note 5.  The distribution of commitments to extend credit
approximates the distribution of loans outstanding. The Bank's primary focus is
toward commercial, consumer and small business transactions, and accordingly, it
does not have a significant number of credits to any single borrower or group of
related borrowers in excess of $4,000,000.





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


34


---

Notes
to Consolidated Financial Statements


For
the years ended December 31, 2008, 2007 and 2006





Note
18.  Regulatory Restrictions





Dividends





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





Capital
Requirements





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





Quantitative
measures established by regulation to ensure capital adequacy require the
Company and the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital to risk-weighted assets, and of Tier I
capital to average assets, as all those terms are defined in the
regulations.  Management believes, as of December 31, 2008 and 2007,
that the Company and the Bank met all capital adequacy requirements to which
they are subject.





As of
December 31, 2008 and 2007, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action.  To be categorized
as well capitalized, an institution must maintain minimum total risk-based, Tier
I risk-based, and Tier I leverage ratios as set forth in the following
table.  There are no conditions or events since the notification that
management believes have changed the Bank’s category.





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





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


35


---




Notes
to Consolidated Financial Statements


For
the years ended December 31, 2008, 2007 and 2006





Note
18.  Regulatory Restrictions, continued





Capital
Requirements, continued




MinimumTo Be WellMinimum
                
                
                Capitalized UnderCapital
                
                
                Prompt CorrectiveActual
                
                
                Required
                
                
                Action ProvisionsAmount
                
                
                Ratio
                
                
                Amount
                
                
                Ratio
                
                
                Amount
                
                
                RatioDecember
      31, 2007Total
      capital to risk- weighted assetsConsolidated
                
                $
                45,591
                
                
                
                10.88
                %
                
                $
                33,509
                
                
                
                8.00
                %
                
                $
                n/a
                
                
                
                n/aBank
                
                $
                44,670
                
                
                
                10.67
                %
                
                $
                33,585
                
                
                
                8.00
                %
                
                $
                41,981
                
                
                
                10.00
                %Tier
      1 capital to risk- weighted assetsConsolidated
                
                $
                40,350
                
                
                
                9.63
                %
                
                $
                16,755
                
                
                
                4.00
                %
                
                $
                n/a
                
                
                
                n/aBank
                
                $
                39,429
                
                
                
                9.42
                %
                
                $
                16,792
                
                
                
                4.00
                %
                
                $
                25,189
                
                
                
                6.00
                %Tier
      1 capital to average assetsConsolidated
                
                $
                40,350
                
                
                
                8.70
                %
                
                $
                18,547
                
                
                
                4.00
                %
                
                $
                n/a
                
                
                
                n/aBank
                
                $
                39,429
                
                
                
                8.53
                %
                
                $
                18,497
                
                
                
                4.00
                %
                
                $
                23,121
                
                
                
                5.00
                %





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 $2,900,000 at December 31,
2008.  No 23A transactions existed at December 31, 2008 or
2007.





Note
19.  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:


36


---




Notes
to Consolidated Financial Statements


For
the years ended December 31, 2008, 2007 and 2006





Note
19.  Transactions with Related Parties





Loans,
continued


2008
                
                
                2007Balance,
      beginning
                
                $
                2,634,705
                
                
                $
                750,807Change
      in relationships
                
                
                -
                
                
                
                (351,277
                )New
      loans and advances
                
                
                2,872,453
                
                
                
                2,368,863Repayments
                
                
                (824,974
                )
                
                
                (133,688
                )Balance,
      ending
                
                $
                4,682,184
                
                
                $
                2,634,705





Note
20.  Parent Company Financial Information





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





Balance
Sheets


December
31, 2008 and 2007


2008
                
                
                2007AssetsCash
      and due from banks
                
                $
                147,430
                
                
                $
                95,302Investment
      in subsidiary bank at equity
                
                
                40,065,993
                
                
                
                42,102,173Investment
      securities, available for sale
                
                
                -
                
                
                
                227,735Other
      assets
                
                
                1,101,130
                
                
                
                897,068Total
      assets
                
                $
                41,314,553
                
                
                $
                43,322,278LiabilitiesShort-term
      debt
                
                $
                1,000,000
                
                
                $
                -Junior
      Subordinated debt
                
                
                12,372,000
                
                
                
                8,248,000Other
      liabilities
                
                
                98,397
                
                
                
                51,137Total
      liabilities
                
                
                13,470,397
                
                
                
                8,299,137Stockholders'
      equityPreferred
      stock
                
                
                464,476
                
                
                
                793,967Common
      stock
                
                
                24,591,885
                
                
                
                23,785,199Retained
      earnings
                
                
                8,907,591
                
                
                
                11,124,589Accumulated
      other comprehensive loss
                
                
                (6,119,796
                )
                
                
                (680,614
                )Total
      stockholders' equity
                
                
                27,844,156
                
                
                
                35,023,141Total
      liabilities and stockholders' equity
                
                $
                41,314,553
                
                
                $
                43,322,278


37


---

Notes
to Consolidated Financial Statements


For
the years ended December 31, 2008, 2007 and 2006





Note
20.  Parent Company Financial Information, continued





Statements
of Operations


Years
ended December 31, 2008 and 2007





2008
                
                
                2007IncomeLoans
      and fees on loans
                
                $
                7,139
                
                
                $
                14,037Investment
      securities, taxable
                
                
                57,442
                
                
                
                40,208Investment
      securities, non-taxable
                
                
                4,195
                
                
                
                5,000Net
      realized gains on sale or maturity of investment
securities
                
                
                56,600
                
                
                
                131,606Total
      income
                
                
                125,376
                
                
                
                190,851ExpensesSalaries
      and employee benefits
                
                
                127,409
                
                
                
                98,729Franchise
      tax
                
                
                52,535
                
                
                
                46,096Interest
      expense
                
                
                701,520
                
                
                
                716,591Other
      expenses
                
                
                1,672
                
                
                
                2,243Total
      expenses
                
                
                883,136
                
                
                
                863,659Loss
      before tax expense and equity in undistributed income of
      subsidiary
                
                
                (757,760
                )
                
                
                (672,808
                )Federal
      income tax benefit
                
                
                215,745
                
                
                
                154,643State
      income tax expense
                
                
                (31,043
                )
                
                
                (10,127
                )Total
      income tax benefit
                
                
                184,702
                
                
                
                144,516Loss
      before equity in undistributed income of subsidiary
                
                
                (573,058
                )
                
                
                (528,292
                )Equity
      in undistributed income (loss) of subsidiary
                
                
                (1,469,972
                )
                
                
                4,437,240Net
      income (loss)
                
                $
                (2,043,030
                )
                
                $
                3,908,948


38


---

Notes
to Consolidated Financial Statements


For
the years ended December 31, 2008, 2007 and 2006





Note
20.  Parent Company Financial Information, continued





Statements
of Cash Flows


Years
ended December 31, 2008 and 2007





2008
                
                
                2007Cash
      flows from operating activitiesNet
      income (loss)
                
                $
                (2,043,030
                )
                
                $
                3,908,948Adjustments:Amortization
                
                
                25,583
                
                
                
                24,000Stock-based
      compensation
                
                
                127,409
                
                
                
                98,729Tax
      benefit of non-qualified stock option exercise
                
                
                184,011
                
                
                
                60,029Accretion
      of discount on securities, net of amortization of premiums
                
                
                -
                
                
                
                638(Gain)
      on sale of investment securities
                
                
                (56,600
                )
                
                
                (131,606
                )Decrease
      (increase) in equity in undistributed (income) loss of
      subsidiary
                
                
                1,469,972
                
                
                
                (4,437,240
                )(Increase)
      decrease in other assets
                
                
                (229,645
                )
                
                
                148,381Increase
      (decrease) in other liabilities
                
                
                71,442
                
                
                
                501Net
      cash used by operating activities
                
                
                (450,858
                )
                
                
                (327,620
                )Cash
      flows from investing activitiesSales
      of investment securities
                
                
                213,212
                
                
                
                206,372Investment
      in subsidiary
                
                
                (5,000,000
                )
                
                
                -Net
      cash provided (used) by investing activities
                
                
                (4,786,788
                )
                
                
                206,372Cash
      flows from financing activitiesProceeds
      of junior subordinated debt
                
                
                4,124,000
                
                
                
                -Proceeds
      of short-term debt
                
                
                1,000,000
                
                
                
                -Issuance
      of stock and redemption of fractional shares
                
                
                165,774
                
                
                
                87,815Net
      cash provided  by financing activities
                
                
                5,289,774
                
                
                
                87,815Increase
      (decrease) in cash and due from banks
                
                
                52,128
                
                
                
                (33,433
                )Cash
      and cash equivalents, beginning
                
                
                95,302
                
                
                
                128,735Cash
      and cash equivalents, ending
                
                $
                147,430
                
                
                $
                95,302


39


---

Notes
to Consolidated Financial Statements


For
the years ended December 31, 2008, 2007 and 2006





Note
21.  Quarterly Data (Unaudited)





Years
      Ended December 31,2008
                
                
                2007Fourth
                
                
                Third
                
                
                Second
                
                
                First
                
                
                Fourth
                
                
                Third
                
                
                Second
                
                
                FirstQuarter
                
                
                Quarter
                
                
                Quarter
                
                
                Quarter
                
                
                Quarter
                
                
                Quarter
                
                
                Quarter
                
                
                QuarterInterest
      income
                
                $
                7,180
                
                
                $
                7,473
                
                
                $
                7,695
                
                
                $
                8,137
                
                
                $
                8,166
                
                
                $
                8,122
                
                
                $
                7,907
                
                
                $
                7,442Interest
      expense
                
                
                (4,085
                )
                
                
                (3,965
                )
                
                
                (4,196
                )
                
                
                (4,688
                )
                
                
                (4,499
                )
                
                
                (4,205
                )
                
                
                (3,919
                )
                
                
                (3,674
                )Net
      interest income
                
                
                3,095
                
                
                
                3,508
                
                
                
                3,499
                
                
                
                3,449
                
                
                
                3,667
                
                
                
                3,917
                
                
                
                3,988
                
                
                
                3,768Provision
      for loan losses
                
                
                (2,356
                )
                
                
                (528
                )
                
                
                (106
                )
                
                
                -
                
                
                
                -
                
                
                
                (8
                )
                
                
                (2
                )
                
                
                (375
                )Net
      interest income, after provision for loan losses
                
                
                739
                
                
                
                2,980
                
                
                
                3,393
                
                
                
                3,449
                
                
                
                3,667
                
                
                
                3,909
                
                
                
                3,986
                
                
                
                3,393Non
      interest income
                
                
                (384
                )
                
                
                (757
                )
                
                
                1,024
                
                
                
                1,083
                
                
                
                882
                
                
                
                833
                
                
                
                721
                
                
                
                1,007Non
      interest expenses
                
                
                (3,880
                )
                
                
                (3,883
                )
                
                
                (3,771
                )
                
                
                (3,863
                )
                
                
                (3,484
                )
                
                
                (3,062
                )
                
                
                (3,083
                )
                
                
                (2,811
                )Income
      (loss) before income taxes
                
                
                (3,525
                )
                
                
                (1,660
                )
                
                
                646
                
                
                
                669
                
                
                
                1,065
                
                
                
                1,680
                
                
                
                1,624
                
                
                
                1,589Income
      tax (expense) benefit
                
                
                1,418
                
                
                
                744
                
                
                
                (176
                )
                
                
                (159
                )
                
                
                (352
                )
                
                
                (559
                )
                
                
                (543
                )
                
                
                (595
                )Net
      income (loss)
                
                $
                (2,107
                )
                
                $
                (916
                )
                
                $
                470
                
                
                $
                510
                
                
                $
                713
                
                
                $
                1,121
                
                
                $
                1,081
                
                
                $
                994Earnings
      per common share:Basic
      income (loss) per share
                
                $
                (.38
                )
                
                $
                (.17
                )
                
                $
                .09
                
                
                $
                .09
                
                
                $
                .13
                
                
                $
                .21
                
                
                $
                .20
                
                
                $
                .19Diluted
      income (loss) per share
                
                $
                (.38
                )
                
                $
                (.17
                )
                
                $
                .09
                
                
                $
                .09
                
                
                $
                .13
                
                
                $
                .20
                
                
                $
                .20
                
                
                $
                .18


40











Report
of Independent Registered Public Accounting Firm





To the
Board of Directors and Shareholders


Waccamaw
Bankshares, Inc. and Subsidiary


Whiteville,
North Carolina





We have
audited the accompanying consolidated balance sheet of Waccamaw Bankshares, Inc.
and Subsidiary (hereinafter referred to as the “Company”) as of December 31,
2008, and the related consolidated statements of income, changes in
stockholders’ equity and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Company’s internal control over financial reporting.  Our
audit included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting.  Accordingly, we
express no such opinion.  An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.  We believe that our audit provides a reasonable basis
for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Waccamaw Bankshares, Inc.
and Subsidiary as of December 31, 2008, and the results of their operations and
their cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of America.





As
discussed in Note 1 to the consolidated financial statements, effective January
1, 2008 the Company adopted Emerging Issues Task Force Issue 06-4, Accounting for Deferred Compensation
and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements.










Raleigh,
North Carolina


March 31,
2009


41











Report
of Independent Registered Public Accounting Firm





Board of
Directors and Stockholders


Waccamaw
Bankshares, Inc.


Whiteville,
North Carolina





We have
audited the consolidated balance sheets of Waccamaw Bankshares, Inc. and
subsidiary as of December 31, 2007 and 2006 and the related consolidated
statements of income, changes in stockholders’ equity and cash flows for each of
the two years in the period ended December 31, 2007.  These
consolidated financial statements are the responsibility of the Company’s
management.  Our responsibility is to express an opinion on these
financial statements based on our audits.





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





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Waccamaw Bankshares, Inc.
and subsidiary at December 31, 2007 and 2006, and the results of its operations
and its cash flows for each of the two years in the period ended December 31,
2007, in conformity with accounting principles generally accepted in the United
States of America.










Galax,
Virginia


March 27,
2008








42


Management’s
Discussion and Analysis





MANAGEMENT’S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS





The
following presents management’s discussion and analysis of the financial
condition and results of operations of the Company as of December 31, 2008 and
2007 and the years then ended.  This discussion should be read in
conjunction with the Company’s Financial Statements and the Notes
thereto.





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





Overview





Waccamaw
Bank (the Bank) began operations on September 2, 1997.  The Bank
operates by attracting deposits from the general public and using such deposit
funds to make commercial, consumer, and residential construction and permanent
mortgage real estate loans.  Revenues are derived principally from
interest on loans and investments. Changes in the volume and mix of these assets
and liabilities, as well as changes in the yields earned and rates paid,
determine changes in net interest income.  Waccamaw Bankshares, Inc.
(the Company) was formed during 2001 and acquired all the outstanding shares of
the Bank on June 30, 2001.





The
Company’s total assets were $537.5 million at December 31, 2008 as compared to
$508.4 million at December 31, 2007. Total deposits at December 31, 2008
increased 10.7% to $418.6 million.  Total deposits were $378.2 million
at December 31, 2007. The Bank used these resources primarily to fund new loans
and purchase investment securities. The Bank’s net loans increased to $378.9
million at the end of 2008, an increase of $23.7 million over the 2007 amount of
$355.1 million. Investment securities were $87.4 million and $99.3 million at
December 31, 2008 and 2007, respectively.





In the
third quarter of 2008, the Company completed construction of a branch in Little
River, SC.





Critical
Accounting Policies





The
Company’s financial statements are prepared in accordance with accounting
principles generally accepted in the United States (GAAP).  The notes
to the audited consolidated financial statements included in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2008 contain a
summary of its significant accounting policies.  Management believes
the Company’s policies with respect to the methodology for the determination of
the allowance for loan losses, investment impairment charges, goodwill
impairment and asset impairment judgments, such as the recoverability of
intangible assets, involve a higher degree of complexity and require management
to make difficult and subjective judgments that often require assumptions or
estimates about highly uncertain matters.  Accordingly, the Company
considers the policies related to those areas to be critical.





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


43


---




Management’s
Discussion and Analysis





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





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





·
            the
      expected use of the asset;


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


·
            any
      legal, regulatory, or contractual provisions that may limit the useful
      life;


·
              any
      legal, regulatory, or contractual provisions that enable renewal and
      extension of the asset’s legal or contractual life without substantial
      cost;


·
            the
      effects of obsolescence, demand, competition, and other economic factors;
      and


·
            the
      level of maintenance expenditures required to obtain the expected future
      cash flows from the asset.





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





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





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





Intangible
assets that are not subject to amortization are reviewed for impairment in
accordance with SFAS No. 144 and tested annually, or more frequently if events
or changes in circumstances indicate that the asset might be
impaired.  The impairment test consists of a comparison of the fair
value of the intangible asset with its carrying amount.  If the
carrying amount of the intangible asset exceeds its fair value, an impairment
loss is recognized in an amount equal to that excess.  After an
impairment loss is recognized, the adjusted carrying amount of the intangible
asset becomes its new accounting basis.  Subsequent reversal of a
previously recognized impairment loss is not allowed. Based on the
aforementioned testing, the Company has determined that its recorded intangible
assets are not impaired.


44





Management’s
Discussion and Analysis








Net
Interest Income and Average Balances (thousands)





Periods
      Ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006Interest
                  
                  
                  
                  
                  
                  
                  
                  
                  Interest
                  
                  
                  
                  
                  
                  
                  
                  
                  InterestAverage
                  
                  
                  Income/
                  
                  
                  Yield/
                  
                  
                  Average
                  
                  
                  Income/
                  
                  
                  Yield/
                  
                  
                  Average
                  
                  
                  Income/
                  
                  
                  Yield/Balance
                  
                  
                  Expenses
                  
                  
                  Cost
                  
                  
                  Balance
                  
                  
                  Expenses
                  
                  
                  Cost
                  
                  
                  Balances
                  
                  
                  Expenses
                  
                  
                  CostInterest-earning
      assets:Investment
      securities
                  
                  $
                  105,819
                  
                  
                  $
                  6,327
                  
                  
                  
                  5.98
                  %
                  
                  $
                  65,454
                  
                  
                  $
                  3,805
                  
                  
                  
                  5.81
                  %
                  
                  $
                  46,561
                  
                  
                  $
                  2,526
                  
                  
                  
                  5.43
                  %Federal
      funds sold
                  
                  
                  6,318
                  
                  
                  
                  70
                  
                  
                  
                  1.11
                  %
                  
                  
                  5,481
                  
                  
                  
                  290
                  
                  
                  
                  5.29
                  %
                  
                  
                  4,630
                  
                  
                  
                  226
                  
                  
                  
                  4.88
                  %Deposits
      with banks
                  
                  
                  1,999
                  
                  
                  
                  32
                  
                  
                  
                  1.60
                  %
                  
                  
                  943
                  
                  
                  
                  49
                  
                  
                  
                  5.19
                  %
                  
                  
                  897
                  
                  
                  
                  42
                  
                  
                  
                  4.68
                  %Loans, net1,2
                  
                  
                  376,747
                  
                  
                  
                  24,056
                  
                  
                  
                  6.39
                  %
                  
                  
                  332,451
                  
                  
                  
                  27,493
                  
                  
                  
                  8.27
                  %
                  
                  
                  279,625
                  
                  
                  
                  22,585
                  
                  
                  
                  8.08
                  %Total
      interest-earning assets
                  
                  
                  490,883
                  
                  
                  
                  30,485
                  
                  
                  
                  
                  
                  
                  
                  404,329
                  
                  
                  
                  31,637
                  
                  
                  
                  
                  
                  
                  
                  331,713
                  
                  
                  
                  25,379Yield
      on average interest- earning assets
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  6.21
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  7.82
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  7.65
                  %Noninterest-earning
      assets:Cash
                  
                  
                  8,181
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  8,204
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  6,687Premises
      and equipment
                  
                  
                  17,093
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  8,475
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  5,395Interest
      receivable and other
                  
                  
                  23,311
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  17,571
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  12,880Total
      noninterest-earning assets
                  
                  
                  48,585
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  34,250
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  24,962Total
      assets
                  
                  $
                  539,468
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  438,579
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  356,675Interest-bearing
      liabilities:Demand
      deposits
                  
                  $
                  29,399
                  
                  
                  
                  179
                  
                  
                  
                  .61
                  %
                  
                  $
                  26,714
                  
                  
                  
                  167
                  
                  
                  
                  .62
                  %
                  
                  $
                  27,404
                  
                  
                  
                  206
                  
                  
                  
                  .75
                  %Savings
      deposits
                  
                  
                  76,580
                  
                  
                  
                  1,843
                  
                  
                  
                  2.41
                  %
                  
                  
                  72,620
                  
                  
                  
                  2,436
                  
                  
                  
                  3.35
                  %
                  
                  
                  69,129
                  
                  
                  
                  2,093
                  
                  
                  
                  3.03
                  %Time
      deposits
                  
                  
                  275,956
                  
                  
                  
                  11,481
                  
                  
                  
                  4.16
                  %
                  
                  
                  218,997
                  
                  
                  
                  11,067
                  
                  
                  
                  5.05
                  %
                  
                  
                  168,532
                  
                  
                  
                  7,189
                  
                  
                  
                  4.27
                  %Other
      short-term borrowings
                  
                  
                  22,644
                  
                  
                  
                  764
                  
                  
                  
                  3.37
                  %
                  
                  
                  10,513
                  
                  
                  
                  469
                  
                  
                  
                  4.46
                  %
                  
                  
                  5,142
                  
                  
                  
                  226
                  
                  
                  
                  4.40
                  %Long-term
      debt
                  
                  
                  65,250
                  
                  
                  
                  2,667
                  
                  
                  
                  4.09
                  %
                  
                  
                  37,422
                  
                  
                  
                  2,157
                  
                  
                  
                  5.77
                  %
                  
                  
                  25,389
                  
                  
                  
                  1,512
                  
                  
                  
                  5.96
                  %Total
      interest-bearing liabilities
                  
                  
                  469,829
                  
                  
                  
                  16,934
                  
                  
                  
                  
                  
                  
                  
                  366,266
                  
                  
                  
                  16,296
                  
                  
                  
                  
                  
                  
                  
                  295,596
                  
                  
                  
                  11,226Cost
      of average interest- bearing liabilities
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3.60
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  4.45
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3.80
                  %Noninterest-bearing
      liabilities:Demand
      deposits
                  
                  
                  33,775
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  36,181
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  33,259Interest
      payable and other
                  
                  
                  2,404
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2,631
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,875Total
      noninterest- bearing liabilities
                  
                  
                  36,179
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  38,812
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  35,134Total
      liabilities
                  
                  
                  506,008
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  405,078
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  330,730Stockholders'
      equity
                  
                  
                  33,460
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  33,501
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  25,945Total
      liabilities and stockholders' equity
                  
                  $
                  539,468
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  438,579
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  356,675Net
      interest income
                  
                  
                  
                  
                  
                  $
                  13,551
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  15,341
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  14,153Net
      yield on interest-earning assets
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2.76
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3.79
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  4.27
                  %


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


45


Management’s
Discussion and Analysis




Net
Interest Income





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





Interest
income during 2008 was $30.5 million, a decrease of 3.6% from the 2007 total of
$31.6 million.  Interest income for 2006 was $25.4
million.  The decreases in 2008 can primarily be attributed to the
decrease of 450 basis points in the Prime lending rate, as a result of which the
majority of the Company’s loans re-priced immediately.  Average
earning assets were $490.9 million during 2008, an increase of 21.4% over
2007.  Average earning assets increased 21.9% to $404.3 million during
2007 over the 2006 balance of $331.7 million.  Yields on
interest-earning assets during 2008, 2007, and 2006 were 6.2%, 7.8%, and 7.7%,
respectively.





Interest
rates charged on loans vary with the degree of risk, maturity and amount of the
loan.  Competitive pressures, money market rates, availability of
funds, and government regulation also influence interest rates.  On
average, loans yielded 6.4%, 8.3% and 8.1% during 2008, 2007, and 2006,
respectively.  Yields on loans decreased in 2008 primarily as a result
of the declining rate environment.





Interest
expense was $16.9 million during 2008, an increase of 3.9% over
2007.  Interest expense in 2007 was $16.3 million, an increase of
45.2% over 2006. The increases in 2008 and 2007 are due to the increase in the
level of average interest bearing liabilities. The average rate paid on
interest-bearing liabilities during 2008, 2007, and 2006 was 3.6%, 4.5%, and
3.8%, respectively.





Net
interest income was $13.6 million during 2008, a decrease of 11.7% from
2007.  During 2007 net interest income increased to $15.3
million.  Net interest income was $14.2 million in 2006. The decrease
in net interest income in 2008 can primarily be attributed to the decrease of
450 basis points in the Prime lending rate, as a result of which the majority of
the Company’s loans re-priced immediately, and the higher relative cost of
funding loans, due to the fact that the Company’s deposits were not able to
re-price as quickly as the loans. The increase in 2007 is due to increased
levels of average earning assets and liabilities complemented by increased
yields and rates.  Net interest margin during 2008, 2007, and 2006 was
2.8%, 3.8%, and 4.3%, respectively.


46


Management’s
Discussion and Analysis


The
effects of changes in volumes and rates on net interest income for 2008, 2007
and 2006 are shown in the table below.





Rate/Volume
Variance Analysis (thousands)





2008 Compared to 2007
                
                
                2007 Compared to 2006Interest
                
                
                
                
                
                
                
                
                InterestIncome/
                
                
                Variance
                
                
                Income/
                
                
                VarianceExpense
                
                
                Attributable to
                
                
                Expense
                
                
                Attributable toVariance
                
                
                Rate
                
                
                Volume
                
                
                Variance
                
                
                Rate
                
                
                VolumeInterest-earning
      assets:Loans
                
                $
                (3,436
                )
                
                $
                (8,274
                )
                
                $
                4,838
                
                
                $
                4,908
                
                
                $
                551
                
                
                $
                4,357Investment
      securities
                
                
                2,522
                
                
                
                111
                
                
                
                2,411
                
                
                
                1,279
                
                
                
                192
                
                
                
                1,087Deposits
      with banks
                
                
                (17
                )
                
                
                28
                
                
                
                (45
                )
                
                
                7
                
                
                
                5
                
                
                
                2Federal
      funds sold
                
                
                (220
                )
                
                
                (273
                )
                
                
                53
                
                
                
                64
                
                
                
                20
                
                
                
                44Total
                
                
                (1,151
                )
                
                
                (8,408
                )
                
                
                7,257
                
                
                
                6,258
                
                
                
                768
                
                
                
                5,490Interest-bearing
      liabilities:Demand
      deposits
                
                
                12
                
                
                
                -
                
                
                
                12
                
                
                
                (39
                )
                
                
                (34
                )
                
                
                (5
                )Savings
      deposits
                
                
                (858
                )
                
                
                (133
                )
                
                
                (725
                )
                
                
                343
                
                
                
                234
                
                
                
                109Time
      deposits
                
                
                413
                
                
                
                (19
                )
                
                
                432
                
                
                
                3,878
                
                
                
                1,479
                
                
                
                2,399Short-term
      borrowings
                
                
                162
                
                
                
                (5
                )
                
                
                167
                
                
                
                243
                
                
                
                3
                
                
                
                240Long-term
      debt
                
                
                644
                
                
                
                (24
                )
                
                
                668
                
                
                
                645
                
                
                
                (47
                )
                
                
                692Total
                
                
                373
                
                
                
                (181
                )
                
                
                554
                
                
                
                5,070
                
                
                
                1,635
                
                
                
                3,435Net
      interest income
                
                $
                (1,524
                )
                
                $
                (8,227
                )
                
                $
                6,703
                
                
                $
                1,188
                
                
                $
                (867
                )
                
                $
                2,055





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


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





Provision
for Loan Losses





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





The
provision for loan loss expense was $2,990,096, $385,864, and $1,450,000 during
2008, 2007, and 2006 respectively. The Bank's allowance for loan losses as a
percentage of gross loans was 1.86%, 1.49% and 1.54% at the end of 2008, 2007,
and 2006, respectively.  Additional information regarding loan loss
provisions is discussed in “Nonperforming and Problem Assets.”


47





Management’s
Discussion and Analysis





Noninterest
Income





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





Noninterest
income totaled $966,000, $3.4 million, and $2.6 million for the years ended
December 31, 2008, 2007, and 2006, respectively. Noninterest income decreased in
2008 primarily due to the Company investment write-downs of a single issue trust
preferred security of $339,013, a pooled trust preferred security of $1,044,675
and FNMA Preferred Stock of $1,964,772. Service charges on deposit accounts were
49.0% of total noninterest income excluding the write-downs of investment
securities for 2008.  Service charges will most likely increase as the
number of deposit accounts increase. The Bank's fee structure is reviewed
annually to determine if adjustments to fees are warranted.





Mortgage
origination fees decreased 24.4% to $353,000 from 2008 to 2007 due to weak
housing demand in the existing market areas. The Bank purchased life insurance
for certain number of its key employees in December, 2004, March 2007, December
2007, June 2008 and December 2008 providing $548,000, $390,000 and $240,000 of
noninterest income for the years ended December 31, 2008, 2007 and 2006,
respectively.





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





Sources
of Noninterest Income (thousands)





2008
                
                
                2007
                
                
                2006Service
      charges on deposit accounts
                
                $
                2,115
                
                
                $
                1,325
                
                
                $
                1,100ATM
      and check cashing fees
                
                
                755
                
                
                
                538
                
                
                
                439Gain
      on sale of investment securities
                
                
                98
                
                
                
                246
                
                
                
                (1
                )Gain
      on sale of investment in mortgage banking investee
                
                
                -
                
                
                
                -
                
                
                
                44Mortgage
      origination
                
                
                353
                
                
                
                467
                
                
                
                374Insurance
      commission
                
                
                15
                
                
                
                14
                
                
                
                17Income
      from financial services
                
                
                264
                
                
                
                305
                
                
                
                290Earnings
      on bank owned life insurance
                
                
                548
                
                
                
                390
                
                
                
                240Impairment
      of investment securities
                
                
                (3,348
                )
                
                
                -
                
                
                
                -Other
                
                
                166
                
                
                
                158
                
                
                
                78Total
      noninterest income
                
                $
                966
                
                
                $
                3,443
                
                
                $
                2,581





Noninterest
Expense





Noninterest
expense for 2008, 2007, and 2006 was $15.4 million, $12.4 million and $9.4
million, respectively.  The majority of the increase in noninterest
expense for 2008 can be attributed to personnel and occupancy costs related to
opening a new branch in Little River, South Carolina and full year expenses for
branches opened in 2007.


48





Management’s
Discussion and Analysis








Total
personnel expenses, the largest component of noninterest expense, were $8.2
million, $6.9 million and $5.3 million during 2008, 2007 and 2006,
respectively.  Personnel expenses increased 19.5% during 2008 and
30.0% during 2007.  This was due to Bank growth and the addition of
senior management.  Management expects these costs to continue to
increase as the Company grows.





Combined
occupancy and furniture and equipment expense was $2.0 million, $1.5 million and
$1.1 million, or 13.1%, 12.2% and 11.7% of noninterest expense during 2008, 2007
and 2006, respectively.  Professional services expense, fees paid to
attorneys, independent auditors, consultants and state examiners was $490,000,
$315,000, and $293,000 in 2008, 2007 and 2006, respectively. The increase in
2008 can be mostly attributed to legal fees related to collections of various
loans.





Advertising
and public relations expense increased to $705,000 in 2008 from $593,000 in 2007
as these expenses will continue to increase with Bank growth.  Data
processing and credit card processing fees was $1.3 million, $1.0 million and
$809,000 during 2008, 2007 and 2006, respectively. These fees relate directly to
the number of accounts serviced and transactions processed.





The
overhead ratio of noninterest expense to adjusted total revenues (net interest
income plus noninterest income excluding securities transactions) was 111%, 66%
and 56% in 2008, 2007, and 2006, respectively.  Total noninterest
expense will most likely continue to increase as the Company
grows.  However, as the Company becomes more mature, growth in net
interest income should outpace growth in noninterest expense resulting in
improved overhead ratios.  The primary elements of noninterest expense
for the past three years are summarized in the following table.





Sources
of Noninterest Expense (thousands)





2008
                        
                        
                        2007
                        
                        
                        2006Salaries
      and wages
                        
                        $
                        6,838
                        
                        
                        $
                        5,862
                        
                        
                        $
                        4,440Employee
      benefits
                        
                        
                        1,359
                        
                        
                        
                        994
                        
                        
                        
                        834Total
      personnel expense
                        
                        
                        8,197
                        
                        
                        
                        6,856
                        
                        
                        
                        5,274Occupancy
      expense
                        
                        
                        1,435
                        
                        
                        
                        1,074
                        
                        
                        
                        776Furniture
      and equipment
                        
                        
                        577
                        
                        
                        
                        439
                        
                        
                        
                        329Printing
      and supplies
                        
                        
                        157
                        
                        
                        
                        164
                        
                        
                        
                        129Professional
      services
                        
                        
                        490
                        
                        
                        
                        315
                        
                        
                        
                        293Postage
      and office supplies
                        
                        
                        153
                        
                        
                        
                        116
                        
                        
                        
                        98Telephone
                        
                        
                        180
                        
                        
                        
                        139
                        
                        
                        
                        106Dues
      and subscriptions
                        
                        
                        61
                        
                        
                        
                        63
                        
                        
                        
                        39Education
      and seminars
                        
                        
                        92
                        
                        
                        
                        71
                        
                        
                        
                        47Franchise
      and local taxes
                        
                        
                        117
                        
                        
                        
                        92
                        
                        
                        
                        83Regulatory
      agency expense
                        
                        
                        389
                        
                        
                        
                        265
                        
                        
                        
                        95Director
      fees
                        
                        
                        133
                        
                        
                        
                        170
                        
                        
                        
                        156Data
      processing services
                        
                        
                        1,307
                        
                        
                        
                        1,001
                        
                        
                        
                        809Amortization
      of deposit premium
                        
                        
                        286
                        
                        
                        
                        282
                        
                        
                        
                        273Other
      operating expense
                        
                        
                        1,118
                        
                        
                        
                        800
                        
                        
                        
                        607Total
      noninterest expenses
                        
                        $
                        15,397
                        
                        
                        $
                        12,440
                        
                        
                        $
                        9,422


49





Management’s
Discussion and Analysis








Income
Taxes





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





Income
tax (benefit) and expense was $(1,827,000), $2,049,000 and $2,210,000 for 2008,
2007 and 2006, respectively.  Net deferred income tax assets of
approximately $6,994,000 and $2,358,000 at December 31, 2008 and 2007,
respectively, were included in other assets.  At December 31, 2008,
$3,153,000 of the total deferred tax asset is applicable to unrealized losses on
investment securities available for sale.





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





Earning
Assets





Average
earning assets were $490.9 million during 2008, an increase of 21.4% over
2007.  Average earning assets were $404.3 million in 2007, an increase
of 21.9% over the $331.7 million balance for 2006.  Total average
earning assets represented 91.0%, 92.2%, and 93.0% of total average assets
during the years ended December 31, 2008, 2007 and 2006,
respectively.  A summary of average assets is shown in the following
table.





Average
Asset Mix (dollars in thousands)





2008
                
                
                2007
                
                
                2006Average
                
                
                
                
                
                Average
                
                
                
                
                
                AverageBalance
                
                
                Percent
                
                
                Balance
                
                
                Percent
                
                
                Balance
                
                
                PercentEarnings
      assets:Loans,
      net
                
                $
                376,747
                
                
                
                69.84
                %
                
                $
                332,451
                
                
                
                75.80
                %
                
                $
                279,625
                
                
                
                78.40
                %Investment
      securities
                
                
                105,819
                
                
                
                19.61
                %
                
                
                65,454
                
                
                
                14.92
                %
                
                
                46,561
                
                
                
                13.05
                %Federal
      funds sold
                
                
                6,318
                
                
                
                1.17
                %
                
                
                5,481
                
                
                
                1.25
                %
                
                
                4,630
                
                
                
                1.30
                %Deposits
      with banks
                
                
                1,999
                
                
                
                .37
                %
                
                
                943
                
                
                
                .21
                %
                
                
                897
                
                
                
                .25
                %Total
      earning assets
                
                
                490,883
                
                
                
                90.99
                %
                
                
                404,329
                
                
                
                92.18
                %
                
                
                331,713
                
                
                
                93.00
                %Nonearning
      assets:Cash
      and due from banks
                
                
                8,181
                
                
                
                1.52
                %
                
                
                8,204
                
                
                
                1.88
                %
                
                
                6,687
                
                
                
                1.88
                %Premises
      and equipment
                
                
                17,093
                
                
                
                3.17
                %
                
                
                8,475
                
                
                
                1.93
                %
                
                
                5,395
                
                
                
                1.51
                %Other
      assets
                
                
                23,321
                
                
                
                4.32
                %
                
                
                17,571
                
                
                
                4.01
                %
                
                
                12,880
                
                
                
                3.61
                %Total
      nonearning assets
                
                
                48,595
                
                
                
                9.01
                %
                
                
                34,250
                
                
                
                7.82
                %
                
                
                24,962
                
                
                
                7.00
                %Total
      assets
                
                $
                539,468
                
                
                
                100.00
                %
                
                $
                438,579
                
                
                
                100.00
                %
                
                $
                356,675
                
                
                
                100.00
                %





Loans





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





A
significant portion of the loan portfolio is made up of loans secured by various
types of real estate.  Real estate loans represented 83.6%, 82.6%, and
79.7% of total loans at December 31, 2008, 2007, and 2006,
respectively.  Total loans     secured by
one-to-four family residential properties represented 21.7%, 21.0% and 20.3% of
total loans at the end of 2008, 2007 and 2006, respectively.  Loans
for commercial and business purposes were $43.0 million, $43.6 million and $48.9
million, or 11.1%, 12.1% and 15.4% of total loans outstanding at December 31,
2008, 2007 and 2006, respectively.


50





Management’s
Discussion and Analysis








The
amounts of gross loans outstanding by type at December 31, 2008 through December
31, 2004 are shown in the following table.





Loan
Portfolio Summary (thousands)





2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004Construction
      and development
                
                $
                125,878
                
                
                $
                121,760
                
                
                $
                109,036
                
                
                $
                83,575
                
                
                $
                37,529Farmland
                
                
                3,343
                
                
                
                3,806
                
                
                
                2,412
                
                
                
                2,545
                
                
                
                2,1191-4
      family residential
                
                
                83,734
                
                
                
                75,671
                
                
                
                64,475
                
                
                
                62,796
                
                
                
                58,484Multifamily
      residential
                
                
                11,802
                
                
                
                3,670
                
                
                
                3,650
                
                
                
                4,495
                
                
                
                3,600Nonfarm,
      nonresidential
                
                
                98,438
                
                
                
                93,222
                
                
                
                73,529
                
                
                
                67,199
                
                
                
                65,156Total
      real estate
                
                
                323,195
                
                
                
                298,129
                
                
                
                253,102
                
                
                
                220,610
                
                
                
                166,888Agricultural
                
                
                654
                
                
                
                671
                
                
                
                675
                
                
                
                388
                
                
                
                1,976Commercial
      and industrial
                
                
                42,958
                
                
                
                43,617
                
                
                
                48,858
                
                
                
                29,036
                
                
                
                30,928Consumer
                
                
                17,217
                
                
                
                13,950
                
                
                
                13,172
                
                
                
                10,544
                
                
                
                8,564Other
                
                
                2,432
                
                
                
                4,610
                
                
                
                1,783
                
                
                
                1,327
                
                
                
                1,471Total
                
                $
                386,456
                
                
                $
                360,977
                
                
                $
                317,590
                
                
                $
                261,905
                
                
                $
                209,827





The
maturity/re-pricing distributions of loans as of December 31, 2008 are set forth
in the following table.





Maturity
Schedule of Loans (dollars in thousands)





Commercial
                
                
                Constructionand
                
                
                and
                
                
                
                
                
                TotalIndustrial
                
                
                Development
                
                
                Others
                
                
                Amount
                
                
                PercentThree
      months or less
                
                $
                19,131
                
                
                $
                56,060
                
                
                $
                85,273
                
                
                $
                160,464
                
                
                
                41.52
                %Over
      three months to twelve months
                
                
                6,736
                
                
                
                19,737
                
                
                
                21,345
                
                
                
                47,818
                
                
                
                12.37
                %Over
      one year to five years
                
                
                14,273
                
                
                
                41,824
                
                
                
                70,003
                
                
                
                126,100
                
                
                
                32.63
                %Over
      five years
                
                
                2,818
                
                
                
                8,257
                
                
                
                40,999
                
                
                
                52,074
                
                
                
                13.48
                %Total
      loans
                
                $
                42,958
                
                
                $
                125,878
                
                
                $
                217,620
                
                
                $
                386,456
                
                
                
                100.00
                %





Investment
Securities





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





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





Management
of the investment portfolio is conservative with virtually all investments
taking the form of purchases of Government sponsored enterprises, Corporate
securities, municipal securities, and mortgage-backed securities. Management
views the investment portfolio as a source of income, and purchases securities
with that in mind.  However, adjustments are necessary in the
portfolio to provide an adequate source of liquidity which can be used to meet
funding requirements for loan demand and deposit fluctuations and to control
interest rate risk.  Therefore, management may sell certain securities
prior to their maturity.


51





Management’s
Discussion and Analysis








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





Investment
Securities (dollars in thousands)





December 31, 2008Amortized Cost DueAfter
      One
                    
                    
                    After
      FiveIn One Yr.
                    
                    
                    Through
                    
                    
                    Through
                    
                    
                    After
      Ten
                    
                    
                    
                    
                    
                    FairOr Less
                    
                    
                    Five Years
                    
                    
                    Ten Years
                    
                    
                    Years
                    
                    
                    Total
                    
                    
                    ValueInvestment
      securitiesGovernment
      sponsored enterprises (FHLB,FFCB
      and FHLMC)
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    3,500
                    
                    
                    $
                    7,000
                    
                    
                    $
                    10,500
                    
                    
                    $
                    10,606Equity
      securities
                    
                    
                    53
                    
                    
                    
                    53
                    
                    
                    
                    53Municipal
      securities
                    
                    
                    255
                    
                    
                    
                    575
                    
                    
                    
                    -
                    
                    
                    
                    15,747
                    
                    
                    
                    16,577
                    
                    
                    
                    14,772Corporate
      securities
                    
                    
                    2,959
                    
                    
                    
                    2,000
                    
                    
                    
                    -
                    
                    
                    
                    2,360
                    
                    
                    
                    7,319
                    
                    
                    
                    5,173Single
      issue trust preferred securities
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,003
                    
                    
                    
                    20,563
                    
                    
                    
                    21,565
                    
                    
                    
                    15,749Pool
      trust preferredsecurities
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    570
                    
                    
                    
                    570
                    
                    
                    
                    140Mortgage-backedsecurities
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    40,091
                    
                    
                    
                    40,091
                    
                    
                    
                    40,910Total
                    
                    $
                    3,214
                    
                    
                    $
                    2,575
                    
                    
                    $
                    4,503
                    
                    
                    $
                    86,384
                    
                    
                    $
                    96,675
                    
                    
                    $
                    87,403Weighted
      average yieldsGovernment
      sponsored enterprises (FHLB and FHLMC)
                    
                    
                    -
                    %
                    
                    
                    -
                    %
                    
                    
                    5.87
                    %
                    
                    
                    5.99
                    %
                    
                    
                    
                    
                    
                    
                    5.95
                    %Equity
      securities
                    
                    
                    -
                    %
                    
                    
                    -
                    %
                    
                    
                    -
                    %
                    
                    
                    6.57
                    %
                    
                    
                    
                    
                    
                    
                    6.57
                    %Municipal
      securities
                    
                    
                    2.72
                    %
                    
                    
                    4.00
                    %
                    
                    
                    -
                    %
                    
                    
                    4.29
                    %
                    
                    
                    
                    
                    
                    
                    4.26
                    %Corporate
      securities
                    
                    
                    10.30
                    %
                    
                    
                    2.21
                    %
                    
                    
                    -
                    %
                    
                    
                    7.67
                    %
                    
                    
                    
                    
                    
                    
                    6.65
                    %Single
      issue trust preferred securities
                    
                    
                    -
                    %
                    
                    
                    -
                    %
                    
                    
                    6.75
                    %
                    
                    
                    6.88
                    %
                    
                    
                    
                    
                    
                    
                    6.88
                    %Pooled
      trust preferred securities
                    
                    
                    -
                    %
                    
                    
                    -
                    %
                    
                    
                    -
                    %
                    
                    
                    5.51
                    %
                    
                    
                    
                    
                    
                    
                    5.51
                    %Mortgage-backed
      securities
                    
                    
                    -
                    %
                    
                    
                    -
                    %
                    
                    
                    -
                    %
                    
                    
                    5.73
                    %
                    
                    
                    
                    
                    
                    
                    5.73
                    %Consolidated
                    
                    
                    6.98
                    %
                    
                    
                    2.61
                    %
                    
                    
                    6.06
                    %
                    
                    
                    5.82
                    %
                    
                    
                    
                    
                    
                    
                    5.78
                    %





2007Book
                    
                    
                    FairValue
                    
                    
                    ValueInvestment
      securitiesGovernment
      sponsored enterprises (FHLB,FFCB
      and FHLMC
                    
                    $
                    15,448
                    
                    
                    $
                    15,621Municipal
      securities
                    
                    
                    16,691
                    
                    
                    
                    16,011Corporate
      securities, single issue trust preferred securities, pooled trust
      preferred securities
                    
                    
                    27,503
                    
                    
                    
                    27,055Mortgage-backed
      securities
                    
                    
                    40,692
                    
                    
                    
                    40,615Total
                    
                    $
                    100,334
                    
                    
                    $
                    99,302




52


Management’s
Discussion and Analysis




The
interest rate environment and the need for liquidity resulted in an annualized
average yield on the investment portfolio of 6.0%, 5.8%, and 5.4% during 2008,
2007 and 2006, respectively.  At December 31, 2008, 2007 and 2006, the
market value of the investment portfolio was $87.4 million, $99.3 million, and
$50.5 million, respectively. Amortized cost was $96.7 million, $100.3 million,
and $50.3 million.





Federal
Funds Sold





Federal
funds represent the most liquid portion of the Bank's invested funds and
generally the lowest yielding portion of earning assets. However, because of the
flat yield curve and the need to maintain liquidity, management maintained a
significant amount of Federal funds during the past three
years.  Average Federal funds sold totaled $6.3 million, $5.5 million,
and $4.6 million in 2008, 2007, and 2006, respectively.  Federal funds
sold were $4.2 million at December 31, 2008 and no Federal funds sold at
December 31, 2007.





Deposits





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





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





Average
total deposits were $415.7 million during 2008.  This is an increase
of 17.3% over 2007.  Average total deposits were $354.5 million for
the year ended December 31, 2007, an increase of 18.8% over 2006.  The
majority of those deposits were core deposits. The percentage of the Bank's
average deposits that were interest bearing in 2008 was 91.9% and 89.8% during
2007 and 88.9% during 2006.  Average demand deposits which earn no
interest were $33.8 million, $36.1 million and $33.3 million for the periods
ended December 31, 2008, 2007 and 2006, respectively.





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





Average
deposits and related average rates paid for the periods ended December 31, 2008,
2007, and 2006 are summarized in the following table.





Average
Deposit Mix (dollars in thousands)





2008
                
                
                2007
                
                
                2006Amount
                
                
                Rate
                
                
                Amount
                
                
                Rate
                
                
                Amount
                
                
                RateInterest
      bearing deposits:Demand
      accounts
                
                $
                29,399
                
                
                
                .61
                %
                
                $
                26,714
                
                
                
                .62
                %
                
                $
                27,404
                
                
                
                .75
                %Money
      market
                
                
                67,749
                
                
                
                2.57
                
                
                
                66,482
                
                
                
                3.58
                
                
                
                62,472
                
                
                
                2.37Savings
                
                
                8,831
                
                
                
                1.12
                
                
                
                6,138
                
                
                
                .89
                
                
                
                6,657
                
                
                
                .67Time
      deposit
                
                
                275,956
                
                
                
                4.16
                
                
                
                218,997
                
                
                
                5.05
                
                
                
                168,532
                
                
                
                4.27Total
      interest bearing deposits
                
                
                381,935
                
                
                
                3.54
                
                
                
                318,331
                
                
                
                4.29
                
                
                
                265,065
                
                
                
                3.58Noninterest
      bearing demand deposits
                
                
                33,775
                
                
                
                
                
                
                
                36,181
                
                
                
                
                
                
                
                33,259Total
      deposits
                
                $
                415,710
                
                
                
                
                
                
                $
                354,512
                
                
                
                
                
                
                $
                298,324




53


Management’s
Discussion and Analysis




The
following table provides maturity information relating to time deposits of
$100,000 or more at December 31, 2008.





Large
Time Deposit Maturities, (thousands)





Remaining
      maturity of three months or less
                
                $
                49,943Remaining
      maturity over three through twelve months
                
                
                70,492Remaining
      maturity over twelve months
                
                
                35,143Total
      time deposits of $100,000 or more
                
                $
                155,578





Securities
Sold Under Agreements to Repurchase





Other
borrowed funds consisting of securities sold under agreements to repurchase and
Federal funds purchased were $23.8 million, $29.2 million and $5.4 million at
December 31, 2008, 2007 and 2006, respectively. The increase from 2006 to 2007
included $20,000,000 of reverse repurchase agreements at favorable rates used to
purchase $20,000,000 of investments at a favorable spread.  Average
short-term debt was $20.5 million, $10.5 million and $5.1 million during 2008,
2007 and 2006, respectively.  The related interest expense was
$630,905, $468,792 and $225,725 during 2008, 2007 and 2006,
respectively.





Other
short-term Borrowings





There was
one variable rate FHLB advance of $6,000,000 at December 31, 2008 and were three
variable rate FHLB advances of $2,000,000, $6,000,000 and $5,000,000 at December
31, 2007. Also included in other short-term borrowings were $1,000,000 which is
funded by Nexity Bank that will mature on July 1, 2020 at the Prime lending
rate. Also included in other short-term borrowings is $3,000,000 of subordinated
notes that will mature on July 1, 2015 and bears interest at 3 month LIBOR plus
350 basis points.





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, 2008 and 2007 advances of $42.5 million and $25.5 million,
respectively were outstanding. The average amount outstanding during 2008 and
2007 was $34.9 million and $26.4 million, respectively.  Approximately
$30,000,000 in 1-4 family residential loans, $43,000,000 in commercial real
estate loans and 23,000,000 in home equity line of credit loans were pledged as
collateral for the FHLB advances at December 31, 2008. $1,000,000 is funded by
Nexity Bank that will mature on July 1, 2020 at the Prime lending rate. 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.





Maturity Date
                                
                                Advance
                                
                                Rate02/10/10
                                
                                $
                                2,500,000
                                
                                Fixed at 5.85%
                                
                                Convertible
      by FHLB quarterly at 3 Mo LIBOR - ARC09/02/11
                                
                                
                                5,000,000
                                
                                Fixed at 3.76%07/12/12
                                
                                
                                9,000,000
                                
                                1 Month LIBOR -
                                
                                .50%09/04/12
                                
                                
                                6,000,000
                                
                                Fixed at 4.00%09/03/13
                                
                                
                                6,000,000
                                
                                Fixed at 4.15%12/02/13
                                
                                
                                5,000,000
                                
                                3 Month LIBOR -
                                
                                .50%09/29/15
                                
                                
                                4,000,000
                                
                                Fixed at 4.06% -
                                
                                Convertible
      by FHLB quarterly at 3 Mo LIBOR-ARC04/22/19
                                
                                
                                5,000,000
                                
                                3
      Month LIBOR
                                
                                .50%
      Convertible 4/22/09 at 4.75% Fixed Rate$
                                42,500,000




54


Management’s
Discussion and Analysis







Capital
Adequacy





Stockholders’
equity was $27.8 million at December 31, 2008.  This was a 20.5%
decrease from the $35.0 million at the end of 2007.  Average
stockholders' equity as a percentage of average total assets was 6.2%, 7.9% and
7.3% for 2008, 2007, and 2006, respectively.





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





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





The
Company completed its first issuance of Trust Preferred securities in December
2003 in the amount of $8 million and completed its second issuance of Trust
Preferred securities in July 2008 in the amount of $4 million.  The
Trust Preferred securities are accounted for as long-term debt in the
accompanying financial statements, however, for regulatory capital purposes,
these issuances are considered Tier 1 capital.





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





Regulatory
guidelines relating to capital adequacy provide minimum risk-based ratios which
assess capital adequacy while encompassing all credit risks, including those
related to off-balance sheet activities. Capital ratios under these guidelines
are computed by weighing the relative risk of each asset category to derive
risk-adjusted assets. For the Company, risk-based capital guidelines require
minimum ratios of core (Tier 1) capital (common stockholders’ equity) to
risk-weighted assets of 4.0% and total regulatory capital (core capital plus
allowance for loan losses up to 1.25% of risk-weighted assets) to risk-weighted
assets of 8.0%. As of December 31, 2008, the Company’s Tier 1 risk-weighted
capital ratio and total capital ratio were 9.8% and 11.7%,
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, 2008, the Bank’s capital ratios were as
follows:  Tier 1 leverage ratio, 7.8%, Tier 1 risk-based capital
ratio, 9.5% and total risk-based ratio, 11.4%.  These capital ratios
were sufficient at December 31, 2008 to classify the Bank as “well capitalized”
in accordance with the FDIC’s regulatory capital rules.  The Company’s
and Bank’s actual capital amounts and ratios are presented in the following
table.





55





Management’s
Discussion and Analysis







Capital
Requirements (dollars in thousands)





Waccamaw
Bankshares, Inc.





Risk-based CapitalLeverage Capital
                
                
                Tier I Capital
                
                
                Total CapitalAmount
                
                
                Percentage(1)
                
                
                Amount
                
                
                Percentage(2)
                
                
                Amount
                
                
                Percentage(2)Actual
                
                $
                44,206
                
                
                
                8.00
                %
                
                $
                44,206
                
                
                
                9.76
                %
                
                $
                52,871
                
                
                
                11.68
                %Well
      Capitalized
                
                
                27,616
                
                
                
                5.00
                %
                
                
                27,168
                
                
                
                6.00
                %
                
                
                45,280
                
                
                
                10.00
                %





Waccamaw
Bank





Risk-based CapitalLeverage Capital
                
                
                Tier I Capital
                
                
                Total CapitalAmount
                
                
                Percentage(1)
                
                
                Amount
                
                
                Percentage(2)
                
                
                Amount
                
                
                Percentage(2)Actual
                
                $
                43,044
                
                
                
                7.81
                %
                
                $
                43,044
                
                
                
                9.53
                %
                
                $
                51,709
                
                
                
                11.44
                %Well
      Capitalized
                
                
                27,561
                
                
                
                5.00
                %
                
                
                27,102
                
                
                
                6.00
                %
                
                
                45,170
                
                
                
                10.00
                %








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


(2)
            Percentage
      of risk-weighted assets.





Nonperforming
and Problem Assets





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





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





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





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




56





Management’s
Discussion and Analysis








Allowance
for Loan Losses (dollars in thousands)





2008
                                    
                                    
                                    2007
                                    
                                    
                                    2006
                                    
                                    
                                    2005
                                    
                                    
                                    2004Balance
      at beginning of period
                                    
                                    $
                                    5,386
                                    
                                    
                                    $
                                    4,886
                                    
                                    
                                    $
                                    3,939
                                    
                                    
                                    $
                                    2,791
                                    
                                    
                                    $
                                    2,218Charge-offs:Construction
      loans
                                    
                                    
                                    (492
                                    )
                                    
                                    
                                    (86
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Commercial
      and industrial loans
                                    
                                    
                                    (231
                                    )
                                    
                                    
                                    (1
                                    )
                                    
                                    
                                    (500
                                    )
                                    
                                    
                                    (86
                                    )
                                    
                                    
                                    (63
                                    )Consumer
      and other
                                    
                                    
                                    (476
                                    )
                                    
                                    
                                    (201
                                    )
                                    
                                    
                                    (85
                                    )
                                    
                                    
                                    (184
                                    )
                                    
                                    
                                    (210
                                    )Total
      charge-offs
                                    
                                    
                                    (1,199
                                    )
                                    
                                    
                                    (288
                                    )
                                    
                                    
                                    (585
                                    )
                                    
                                    
                                    (270
                                    )
                                    
                                    
                                    (273
                                    )RecoveriesConstruction
      loans
                                    
                                    
                                    -
                                    
                                    
                                    
                                    379
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Commercial
      and industrial loans
                                    
                                    
                                    4
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    34
                                    
                                    
                                    
                                    17Consumer
      and other
                                    
                                    
                                    7
                                    
                                    
                                    
                                    23
                                    
                                    
                                    
                                    36
                                    
                                    
                                    
                                    14
                                    
                                    
                                    
                                    10Total
      recoveries
                                    
                                    
                                    11
                                    
                                    
                                    
                                    402
                                    
                                    
                                    
                                    36
                                    
                                    
                                    
                                    48
                                    
                                    
                                    
                                    27Net
      charge-offs
                                    
                                    
                                    (1,188
                                    )
                                    
                                    
                                    114
                                    
                                    
                                    
                                    (549
                                    )
                                    
                                    
                                    (222
                                    )
                                    
                                    
                                    (246
                                    )Allowance
      purchased from The Bankof
      Heath Springs
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    46
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Provision
      for loan losses
                                    
                                    
                                    2,990
                                    
                                    
                                    
                                    386
                                    
                                    
                                    
                                    1,450
                                    
                                    
                                    
                                    1,370
                                    
                                    
                                    
                                    819Balance
      at the end of the year
                                    
                                    $
                                    7,188
                                    
                                    
                                    $
                                    5,386
                                    
                                    
                                    $
                                    4,886
                                    
                                    
                                    $
                                    3,939
                                    
                                    
                                    $
                                    2,791Total
      loans outstanding at year-end
                                    
                                    $
                                    386,456
                                    
                                    
                                    $
                                    360,977
                                    
                                    
                                    $
                                    317,590
                                    
                                    
                                    $
                                    261,905
                                    
                                    
                                    $
                                    209,827Average
      net loans outstanding for the year
                                    
                                    $
                                    376,747
                                    
                                    
                                    $
                                    332,451
                                    
                                    
                                    $
                                    279,625
                                    
                                    
                                    $
                                    238,579
                                    
                                    
                                    $
                                    168,757Allowance
      for loan losses toloans
      outstanding
                                    
                                    
                                    1.86
                                    %
                                    
                                    
                                    1.49
                                    %
                                    
                                    
                                    1.54
                                    %
                                    
                                    
                                    1.50
                                    %
                                    
                                    
                                    1.33
                                    %Ratio
      of net loan charge-offs toaverage
      loans outstanding
                                    
                                    
                                    .32
                                    %
                                    
                                    
                                    (0.03
                                    )%
                                    
                                    
                                    0.20
                                    %
                                    
                                    
                                    0.09
                                    %
                                    
                                    
                                    0.15
                                    %





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)





2008
                                  
                                  
                                  2007
                                  
                                  
                                  2006
                                  
                                  
                                  2005
                                  
                                  
                                  2004Amount
                                  
                                  
                                  
                                  %(1)
                                  
                                  
                                  Amount
                                  
                                  
                                  
                                  %(1)
                                  
                                  
                                  Amount
                                  
                                  
                                  
                                  %(1)
                                  
                                  
                                  Amount
                                  
                                  
                                  
                                  %(1)
                                  
                                  
                                  Amount
                                  
                                  
                                  %(1)Construction
      and development
                                  
                                  $
                                  2,341
                                  
                                  
                                  
                                  32.57
                                  
                                  
                                  $
                                  1,936
                                  
                                  
                                  
                                  33.73
                                  
                                  
                                  $
                                  1,766
                                  
                                  
                                  
                                  34.33
                                  
                                  
                                  $
                                  1,320
                                  
                                  
                                  
                                  31.91
                                  
                                  
                                  $
                                  253
                                  
                                  
                                  
                                  17.89Farmland
                                  
                                  
                                  62
                                  
                                  
                                  
                                  0.86
                                  
                                  
                                  
                                  61
                                  
                                  
                                  
                                  1.05
                                  
                                  
                                  
                                  39
                                  
                                  
                                  
                                  .76
                                  
                                  
                                  
                                  33
                                  
                                  
                                  
                                  0.97
                                  
                                  
                                  
                                  28
                                  
                                  
                                  
                                  1.011-4
      family residential
                                  
                                  
                                  1,557
                                  
                                  
                                  
                                  21.67
                                  
                                  
                                  
                                  1,059
                                  
                                  
                                  
                                  20.96
                                  
                                  
                                  
                                  954
                                  
                                  
                                  
                                  20.30
                                  
                                  
                                  
                                  911
                                  
                                  
                                  
                                  23.98
                                  
                                  
                                  
                                  702
                                  
                                  
                                  
                                  27.87Multifamily
      residential
                                  
                                  
                                  220
                                  
                                  
                                  
                                  3.05
                                  
                                  
                                  
                                  42
                                  
                                  
                                  
                                  1.02
                                  
                                  
                                  
                                  42
                                  
                                  
                                  
                                  1.15
                                  
                                  
                                  
                                  49
                                  
                                  
                                  
                                  1.71
                                  
                                  
                                  
                                  39
                                  
                                  
                                  
                                  1.72Nonfarm,
      nonresidential
                                  
                                  
                                  1,831
                                  
                                  
                                  
                                  25.47
                                  
                                  
                                  
                                  1,399
                                  
                                  
                                  
                                  25.82
                                  
                                  
                                  
                                  1,176
                                  
                                  
                                  
                                  23.15
                                  
                                  
                                  
                                  1,048
                                  
                                  
                                  
                                  25.66
                                  
                                  
                                  
                                  358
                                  
                                  
                                  
                                  31.05Total
      real estate
                                  
                                  
                                  6,011
                                  
                                  
                                  
                                  83.62
                                  
                                  
                                  
                                  4,497
                                  
                                  
                                  
                                  82.58
                                  
                                  
                                  
                                  3,977
                                  
                                  
                                  
                                  79.69
                                  
                                  
                                  
                                  3,361
                                  
                                  
                                  
                                  84.23
                                  
                                  
                                  
                                  1,380
                                  
                                  
                                  
                                  79.54Agricultural
                                  
                                  
                                  12
                                  
                                  
                                  
                                  0.17
                                  
                                  
                                  
                                  10
                                  
                                  
                                  
                                  0.19
                                  
                                  
                                  
                                  10
                                  
                                  
                                  
                                  .22
                                  
                                  
                                  
                                  5
                                  
                                  
                                  
                                  0.14
                                  
                                  
                                  
                                  28
                                  
                                  
                                  
                                  0.94Commercial
      and industrial
                                  
                                  
                                  800
                                  
                                  
                                  
                                  11.13
                                  
                                  
                                  
                                  593
                                  
                                  
                                  
                                  12.09
                                  
                                  
                                  
                                  664
                                  
                                  
                                  
                                  15.38
                                  
                                  
                                  
                                  389
                                  
                                  
                                  
                                  11.09
                                  
                                  
                                  
                                  1,241
                                  
                                  
                                  
                                  14.74Consumer
                                  
                                  
                                  320
                                  
                                  
                                  
                                  4.45
                                  
                                  
                                  
                                  226
                                  
                                  
                                  
                                  3.86
                                  
                                  
                                  
                                  212
                                  
                                  
                                  
                                  4.15
                                  
                                  
                                  
                                  168
                                  
                                  
                                  
                                  4.03
                                  
                                  
                                  
                                  124
                                  
                                  
                                  
                                  4.08Other
                                  
                                  
                                  45
                                  
                                  
                                  
                                  0.63
                                  
                                  
                                  
                                  60
                                  
                                  
                                  
                                  1.28
                                  
                                  
                                  
                                  23
                                  
                                  
                                  
                                  .56
                                  
                                  
                                  
                                  16
                                  
                                  
                                  
                                  0.51
                                  
                                  
                                  
                                  18
                                  
                                  
                                  
                                  0.70Total
                                  
                                  $
                                  7,188
                                  
                                  
                                  
                                  100.00
                                  
                                  
                                  $
                                  5,386
                                  
                                  
                                  
                                  100.00
                                  
                                  
                                  $
                                  4,886
                                  
                                  
                                  
                                  100.00
                                  
                                  
                                  $
                                  3,939
                                  
                                  
                                  
                                  100.00
                                  
                                  
                                  $
                                  2,791
                                  
                                  
                                  
                                  100.00





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





Management
realizes that general economic trends greatly affect loan losses and no
assurances can be made about future losses.  Management does, however
consider the allowance for loan losses to be adequate at December 31,
2008.


57


Management’s
Discussion and Analysis








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





Nonperforming
Assets (dollars in thousands)





2008
                          
                          
                          2007
                          
                          
                          2006
                          
                          
                          2005
                          
                          
                          2004Nonaccrual
      loans
                          
                          $
                          15,633
                          
                          
                          $
                          1,534
                          
                          
                          $
                          1,181
                          
                          
                          $
                          1,711
                          
                          
                          $
                          1,723Loans
      past due 90 days or moreand
      still accruing interest
                          
                          
                          1,451
                          
                          
                          
                          2,608
                          
                          
                          
                          340
                          
                          
                          
                          250
                          
                          
                          
                          628Total
      nonperforming loans
                          
                          
                          17,084
                          
                          
                          
                          4,142
                          
                          
                          
                          1,521
                          
                          
                          
                          1,961
                          
                          
                          
                          2,351Other
      real estate and repossessedpersonal
      property
                          
                          
                          963
                          
                          
                          
                          340
                          
                          
                          
                          32
                          
                          
                          
                          140
                          
                          
                          
                          82Total
      nonperforming assets
                          
                          $
                          18,047
                          
                          
                          $
                          4,482
                          
                          
                          $
                          1,553
                          
                          
                          $
                          2,101
                          
                          
                          $
                          2,433Nonperforming
      assets as apercentage
      of:Total
      assets
                          
                          
                          3.36
                          %
                          
                          
                          .88
                          %
                          
                          
                          .39
                          %
                          
                          
                          .65
                          %
                          
                          
                          .94
                          %Total
      loans
                          
                          
                          4.67
                          %
                          
                          
                          1.24
                          %
                          
                          
                          .49
                          %
                          
                          
                          .80
                          %
                          
                          
                          1.16
                          %





Asset
Quality





During
2008, management refined its allowance for loan losses methodology taking into
account existing Securities and Exchange Commission (SEC) and regulatory
guidance. The refinement in methodology focused on revised loss factors that are
more indicative of actual loss experience in recent years and current borrower
analysis. The results of the allowance for loan loss model indicated that a
$2,990,096 provision was needed for the year ended December 31, 2008. The
increase in the provision as compared to 2007 is the result of an increase in
non performing loans along with loans identified as impaired under SFAS 114 as
discussed under “Fair Value”.





The
allowance for loan losses at December 31, 2008, was $7.2 million or 1.86% of
period end loans compared to an allowance for loan losses of $5.4 million or
1.49% of period end loans at December 31, 2007.   At December 31,
2008 the Bank had $15.6 million of loans in nonaccrual status as compared to
$1.5 million at December 31, 2007. The increase in non accrual loans includes
increases in various non-performing commercial real estate loans totaling $11.3
million as the largest nonaccrual loan relationship totaled $4.1 million. At
December 31, 2008 there was $1.2 million in net charge-offs compared to $288,000
at December 31, 2007, as the increase in charge-offs can be attributed to eight
loans relating to commercial and residential real estate. At December 31, 2008
there was $6,681 in repossessed assets and no repossessed assets at December 31,
2007. At December 31, 2008 there was $956,831 in other real estate owned
compared to $318,234 at December 31, 2007, as the increase in other real estate
owned can be attributed to ten properties totaling $638,597 acquired by the Bank
in 2008.





In
addition to the impact on our allowance for loan losses resulting from our loan
portfolio rebalancing efforts, which have effectively reduced our concentrations
in construction and development sector loans, our refined allowance for loan
losses methodology, as previously discussed, has resulted in an overall increase
in the allowance for loan losses as a percent of total loans. In management’s
judgment, an adequate allowance for estimated losses has been established;
however, there can be no assurance that actual losses will not exceed the
estimated amounts in the future.





The level
of the allowance for loan losses is established based upon management’s
evaluation of portfolio composition, current and projected national and local
economic conditions and results of independent reviews of the loan portfolio by
internal and external examination. Management recognizes the inherent risk
associated with commercial and consumer lending, including whether or not a
borrower’s actual results of operations will correspond to those projected by
the borrower when the loan was funded, economic factors such as the number of
housing starts and fluctuations in interest rates, etc., depression of
collateral values, and completion of projects within the original cost and time estimates.
As a result, management continues to actively monitor the Bank’s asset quality
and lending policies. Management believes that its loan portfolio is diversified
so that it is unlikely that a downturn in a particular market or industry will
have a significant impact on the loan portfolio or the Bank’s financial
condition.




58





Management’s
Discussion and Analysis







Liquidity
and Sensitivity





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





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





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





At
December 31, 2008, 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 $114.1 million. Historically,
these short-term deposits are not as rate sensitive as other types of
interest-bearing deposits.  The Bank is asset sensitive in the three
month or less time period, with the four to twelve months time period being
liability-sensitive, the thirteen to sixty months time period being
asset-sensitive and the over sixty months time period being
asset-sensitive.





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





Mortgage
backed securities are shown based on their contractual maturity but tend to be
repaid earlier.  Long-term debt maturing in 2010 with a quarterly call
feature is shown in the 1-3 month re-pricing period. Repurchase agreements with
a put feature are shown in the re-pricing period in which the structure is put
back to the Bank.





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


59





Management’s
Discussion and Analysis







Interest
Rate Sensitivity (dollars in thousands)





December 31, 2008Maturities/Re-pricing1-3
                
                
                
                4-12
                
                
                
                13-60
                
                
                Over 60Months
                
                
                Months
                
                
                Months
                
                
                Months
                
                
                TotalEarning
      assets:Loans
                
                $
                160,464
                
                
                $
                47,818
                
                
                $
                126,100
                
                
                $
                52,074
                
                
                $
                386,456Investments
                
                
                1,153
                
                
                
                2,030
                
                
                
                1,130
                
                
                
                87,221
                
                
                
                91,534Federal
      funds sold
                
                
                4,281
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                4,281Deposits
      with banks
                
                
                2,685
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                2,685Total
                
                
                168,583
                
                
                
                49,848
                
                
                
                127,230
                
                
                
                141,295
                
                
                
                484,956Interest-bearing
      liabilities:Demand
      accounts
                
                
                31,567
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                31,567Savings
      and money market
                
                
                82,459
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                82,459Time
      deposits
                
                
                90,235
                
                
                
                135,017
                
                
                
                40,818
                
                
                
                2,325
                
                
                
                268,395Repurchase
      agreements and purchased funds
                
                
                3,830
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                3,830Other
      short-term borrowings
                
                
                6,000
                
                
                
                4,000
                
                
                
                -
                
                
                
                -
                
                
                
                10,000Long-term
      debt
                
                
                -
                
                
                
                -
                
                
                
                53,500
                
                
                
                9,000
                
                
                
                46,500Subordinated
      debentures
                
                
                12,372
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                12,372Total
                
                
                226,463
                
                
                
                139,017
                
                
                
                94,318
                
                
                
                11,325
                
                
                
                471,123Interest
      rate gap
                
                $
                (57,880
                )
                
                $
                (89,169
                )
                
                $
                32,912
                
                
                $
                127,970
                
                
                $
                13,833Cumulative
      interest sensitivity gap
                
                $
                (57,880
                )
                
                $
                (147,049
                )
                
                $
                (114,137
                )
                
                $
                13,833Ratio
      of sensitivity gap to total earnings assets
                
                
                (11.94
                )%
                
                
                (18.39
                )%
                
                
                6.80
                %
                
                
                26.39
                %
                
                
                2.86
                %Cumulative
      ratio of sensitivity gap to total earnings assets
                
                
                (11.94
                )%
                
                
                (30.33
                )%
                
                
                (23.53
                )%
                
                
                2.86
                %





Effects
of Inflation





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





Commitments
and Contingencies





Litigation





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





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.


60


Management’s
Discussion and Analysis





Financial
Instruments with Off-Balance-Sheet Risk





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:





2008
                  
                  
                  2007Commitments
      to extend credit
                  
                  $
                  41,067,000
                  
                  
                  $
                  48,600,000Stand-by
      letters of credit
                  
                  
                  3,194,000
                  
                  
                  
                  4,509,000$
                  44,261,000
                  
                  
                  $
                  53,109,000





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





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





Concentrations
of Credit Risk





Substantially
all of the Bank's loans and commitments to extend credit have been granted to
customers in the Bank's market area and such customers are generally depositors
of the Bank.  The concentrations of credit by type of loan are set
forth in Note 5.  The distribution of commitments to extend credit
approximates the distribution of loans outstanding. The Bank's primary focus is
toward commercial, consumer and small business transactions, and accordingly, it
does not have a significant number of credits to any single borrower or group of
related borrowers in excess of $4,000,000.





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


61





Stockholder
Information





Financial
Ratios





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





Key
Financial Ratios





2008
                
                
                2007
                
                
                2006Average
      equity to average assets
                
                
                6.20
                %
                
                
                7.64
                %
                
                
                7.27
                %Return
      on average assets
                
                
                (.38
                )
      %
                
                
                .89
                %
                
                
                1.02
                %Return
      on average equity
                
                
                (6.11
                )
      %
                
                
                11.67
                %
                
                
                14.07
                %





Annual
Meeting





The
annual meeting of stockholders will be held Thursday, May 21, 2009 at 7:00 p.m.
at the Vineland Station Train Depot, Whiteville, North Carolina.









Requests for
Information





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









Independent Auditors
              
              Stock Transfer Agent
              
              Legal CounselDixon
      Hughes PLLC
              
              First-Citizens
      Bank
              
              Gaeta
      & Eveson, P.A.Certified
      Public Accountants
              
              &
      Trust Company
              
              8305
      Falls of Neuse Road2501
      Blue Ridge Road
              
              Post
      Office Box 29522
              
              Suite
      203Suite
      500
              
              Raleigh,
      North Carolina  27626-0522
              
              Raleigh,
      North Carolina  27615Raleigh, NC 27607





Federal Deposit Insurance
Corporation





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


62