# UNITED STATESSECURITIES AND EXCHANGE
COMMISSION Washington, D.C. 20549

# Form 10-KSB

| | (Mark One)
| | ----------

|X | Annual Report under Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ------------------------------------------------------------------------------

| | For the fiscal year ended December 31, 2006
| | -------------------------------------------

| | or
| | --

| | Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934
| | ----------------------------------------------------------------------------------
| | For the transition period from __________ to ________                             

Commission file no.
001-33065

TIDELANDS BANCSHARES, INC.
(Name of Small Business Issuer in Its Charter)

|South Carolina                    |  | 02-0570232         
|--------------------------------- |  | -------------------
|(State or Other Jurisdiction      |  | (I.R.S. Employer   
|of Incorporation or Organization) |  | Identification No.)

|875 Lowcountry Blvd.                     |  |           
|---------------------------------------- |  | ----------
|Mount Pleasant, South Carolina           |  | 29464     
|(Address of Principal Executive Offices) |  | (Zip Code)

(843) 388-8433Issuers Telephone Number, Including Area Code

Securities registered pursuant to Section 12(b) of the Act:   Common Stock, $0.01 par value per share
Securities registered pursuant to Section 12(g) of the Act: None

Check whether the issuer (1) filed
all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the
past 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes      No

Check if there is no disclosure of
delinquent filers in response to Item 405 of Regulation S-B in this form, and no
disclosure will be contained, to the best of registrants knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).                         
              
Yes      No

The issuers revenue for the year ended December 31, 2006 was $22,556,968.

The aggregate market value of the
voting stock held by non-affiliates (shareholders holding less than 5% of an outstanding
class of stock, excluding directors and executive officers), as of March 19, 2007, was
approximately $42,973,845. This calculation was based on the closing
price of our common stock on March 19, 2007 of $14.75.

The number of shares outstanding of
the issuers common stock was 4,272,485 at March 19, 2007.

# DOCUMENTS INCORPORATED
BY REFERENCE

|                                                                                  | 
|--------------------------------------------------------------------------------- | 
|Proxy Statement for the Annual Meeting of Shareholders to be held on May 21, 2007 | 
|                                                                                  | 

Transitional Small Business Disclosure Format.   (Check one):   Yes      No

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# PART I

# Item 1. Description of
Business.

This
report contains statements which constitute forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934. These statements are based on many assumptions and estimates and are not
guarantees of future performance. Our actual results may differ materially from those
projected in any forward-looking statements, as they will depend on many factors about
which we are unsure, including many factors which are beyond our control. The words
may, would, could, will,
expect, anticipate, believe, intend,
plan, and estimate, as well as similar expressions, are meant to
identify such forward-looking statements. Potential risks and uncertainties include, but
are not limited to those described below under Risk Factors and the following:

| |  | significant increases in
competitive pressure in the banking and financial services industries;
| | - | -----------------------------------------------------------------------------------------------

| |  | changes in the
interest rate environment which could reduce anticipated or actual margins;
| | - | ------------------------------------------------------------------------------------------

| |  | changes in
political conditions or the legislative or regulatory environment;
| | - | -----------------------------------------------------------------------------

| |  | general economic
conditions, either nationally or regionally and especially in our primary service area,
becoming less favorable than expected resulting in, among other things, a deterioration in credit quality;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | changes occurring in business conditions and inflation;
| | - | -------------------------------------------------------

| |  | changes in technology;
| | - | ----------------------

| |  | changes
in monetary and tax policies;
| | - | -------------------------------------

| |  | the level of allowance for loan loss;
| | - | -------------------------------------

| |  | the rate of
delinquencies and amounts of charge-offs;
| | - | -----------------------------------------------------

| |  | the rates of loan growth;
| | - | -------------------------

| |  | adverse changes in
asset quality and resulting credit risk-related losses and expenses;
| | - | ---------------------------------------------------------------------------------------

| |  | loss of consumer
confidence and economic disruptions resulting from terrorist activities;
| | - | -----------------------------------------------------------------------------------------

| |  | changes in the
securities markets; and
| | - | --------------------------------------

| |  | other risks and uncertainties detailed from time to time in our
filings with the Securities and Exchange Commission.
| | - | --------------------------------------------------------------------------------------------------------------------

# General Overview

We
are a South Carolina corporation organized in 2002 as the holding company for Tidelands
Bank, a state chartered bank headquartered in Mount Pleasant, South Carolina. We opened
Tidelands Bank in October 2003, and we have grown rapidly since our inception. As of
December 31, 2006, our assets totaled $336.6 million and our shareholders equity was $41.8
million. We are primarily engaged in the business of accepting demand deposits and savings
deposits insured by the FDIC and providing commercial, consumer, and mortgage loans to the
general public.

# Marketing Focus

We
have created a strategic plan that focuses on professionals, entrepreneurs, small business
owners, and their family members in our core market of the Charleston metropolitan area
and other fast-growing areas along the South Carolina coast. The cornerstone of
relationship banking is to hire and retain professional banking officers that know their
customers and focus on their individual needs. This relationship service model
ensures that we are able to generate both repeat business from existing customers as well
as new business from customer referrals. We have recruited several banking officers with
significant banking relationships in their respective communities, and we have grown our
operations in these markets from these core customer bases.

2

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# Location and Service Area

Our
main office is located at 875 Lowcountry Boulevard, Mount Pleasant, South Carolina 29464
on a major artery and provides excellent visibility for the bank. In August 2004, we
opened a loan production office in Summerville, South Carolina managed by a 25-year
banking veteran of that market. Because of the success of this loan production office, we
converted it to a full service branch on April 4, 2005. In January 2005, we opened a loan
production office in Myrtle Beach, South Carolina. We converted this office into a full
service branch on October 11, 2005. We also plan to open a branch in the Park West section
of Mount Pleasant in mid 2007. In addition, we opened loan production offices in the West
Ashley area of Charleston, South Carolina in September 2006 and in the Hilton Head area of
South Carolina in October 2006.

Our
primary market area is the Charleston metropolitan area (which includes Charleston,
Dorchester, and Berkeley counties), Myrtle Beach, the Hilton Head area, and additional
markets along the South Carolina coast. This area is one of the most attractive markets in
the Southeast and includes over 90 miles of Atlantic coastline, reaches some 50 miles
inland towards the intersection of Interstate highways 26 and 95, and offers a wide
diversity of recreational, arts, and cultural experiences to its residents and visitors.
According to FDIC data, total deposits in the Charleston metropolitan area increased 89%
from approximately $4.3 billion in 2000 to approximately $8.1 billion in 2006. According
to U.S. Census Bureau estimates, the population of the Charleston metropolitan area was
almost 600,000 in 2005, an increase of 8% from 2000. Mount Pleasant, which is where we are
headquartered, now ranks as the sixth largest city in South Carolina with the third
highest per capita income in the state.

The
economy of Charleston is diverse and vibrant having recently experienced significant
growth in tourism, healthcare, manufacturing and at the Port of Charleston. Notably, in
2004, approximately 4.7 million people visited the Charleston region (a 47% increase from
1997) and spent approximately $5.7 billion (a 138% increase from 1997). The Port of
Charleston is the top ranked container cargo port on the South Atlantic and Gulf coasts,
is second only to New York and New Jersey on the East Coast, and is the fourth largest
container port in the United States. Continued growth of the ports business is
expected with plans to deepen its channel and create a new three-berth 280-acre container
terminal on the site of the former Charleston Naval complex. Recent economic expansion in
the manufacturing sector includes the construction of two new plants designed for the
production and assembly of the fuselage sections for Boeings new 787 Dreamliner.
These two plants are expected to create approximately 750 jobs. In total, these plants
represent a $560 million investment, the largest in South Carolina since BMW entered the
state in the early 1990s.

Our
additional market areas along the South Carolina coast are also experiencing significant
growth. The Myrtle Beach area, also known as South Carolinas Grand Strand, is a
60-mile stretch of coastline extending from the South Carolina state line at Little River
(Horry County) south to Pawleys Island (Georgetown County). According to FDIC data, total
deposits in the Myrtle Beach metropolitan statistical area increased 95% from
approximately $2.8 billion in 2000 to approximately $5.5 billion in 2006. According to
U.S. Census Bureau estimates, the population of the Myrtle Beach metropolitan statistical
area was approximately 227,000 in 2005, an increase of approximately 15% from 2000. A
significant portion of this growth is attributable to retirees. In recent years, both
The Wall Street Journal and Money magazine rated the Grand Strand as one of
the nations top retirement locations. Today, approximately 25% of South
Carolinas residents are over 55 years of age and Horry County is No. 1 among the top
five regions in the state where retirees are relocating. The growth in Myrtle Beachs
retirement population is projected to fuel total population growth of 48% from 2005 to
2030. Similar to Charleston, tourism plays a vital role in the economy of Myrtle Beach.
The American Automobile Association recently ranked the area as the nations second
most popular tourist destination with an estimated 13.7 million visitors annually.

Hilton
Head, located in Beaufort County, approximately 45 miles north of Savannah, Georgia and 90
miles south of Charleston, is also an internationally recognized vacation destination
famous for its championship golf courses, beaches, and resorts. The Hilton Head Chamber of
Commerce estimates that the year-round tourism industry accounts for more than 60% of
local jobs and contributes in excess of $1.5 billion annually to the Hilton Head economy.
According to FDIC data as of June 30, 2006, total deposits in Beaufort County increased
73% from approximately $1.8 billion in 2000 to approximately $3.2 billion in 2006.

3

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According  to U.S. Census Bureau estimates, the
population of Beaufort County increased 14% from 120,937 in 2000 to 137,849 in 2005, and
is projected to grow an additional 10% by 2010. The median family income of Hilton Head
residents in 2005 was approximately $72,000, compared with $43,000 for South Carolina and
$50,000 nationally.

# Lending Activities

General.
          We emphasize a range of lending services, including commercial and residential
          real estate mortgage loans, real estate construction and land development loans,
          commercial business loans, consumer loans and equity-line loans to individuals
          and small- to medium-sized businesses and professional firms that are located in
          or conduct a substantial portion of their business in our market area. At
          December 31, 2006, we had total loans of $273.2 million, representing 86.9% of
          our total earning assets. When we opened our bank, we introduced a strong credit
          culture based on traditional credit measures and our intimate knowledge of our
          markets through veteran bankers. We currently engage an outside firm to evaluate
          our loan portfolio on a semi-annual basis for credit quality and a second
          outside firm for compliance issues. As of December 31, 2006, we had two
          nonperforming assets totaling approximately $2.0 million. The loans were placed
          in nonaccrual as a result of the death of the borrower. A review of the
          collateral leads us to believe that there is sufficient value to protect the
          Bank from any loss. We believe the situation will be satisfactorily resolved by
          the end of the first quarter of this year.

Our
underwriting standards vary for each type of loan, as described below. While we generally
underwrite the loans in our portfolio in accordance with our own internal underwriting
guidelines and regulatory supervisory guidelines, in certain circumstances we have made
loans which exceed either our internal underwriting guidelines, supervisory guidelines, or
both. We are permitted to hold loans that exceed supervisory guidelines up to 100% of bank
capital, or $50.9 million at December 31, 2006. As such, $37.6 million, or 13.8%, of our
loans had loan-to-value ratios that exceeded regulatory supervisory guidelines, of which
nine loans totaling approximately $3.3 million had loan-to-value ratios of 100% or more.
In addition, supervisory limits on commercial loan to value exceptions are set at 30% of
capital. At December 31, 2006, $19.6 million of our commercial loans, or 38.5% of capital,
exceeded the supervisory loan to value ratio.

We
have focused our lending activities primarily on the professional market, including
doctors, dentists, small business owners, and commercial real estate developers. By
focusing on this customer base and by serving each customer with a consistent relationship
team of bankers, we have generated a loan portfolio with an average outstanding loan
balance of approximately $218,000 as of December 31, 2006. At the same time, we have
strived to maintain a diversified loan portfolio and limit the amount of our loans to any
single customer. As of December 31, 2006, our 10 largest customer loan relationships
represented approximately $44.8 million, or 16.4% of our loan portfolio.

Real
Estate Mortgage Loans. Loans secured by real estate mortgages are the principal
component of our loan portfolio. We obtain a security interest in real estate whenever
possible, in addition to any other available collateral, in order to increase the
likelihood of the ultimate repayment of the loan. As of December 31, 2006, loans secured
by first or second mortgages on real estate made up approximately $124.7 million, or
45.7%, of our loan portfolio.

These
loans will generally fall into one of two categories: commercial real estate loans or
residential real estate loans. Furthermore, each type of real estate loan may be secured
by residential or commercial property. Real estate loans are subject to the same general
risks as other loans and are particularly sensitive to fluctuations in the value of real
estate. Fluctuations in the value of real estate, as well as other factors arising after a
loan has been made, could negatively affect a borrowers cash flow, creditworthiness,
and ability to repay the loan.

| |  | Commercial Real Estate Loans. At December 31, 2006, the outstanding balances on individual
commercial real estate loans ranged from approximately $3,000 to $3.5 million, as we have
participated credits in excess of our legal lending limit to correspondent banks. The
average commercial real estate loan balance was approximately $359,000. These loans
generally have terms of five years or less, although payments may be structured on a
longer amortization basis. We evaluate each borrower on an individual basis and attempt to
determine the business risks and credit profile of each borrower. We attempt to reduce
credit risk in the commercial real estate portfolio by emphasizing loans on
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

4

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| |  | owner-occupied
office buildings where the loan-to-value ratio, established by independent appraisals,
does not exceed 85%. We also generally require that a borrowers cash flow exceeds
125% of monthly debt service obligations. In order to ensure secondary sources of payment
and liquidity to support a loan request, we typically review all of the personal financial
statements of the principal owners and require their personal guarantees. At December 31,
2006, commercial real estate loans (other than construction loans) amounted to $98.3
million, or approximately 36.0% of our loan portfolio.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Residential Real Estate Loans and Home Equity Loans. We do not generally originate
traditional long term residential mortgages for our portfolio, but we do issue traditional
second mortgage residential real estate loans and home equity lines of credit. At December
31, 2006, our individual residential real estate loans balances ranged from approximately
$9,000 to $1.8 million, with an average loan balance of approximately $385,000. Generally,
we limit the loan-to-value ratio on our residential real estate loans to 85%. We offer
fixed and adjustable rate residential real estate loans with terms of up to 30 years
through a third party rather than retaining these loans ourselves. We also offer home
equity lines of credit. At December 31, 2006, our individual home equity lines of credit
balances ranged from $14 to $750,000, with an average balance of approximately $99,000.
Our underwriting criteria for, and the risks associated with, home equity loans and lines
of credit are generally the same as those for first mortgage loans. Home equity lines of
credit typically have terms of fifteen years or less. We generally limit the extension of
credit to 90% of the available equity of each property, although in certain circumstances
we may extend up to 100% of the available equity. At December 31, 2006, residential real
estate loans (other than construction loans) amounted to $26.4 million, or 9.7% of our
loan portfolio. Included in the residential real estate loans was $9.3 million, or 35.1%
of our residential loan portfolio, in first and second mortgages on individuals
homes, and $17.1 million, or 64.9% of our residential loan portfolio, in home equity
loans.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Real
Estate Construction and Land Development Loans.We offer fixed and adjustable rate
residential and commercial construction loans to builders and developers and to consumers
who wish to build their own homes. At December 31, 2006, outstanding balances on our
commercial construction and development real estate loans ranged from approximately $8,000
to $2.7 million, with an average loan balance of approximately $387,000. At December 31,
2006, the outstanding balances on our individual residential construction and development
real estate loans ranged from approximately $27,000 to $726,000, with an average loan
balance of approximately $210,000. The term of our construction and development loans
generally is limited to 18 months, although payments may be structured on a longer
amortization basis. Construction and development loans generally carry a higher degree of
risk than long-term financing of existing properties because repayment depends on the
ultimate completion of the project and usually on the sale of the property. Specific risks
include:

| |  | cost overruns;
| | - | --------------

| |  | mismanaged construction;
| | - | ------------------------

| |  | inferior or improper construction
techniques;
| | - | ---------------------------------------------

| |  | economic changes or downturns during construction;
| | - | --------------------------------------------------

| |  | a downturn in the real
estate market;
| | - | -------------------------------------

| |  | rising interest rates which may prevent sale of the property; and
| | - | -----------------------------------------------------------------

| |  | failure to sell completed projects in a timely manner.
| | - | ------------------------------------------------------

We
attempt to reduce the risk associated with construction and development loans by obtaining
personal guarantees and by keeping the loan-to-value ratio of the completed project at or
below 85%. At December 31, 2006, total construction loans amounted to $122.2 million, or
44.7% of our total loan portfolio. Included in the $122.2 million total was $114.4 million
in construction and development loans, or 93.6% of our construction loan portfolio, that
were made to commercial construction developers, and approximately $7.8 million, or 6.4%
of our construction loan portfolio, that were made to consumers.

Commercial
Business Loans. We make loans for commercial purposes in various lines of businesses,
including the manufacturing industry, service industry, and professional service areas.

5

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At
December 31, 2006, outstanding balances on our individual commercial business loans
ranged from approximately $150 to $3.2 million, with an average loan balance of
approximately $86,000. Commercial loans are generally considered to have greater risk than
first or second mortgages on real estate because commercial loans may be unsecured, or if
they are secured, the value of the collateral may be difficult to assess and more likely
to decrease than real estate. At December 31, 2006, commercial business loans amounted to
$24.6 million, or 9.0% of our total loan portfolio.

We
are eligible to offer small business loans utilizing government enhancements such as the
Small Business Administrations (SBA) 7(a) program and SBAs 504
programs. These loans typically are partially guaranteed by the government, which helps to
reduce their risk. Government guarantees of SBA loans do not exceed, and are generally
less than, 80% of the loan. As of December 31, 2006, we had not originated any small
business loans utilizing government enhancements.

Consumer
Loans. We make a variety of loans to individuals for personal and household purposes,
including secured and unsecured installment loans and revolving lines of credit. Consumer
loans are underwritten based on the borrowers income, current debt level, past
credit history, and the availability and value of collateral. Consumer rates are both
fixed and variable, with negotiable terms. At December 31, 2006, the outstanding balance
on our individual consumer loans ranged from approximately $65 to $155,000, with an
average loan balance of approximately $12,000. Our installment loans typically amortize
over periods up to 60 months. Although we typically require monthly payments of interest
and a portion of the principal on our revolving loan products, we will offer consumer
loans with a single maturity date when a specific source of repayment is available.
Consumer loans are generally considered to have greater risk than first or second
mortgages on real estate because they may be unsecured, or, if they are secured, the value
of the collateral may be difficult to assess and more likely to decrease in value than
real estate. At December 31, 2006, consumer loans amounted to $1.9 million, or 0.7% of our
loan portfolio.

Loan
Approval. Certain credit risks are inherent in making loans. These include prepayment
risks, risks resulting from uncertainties in the future value of collateral, risks
resulting from changes in economic and industry conditions, and risks inherent in dealing
with individual borrowers. We attempt to mitigate repayment risks by adhering to internal
credit policies and procedures. These policies and procedures include officer and customer
lending limits, a multi-layered approval process for larger loans, documentation
examination, and follow-up procedures for any exceptions to credit policies. Our loan
approval policies provide for various levels of officer lending authority. When the amount
of aggregate loans to a single borrower exceeds an individual officers lending
authority, the loan request will be reviewed by an officer with a higher lending
authority. Between the Chief Executive Officer, Chief Lending Officer and Chief Credit
Officer, any two may combine their authority to approve credits up to $1.5 million. If the
loans exceed $1.5 million, then a loan committee comprised of Mr. Coffee and four outside
directors may approve the loans up to 10% of our capital and surplus. All loans in excess
of this lending limit will be submitted for approval to the entire board of directors. We
do not make any loans to any director or executive officer of the bank unless the loan is
approved by the disinterested members of the board of directors of the bank and is on
terms not more favorable to such person than would be available to a person not affiliated
with the bank.

Credit
Administration and Loan Review. We maintain a continuous loan review system. We also
apply a credit grading system to each loan, and we use an independent consultant on a
semi-annual basis to review the loan files on a test basis to confirm the grading of each
loan. Each loan officer is responsible for each loan he or she makes, regardless of
whether other individuals or committees joined in the approval. This responsibility
continues until the loan is repaid or until the loan is officially assigned to another
officer.

Lending
Limits. Our lending activities are subject to a variety of lending limits imposed by
federal law. In general, the bank is subject to a legal limit on loans to a single
borrower equal to 15% of the banks capital and unimpaired surplus. This limit will
increase or decrease as the banks capital increases or decreases. Based upon the
capitalization of the bank at December 31, 2006, our legal lending limit was approximately
$7.6 million. Our internal lending limit was $5.0 million at December 31, 2006. We are
able to sell participations in our larger loans to other financial institutions, which
allows us to manage the risk involved in these loans and to meet the lending needs of our
customers requiring extensions of credit in excess of these limits.

6

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# Deposit Products

We
offer a full range of deposit services that are typically available in most banks and
savings institutions, including checking accounts, commercial accounts, savings accounts,
and other time deposits of various types, ranging from daily money market accounts to
longer-term certificates of deposit. Transaction accounts and time deposits are tailored
to and offered at rates competitive to those offered in our primary market area. In
addition, we offer certain retirement account services, such as IRAs. We solicit accounts
from individuals, businesses, associations, organizations, and governmental authorities.

# Other Banking Services

We
also offer other bank services including safe deposit boxes, travelers checks,
direct deposit, United States Savings Bonds, and banking by mail. We are associated with
the Cirrus, Master-Money, Pulse, and Subswitch ATM networks,which are available to
our customers throughout the country. We believe that by being associated with a shared
network of ATMs, we are better able to serve our customers and are able to attract
customers who are accustomed to the convenience of using ATMs, although we do not believe
that maintaining this association is critical to our success. We also offer internet
banking services, bill payment services, and cash management services. We do not expect to
exercise trust powers during our next few years of operation.

# Competition

The
banking business is highly competitive, and we experience competition in our market from
many other financial institutions. Competition among financial institutions is based upon
interest rates offered on deposit accounts, interest rates charged on loans, other credit
and service charges relating to loans, the quality and scope of the services rendered, the
convenience of banking facilities, and, in the case of loans to commercial borrowers,
relative lending limits. We compete with commercial banks, credit unions, savings
institutions, mortgage banking firms, consumer finance companies, securities brokerage
firms, insurance companies, money market funds, and other mutual funds, as well as other
super-regional, national, and international financial institutions that operate offices in
the Charleston area and elsewhere.

As
of June 30, 2006, there were 21 financial institutions other than us in Charleston County,
and 20 and 21 in Horry and Beaufort County, where our Myrtle Beach and Hilton Head area
offices are located, respectively. We compete with these institutions both in attracting
deposits and in making loans. In addition, we have to attract our customer base from other
existing financial institutions and from new residents. Many of our competitors are
well-established, larger financial institutions with substantially greater resources and
lending limits, such as BB&T, Bank of America, Wachovia, and Carolina First Bank.
These institutions offer some services, such as extensive and established branch networks
and trust services, which we do not provide. In addition, many of our non-bank competitors
are not subject to the same extensive federal regulations that govern bank holding
companies and federally insured banks.

# Employees

As
of March 19, 2007, we had 66 full-time employees and 2 part-time employees.

7

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# SUPERVISION AND
REGULATION

Both
Tidelands Bancshares, Inc. and Tidelands Bank are subject to extensive state and federal
banking regulations that impose restrictions on and provide for general regulatory
oversight of their operations. These laws generally are intended to protect depositors and
not shareholders. The following summary is qualified by reference to the statutory and
regulatory provisions discussed. Changes in applicable laws or regulations may have a
material effect on our business and prospects. Our operations may be affected by
legislative changes and the policies of various regulatory authorities. We cannot predict
the effect that fiscal or monetary policies, economic control, or new federal or state
legislation may have on our business and earnings in the future.

The
following discussion is not intended to be a complete list of all the activities regulated
by the banking laws or of the impact of such laws and regulations on our operations. It is
intended only to briefly summarize some material provisions.

# Tidelands Bancshares

We
own 100% of the outstanding capital stock of the bank, and therefore we are considered to
be a bank holding company under the federal Bank Holding Company Act of 1956 (the
Bank Holding Company Act). As a result, we are primarily subject to the
supervision, examination and reporting requirements of the Board of Governors of the
Federal Reserve (the Federal Reserve) under the Bank Holding Company Act and
its regulations promulgated thereunder. As a bank holding company located in South
Carolina, the South Carolina Board of Financial Institutions also regulates and monitors
all significant aspects of our operations.

Permitted
Activities. Under the Bank Holding Company Act, a bank holding company is
generally permitted to engage in, or acquire direct or indirect control of more than 5% of
the voting shares of any company engaged in, the following activities:

| |  | banking or managing or controlling banks; and
| | - | ---------------------------------------------

| |  | furnishing services to or performing services for our subsidiaries; and
| | - | -----------------------------------------------------------------------

| |  | any activity that the Federal Reserve determines to be so closely related to banking as to
be a proper incident to the business of banking.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------

Activities
that the Federal Reserve has found to be so closely related to banking as to be a proper
incident to the business of banking include:

| |  | factoring accounts receivable;
| | - | ------------------------------

| |  | making, acquiring, brokering or servicing loans and usual related activities;
| | - | -----------------------------------------------------------------------------

| |  | leasing personal or real property;
| | - | ----------------------------------

| |  | operating a non-bank depository institution, such as a savings association;
| | - | ---------------------------------------------------------------------------

| |  | trust company functions;
| | - | ------------------------

| |  | financial and investment advisory activities;
| | - | ---------------------------------------------

| |  | conducting discount securities brokerage activities;
| | - | ----------------------------------------------------

| |  | underwriting and dealing in government obligations and
money market instruments;
| | - | --------------------------------------------------------------------------------

| |  | providing specified management
consulting and counseling activities;
| | - | --------------------------------------------------------------------

8

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| |  | performing selected data processing services
and support services;
| | - | ------------------------------------------------------------------

| |  | acting as agent or broker in selling credit life insurance and other types of insurance in connection with credit
              transactions; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------

| |  | performing selected
insurance underwriting activities.
| | - | ------------------------------------------------------

As
a bank holding company we also can elect to be treated as a financial holding
company, which would allow us engage in a broader array of activities. In sum, a
financial holding company can engage in activities that are financial in nature or
incidental or complementary to financial activities, including insurance underwriting,
sales and brokerage activities, providing financial and investment advisory services,
underwriting services and limited merchant banking activities. We have not sought
financial holding company status, but may elect such status in the future as our business
matures. If we were to elect in writing for financial holding company status, each insured
depository institution we control would have to be well capitalized, well managed and have
at least a satisfactory rating under the CRA (discussed below).

The
Federal Reserve has the authority to order a bank holding company or its subsidiaries to
terminate any of these activities or to terminate its ownership or control of any
subsidiary when it has reasonable cause to believe that the bank holding companys
continued ownership, activity or control constitutes a serious risk to the financial
safety, soundness or stability of it or any of its bank subsidiaries.

Change
in Control.In addition, and subject to certain exceptions, the Bank
Holding Company Act and the Change in Bank Control Act, together with regulations
promulgated there under, require Federal Reserve approval prior to any person or company
acquiring control of a bank holding company. Moreover, the South Carolina
Board of Financial Institutions also must approve an acquisition of a South Carolina bank
holding company. Control is conclusively presumed to exist if an individual or company
acquires 25% or more of any class of voting securities of a bank holding company. Control
is rebuttably presumed to exist if a person acquires 10% or more, but less than 25%, of
any class of voting securities and either:

| |  | the company has registered
securities under Section 12 of the Securities Exchange Act of 1934; or
| | - | -------------------------------------------------------------------------------------------------

| |  | no other person owns a greater
percentage of that class of voting securities immediately after the transaction.
| | - | ---------------------------------------------------------------------------------------------------------------

Our
common stock is registered under Section 12 of the Securities Exchange Act of 1934. Any
shareholder of 10% or more, but less than 25% of any class of our voting securities would
be required to either file as a controlling shareholder of the company or rebut the
presumption of control in accordance with Federal Reserve regulations. The
regulations provide a procedure for rebutting control when ownership of any class of
voting securities is below 25%.

Source
of Strength. In accordance with Federal Reserve Board policy, we are
expected to act as a source of financial strength to the bank and to commit resources to
support the bank in circumstances in which we might not otherwise do so. Under the bank
Holding Company Act, the Federal Reserve Board may require a bank 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 Boards determination that such
activity or control constitutes a serious risk to the financial soundness or stability of
any depository institution subsidiary of the bank holding company. Further, federal bank
regulatory authorities have additional discretion to require a bank holding company to
divest itself of any bank or nonbank subsidiaries if the agency determines that
divestiture may aid the depository institutions financial condition.

Capital
Requirements. The Federal Reserve Board imposes certain capital
requirements on the bank holding company under the bank Holding Company Act, including a
minimum leverage ratio and a minimum ratio of qualifying capital to
risk-weighted assets. These requirements are described below under Tidelands Bank
 Capital Regulations. Subject to our capital requirements and certain other
restrictions, we are able to borrow money to make a capital contribution to the bank, and
these loans may be repaid from

9

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dividends paid from the bank to the
Company. Our ability to pay dividends is subject to regulatory restrictions as described
below in Tidelands bank  Dividends. We are also able to raise capital
for contribution to the bank by issuing securities without having to receive regulatory
approval, subject to compliance with federal and state securities laws.

South
Carolina State Regulation. As a South Carolina bank holding company under
the South Carolina Banking and Branching Efficiency Act, we are subject to limitations on
sale or merger and to regulation by the South Carolina Board of Financial Institutions. We
are not required to obtain the approval of the S.C. Board prior to acquiring the capital
stock of a national bank, but we must notify them at least 15 days prior to doing so. We
must receive the Boards approval prior to engaging in the acquisition of a South
Carolina state chartered bank or another South Carolina bank holding company.

# Tidelands Bank

The
bank operates as a state bank incorporated under the laws of the State of South Carolina
and is subject to examination by the South Carolina Board of Financial Institutions.

The
South Carolina Board of Financial Institutions and the FDIC regulate or monitor virtually
all areas of the banks operations, including:

| |  | security devices and procedures;
| | - | --------------------------------

| |  | adequacy of capitalization and loss
reserves;
| | - | ---------------------------------------------

| |  | loans;
| | - | ------

| |  | investments;
| | - | ------------

| |  | borrowings;
| | - | -----------

| |  | deposits;
| | - | ---------

| |  | mergers;
| | - | --------

| |  | issuances of securities;
| | - | ------------------------

| |  | payment of dividends;
| | - | ---------------------

| |  | interest rates payable on deposits;
| | - | -----------------------------------

| |  | interest rates or fees chargeable on loans;
| | - | -------------------------------------------

| |  | establishment of branches;
| | - | --------------------------

| |  | corporate reorganizations;
| | - | --------------------------

| |  | maintenance of books and records; and
| | - | -------------------------------------

| |  | adequacy of staff training to carry on safe
lending and deposit gathering practices.
| | - | ------------------------------------------------------------------------------------

The
South Carolina Board of Financial Institutions requires the bank to maintain specified
capital ratios and imposes limitations on the banks aggregate investment in real
estate, bank premises, and furniture and fixtures. The South Carolina Board of Financial
Institutions also requires the bank to prepare quarterly reports on the banks
financial condition in compliance with its minimum standards and procedures.

All
insured institutions must undergo regular on site examinations by their appropriate
banking agency. The cost of

10

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examinations of insured depository
institutions and any affiliates may be assessed by the appropriate agency against each
institution or affiliate as it deems necessary or appropriate. Insured institutions are
required to submit annual reports to the FDIC, their federal regulatory agency, and their
state supervisor when applicable. The FDIC has developed a method for insured depository
institutions to provide supplemental disclosure of the estimated fair market value of
assets and liabilities, to the extent feasible and practicable, in any balance sheet,
financial statement, report of condition or any other report of any insured depository
institution. The FDIC Improvement Act also requires the federal banking regulatory
agencies to prescribe, by regulation, standards for all insured depository institutions
and depository institution holding companies relating, among other things, to the
following:

| |  | internal controls;
| | - | ------------------

| |  | information systems and audit systems;
| | - | --------------------------------------

| |  | loan documentation;
| | - | -------------------

| |  | credit underwriting;
| | - | --------------------

| |  | interest rate risk exposure; and
| | - | --------------------------------

| |  | asset quality.
| | - | --------------

Prompt
Corrective Action.As an insured depository institution, the bank is
required to comply with the capital requirements promulgated under the Federal Deposit
Insurance Act and the regulations thereunder, which set forthfive capital
categories, each with specific regulatory consequences. Under these regulations, the
categories are:

| |  | Well Capitalized  The institution exceeds the required minimum level for each
relevant capital measure. A well capitalized institution is one (i) having a total
capital ratio of 10% or greater, (ii) having a tier 1 capital ratio of 6% or greater,
(iii) having a leverage capital ratio of 5% or greater and (iv) that is not
subject to any order or written directive to meet and maintain a specific capital level
for any capital measure.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Adequately Capitalized  The institution meets the required minimum level for each
relevant capital measure. No capital distribution may be made that would result in the
institution becoming undercapitalized. An adequately capitalized institution is one
(i) having a total capital ratio of 8% or greater, (ii) having a tier 1 capital
ratio of 4% or greater and (iii) having a leverage capital ratio of 4% or greater or
a leverage capital ratio of 3% or greater if the institution is rated composite 1 under
the CAMELS (Capital, Assets, Management, Earnings, Liquidity and Sensitivity to market
risk) rating system.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Undercapitalized  The institution fails to meet the required minimum level for any
relevant capital measure. An undercapitalized institution is one (i) having a total
capital ratio of less than 8% or (ii) having a tier 1 capital ratio of less than 4%
or (iii) having a leverage capital ratio of less than 4%, or if the institution is rated a
composite 1 under the CAMELS rating system, a leverage capital ratio of less than 3%.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Significantly Undercapitalized  The institution is significantly below the required
minimum level for any relevant capital measure. A significantly undercapitalized
institution is one (i) having a total capital ratio of less than 6% or
(ii) having a tier 1 capital ratio of less than 3% or (iii) having a leverage
capital ratio of less than 3%.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Critically Undercapitalized  The institution fails to meet a critical capital level
set by the appropriate federal banking agency. A critically undercapitalized institution
is one having a ratio of tangible equity to total assets that is equal to or less than 2%.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11

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If
the FDIC determines, after notice and an opportunity for hearing, that the bank is in an
unsafe or unsound condition, the regulator is authorized to reclassify the bank to the
next lower capital category (other than critically undercapitalized) and require the
submission of a plan to correct the unsafe or unsound condition.

If
the bank is not well capitalized, it cannot accept brokered deposits without prior FDIC
approval and, if approval is granted, cannot offer an effective yield in excess of 75
basis points on interests paid on deposits of comparable size and maturity in such
institutions normal market area for deposits accepted from within its normal market
area, or national rate paid on deposits of comparable size and maturity for deposits
accepted outside the banks normal market area. Moreover, if the bank becomes less
than adequately capitalized, it must adopt a capital restoration plan acceptable to the
FDIC. The bank also would become subject to increased regulatory oversight, and is
increasingly restricted in the scope of its permissible activities. Each company having
control over an undercapitalized institution also must provide a limited guarantee that
the institution will comply with its capital restoration plan. Except under limited
circumstances consistent with an accepted capital restoration plan, an undercapitalized
institution may not grow. An undercapitalized institution may not acquire another
institution, establish additional branch offices or engage in any new line of business
unless determined by the appropriate Federal banking agency to be consistent with an
accepted capital restoration plan, or unless the FDIC determines that the proposed action
will further the purpose of prompt corrective action. The appropriate federal banking
agency may take any action authorized for a significantly undercapitalized institution if
an undercapitalized institution fails to submit an acceptable capital restoration plan or
fails in any material respect to implement a plan accepted by the agency. A critically
undercapitalized institution is subject to having a receiver or conservator appointed to
manage its affairs and for loss of its charter to conduct banking activities.

An
insured depository institution may not pay a management fee to a bank holding company
controlling that institution or any other person having control of the institution if,
after making the payment, the institution, would be undercapitalized. In addition, an
institution cannot make a capital distribution, such as a dividend or other distribution
that is in substance a distribution of capital to the owners of the institution if
following such a distribution the institution would be undercapitalized. Thus, if payment
of such a management fee or the making of such would cause the bank to become
undercapitalized, it could not pay a management fee or dividend to us.

As
of December 31, 2006, the bank was deemed to be well capitalized.

FDIC
Assessments. Deposits at the bank are insured by the Deposit Insurance
Fund (the DIF) as administered by the FDIC, up to the applicable limits
established by law  generally $100,000 per accountholder and $250,000 for certain
retirement accountholders. In accordance with regulations adopted to implement the Federal
Deposit Insurance Reform Act of 2005 (FDIRA), deposit insurance premium
assessments are based upon perceived risks to the DIF, by evaluating an institutions
supervisory ratios and other financial ratios and then determining insurance premiums
based upon the likelihood an institution could be downgraded to a CAMELS 3 or worse in the
succeeding year. As a result, institutions deemed to pose less risk, pay lower premiums
than those institutions deemed to pose more risk, which pay more.

FDIRA
caps the amount of the DIF at 1.50% of domestic deposits. The FDIC must issue cash
dividends, awarded on a historical basis, for the amount of the DIF over the 1.50% ratio.
Additionally, if the DIF exceeds 1.35% of domestic deposits at year-end, the FDIC is
required to issue cash dividends, awarded on a historical basis, for half of the amount of
the excess. Pursuant to the FDIRA, the FDIC will begin indexing deposit insurance coverage
levels for inflation beginning in 2012. Moreover, if we become undercapitalized we cannot
accept employee benefit plan deposits.

Transactions
with Affiliates and Insiders. The bank is subject to the provisions of
Section 23A of the Federal Reserve Act, which places limits on the amount of loans or
extensions of credit to, or investments in, or certain other transactions with, affiliates
and on the amount of advances to third parties collateralized by the securities or
obligations of affiliates. The aggregate of all covered transactions is limited in amount,
as to any one affiliate, to 10% of the banks capital and surplus and, as to all
affiliates combined, to 20% of the banks capital and surplus. Furthermore, within
the foregoing limitations as to amount, each covered transaction must meet specified
collateral requirements. Compliance is also required with certain provisions designed to
avoid the taking of low quality assets.

12

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The
bank also is subject to the provisions of Section 23B of the Federal Reserve Act which,
among other things, prohibits an institution from engaging in certain transactions with
certain affiliates unless the transactions are on terms substantially the same, or at
least as favorable to such institution or its subsidiaries, as those prevailing at the
time for comparable transactions with nonaffiliated companies. The bank is subject to
certain restrictions on extensions of credit to executive officers, directors, certain
principal shareholders, and their related interests. Such extensions of credit (i) must be
made on substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with third parties and (ii) must not
involve more than the normal risk of repayment or present other unfavorable features.

The
Federal Reserve Board has issued Regulation W, which codifies prior regulations under
Sections 23A and 23B of the Federal Reserve Act and interpretative guidance with respect
to affiliate transactions. Regulation W incorporates the exemption from the affiliate
transaction rules but expands the exemption to cover the purchase of any type of loan or
extension of credit from an affiliate. In addition, under Regulation W:

| |  | a bank and its subsidiaries may not
purchase a low-quality asset from an affiliate;
| | - | -----------------------------------------------------------------------------------

| |  | covered transactions and other specified transactions between a bank or its subsidiaries
and an affiliate must be on terms and conditions that are consistent with safe and sound
banking practices; and | 
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | with some exceptions, each loan or extension of credit by a bank to an affiliate must be
secured by collateral with a market value ranging from 100% to 130%, depending on the type
of collateral, of the amount of the loan or extension of credit. | 
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

Regulation
W generally excludes all non-bank and non-savings association subsidiaries of banks from
treatment as affiliates, except to the extent that the Federal Reserve Board decides to
treat these subsidiaries as affiliates. The regulation also limits the amount of loans
that can be purchased by a bank from an affiliate to not more than 100% of the banks
capital and surplus.

Branching.
          Under current South Carolina law, we may open branch offices throughout South
          Carolina with the prior approval of the South Carolina Board of Financial
          Institutions. In addition, with prior regulatory approval, the bank will be able
          to acquire existing banking operations in South Carolina. Furthermore, federal
          legislation has been passed that permits interstate branching by banks if
          allowed by state law, and interstate merging by banks.

Community
Reinvestment Act. The Community Reinvestment Act requires that, in
connection with examinations of financial institutions within their respective
jurisdictions, a financial institutions primary regulator, which is the FDIC for the
bank, shall evaluate the record of each financial institution in meeting the credit needs
of its local community, including low and moderate income neighborhoods. These factors are
also considered in evaluating mergers, acquisitions, and applications to open a branch or
facility. Failure to adequately meet these criteria could impose additional requirements
and limitations on our bank. Additionally, we must publicly disclose the terms of various
Community Reinvestment Act-related agreements.

Finance
Subsidiaries. Under the Gramm-Leach-Bliley Act (the GLBA),
subject to certain conditions imposed by their respective banking regulators, national and
state-chartered banks are permitted to form financial subsidiaries that may
conduct financial or incidental activities, thereby permitting bank subsidiaries to engage
in certain activities that previously were impermissible. The GLBA imposes several
safeguards and restrictions on financial subsidiaries, including that the parent
banks equity investment in the financial subsidiary be deducted from the banks
assets and tangible equity for purposes of calculating the banks capital adequacy.
In addition, the GLBA imposes new restrictions on transactions between a bank and its
financial subsidiaries similar to restrictions applicable to transactions between banks
and non-bank affiliates.

Other
Regulations. Interest and other charges collected or contracted for by the
bank are subject to state usury laws and federal laws concerning interest rates. The
banks loan operations are also subject to federal laws applicable to credit

13

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transactions, such as the:

| |  | The federal Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
| | - | ----------------------------------------------------------------------------------------------

| |  | The Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide
information to enable the public and public officials to determine whether a financial
institution is fulfilling its obligation to help meet the housing needs of the community
it serves;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed
or other prohibited factors in extending credit;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------

| |  | The Fair Credit Reporting Act of 1978, as amended by the Fair and Accurate Credit
Transactions Act, governing the use and provision of information to credit reporting
agencies, certain identity theft protections and certain credit and other disclosures;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The Fair Debt Collection Act, governing the manner in which consumer
debts may be collected by collection agencies; and
| | - | -----------------------------------------------------------------------------------------------------------------------

| |  | The Rules and regulations of the
various federal agencies charged with the responsibility of implementing these federal
laws.
| | - | -----------------------------------------------------------------------------------------------------------------------------

The
deposit operations of the bank also are subject to:

| |  | the Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of
consumer financial records and prescribes procedures for complying with administrative
subpoenas of financial records; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve Board to
implement that Act, which governs automatic deposits to and withdrawals from deposit
accounts and customers rights and liabilities arising from the use of automated
teller machines and other electronic banking services.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Enforcement
Powers. The bank and its institution-affiliated parties,
including its management, employees, agents, independent contractors, and consultants such
as attorneys and accountants and others who participate in the conduct of the financial
institutions affairs, are subject to potential civil and criminal penalties for
violations of law, regulations or written orders of a government agency. These practices
can include the failure of an institution to timely file required reports or the filing of
false or misleading information or the submission of inaccurate reports. Civil penalties
may be as high as $1,000,000 a day for such violations. Criminal penalties for some
financial institution crimes have been increased to twenty years. In addition, regulators
are provided with greater flexibility to commence enforcement actions against institutions
and institution-affiliated parties. Possible enforcement actions include the termination
of deposit insurance. Furthermore, banking agencies power to issue cease-and-desist
orders were expanded. Such orders may, among other things, require affirmative action to
correct any harm resulting from a violation or practice, including restitution,
reimbursement, indemnifications or guarantees against loss. A financial institution may
also be ordered to restrict its growth, dispose of certain assets, rescind agreements or
contracts, or take other actions as determined by the ordering agency to be appropriate.

USA
PATRIOT Act.The USA PATRIOT Act became effective on October 26, 2001,
amended, in part, the bank Secrecy Act, and provides, in part, for the facilitation of
information sharing among governmental entities and financial institutions for the purpose
of combating terrorism and money laundering by enhancing anti-money laundering and
financial transparency laws, as well as enhanced information collection tools and
enforcement mechanics for the U.S. government, including: (i) requiring standards for
verifying customer identification at account opening; (ii) rules to promote
cooperation among financial institutions, regulators, and law enforcement entities in
identifying parties that may be involved in terrorism or money laundering;
(iii) reports by nonfinancial trades and businesses filed with the Treasury
Departments Financial Crimes Enforcement Network for transactions exceeding $10,000;

14

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and (iv) filing suspicious
activities reports by brokers and dealers if they believe a customer may be violating U.S.
laws and regulations and requires enhanced due diligence requirements for financial
institutions that administer, maintain, or manage private bank accounts or correspondent
accounts for non-U.S. persons.

Under
the USA PATRIOT Act, the Federal Bureau of Investigation (FBI) can send our
banking regulatory agencies lists of the names of persons suspected of involvement in
terrorist activities. The bank can be requested, to search its records for any
relationships or transactions with persons on those lists. If the bank finds any
relationships or transactions, it must file a suspicious activity report and contact the
FBI.

The
Office of Foreign Assets Control (OFAC), which is a division of the U.S.
Department of the Treasury, is responsible for helping to insure that United States
entities do not engage in transactions with enemies of the United States, as
defined by various Executive Orders and Acts of Congress. OFAC has sent, and will send,
our banking regulatory agencies lists of names of persons and organizations suspected of
aiding, harboring or engaging in terrorist acts. If the bank finds a name on any
transaction, account or wire transfer that is on an OFAC list, it must freeze such
account, file a suspicious activity report and notify the FBI. The bank has appointed an
OFAC compliance officer to oversee the inspection of its accounts and the filing of any
notifications. The bank actively checks high-risk OFAC areas such as new accounts, wire
transfers and customer files. The bank performs these checks utilizing software, which is
updated each time a modification is made to the lists provided by OFAC and other agencies
of Specially Designated Nationals and Blocked Persons.

Privacy
and Credit Reporting.Financial institutions are required to disclose their
policies for collecting and protecting confidential information. Customers generally may
prevent financial institutions from sharing nonpublic personal financial information with
nonaffiliated third parties except under narrow circumstances, such as the processing of
transactions requested by the consumer or when the financial institution is jointly
sponsoring a product or service with a nonaffiliated third party. Additionally, financial
institutions generally may not disclose consumer account numbers to any nonaffiliated
third party for use in telemarketing, direct mail marketing or other marketing to
consumers. It is the banks policy not to disclose any personal information unless
required by law.

Like
other lending institutions, the bank utilizes credit bureau data in its underwriting
activities. Use of such data is regulated under the Federal Credit Reporting Act on a
uniform, nationwide basis, including credit reporting, prescreening, sharing of
information between affiliates, and the use of credit data. The Fair and Accurate Credit
Transactions Act of 2003 (the FACT Act) authorizes states to enact identity
theft laws that are not inconsistent with the conduct required by the provisions of the
FACT Act.

Payment
of Dividends. A South Carolina state bank may not pay dividends from its
capital. All dividends must be paid out of undivided profits then on hand, after deducting
expenses, including reserves for losses and bad debts. The bank is authorized to pay cash
dividends up to 100% of net income in any calendar year without obtaining the prior
approval of the South Carolina Board of Financial Institutions, provided that the bank
received a composite rating of one or two at the last federal or state regulatory
examination. The bank must obtain approval from the South Carolina Board of Financial
Institutions prior to the payment of any other cash dividends. In addition, under the
FDICIA, the bank may not pay a dividend if, after paying the dividend, the bank would be
undercapitalized.

Check
21. The Check Clearing for the 21st Century Act gives substitute
checks, such as a digital image of a check and copies made from that image, the same
legal standing as the original paper check. Some of the major provisions include:

| |  | allowing check truncation without
making it mandatory;
| | - | ------------------------------------------------------

| |  | demanding that every financial institution communicate to accountholders in writing a
description of its substitute check processing program and their rights under the law;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | legalizing substitutions for
and replacements of paper checks without agreement from consumers;
| | - | -----------------------------------------------------------------------------------------------

15

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| |  | retaining in place the previously mandated electronic collection and return of checks
between financial institutions only when individual agreements are in place;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | requiring that when accountholders request verification, financial institutions produce
the original check (or a copy that accurately represents the original) and demonstrate
that the account debit was accurate and valid; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | requiring the re-crediting of funds to an individuals account on the next business
day after a consumer proves that the financial institution has erred.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------

Effect
of Governmental Monetary Policies. Our earnings are affected by domestic economic
conditions and the monetary and fiscal policies of the United States government and its
agencies. The Federal Reserve banks monetary policies have had, and are likely to
continue to have, an important impact on the operating results of commercial banks through
its power to implement national monetary policy in order, among other things, to curb
inflation or combat a recession. The monetary policies of the Federal Reserve Board have
major effects upon the levels of bank loans, investments and deposits through its open
market operations in United States government securities and through its regulation of the
discount rate on borrowings of member banks and the reserve requirements against member
bank deposits. It is not possible to predict the nature or impact of future changes in
monetary and fiscal policies.

Proposed
Legislation and Regulatory Action. New regulations and statutes are regularly
proposed that contain wide-ranging proposals for altering the structures, regulations, and
competitive relationships of the nations financial institutions. We cannot predict
whether or in what form any proposed regulation or statute will be adopted or the extent
to which our business may be affected by any new regulation or statute.

16

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# RISK FACTORS

We have grown rapidly and
may not be able to sustain this rate of growth for future periods.

We
have grown rapidly since opening Tidelands Bank in October 2003. However, we may not be
able to sustain this rate of growth and may not even be able to grow our business at all.
Because of our relatively small size and short operating history, it will be difficult for
us to generate similar asset growth rates as we continue to expand, and consequently our
historical results of operations are not necessarily indicative of our future operations.
Various factors, such as economic conditions, regulatory and legislative considerations,
and competition, may also impede our ability to expand our market presence. If we
experience a significant decrease in our rate of growth, our results of operations and
financial condition may be adversely affected because a high percentage of our operating
costs are fixed expenses.

We are dependent on key
individuals and the loss of one or more of these key individuals could curtail our growth
and adversely affect our prospects.

Robert
E. Coffee, Jr., our president and chief executive officer, has extensive and long-standing
ties within our market area and substantial experience with our operations which has
contributed significantly to our growth. If we lose the services of Mr. Coffee, he would
be difficult to replace and our business and development could be materially and adversely
affected.

Our
success also depends, in part, on our continued ability to attract and retain experienced
management personnel and loan originators, including Alan W. Jackson, Robert H. Mathewes,
Jr., Milon C. Smith, and James M. Bedsole. The loss of the services of several of such key
personnel could adversely affect our growth strategy and prospects to the extent we are
unable to replace such personnel.

The success of our growth
strategy depends on our ability to identify and retain individuals with experience and
relationships in the markets in which we intend to expand.

To
expand our coastal franchise successfully, we must identify and retain experienced key
management members with local expertise and relationships in these markets. We expect that
competition for qualified management in the markets in which we may expand will be intense
and that there will be a limited number of qualified persons with knowledge of and
experience in the community banking industry in these markets. Even if we identify
individuals that we believe could assist us in establishing a presence in a new market, we
may be unable to recruit these individuals away from more established financial
institutions. In addition, the process of identifying and recruiting individuals with the
combination of skills and attributes required to carry out our strategy requires both
management and financial resources and is often lengthy. Our inability to identify,
recruit, and retain talented personnel to manage new offices effectively would limit our
growth and could materially adversely affect our business, financial condition, and
results of operations.

An economic downturn,
especially one affecting the Charleston, Myrtle Beach and Hilton Head metropolitan areas,
could reduce our customer base, our level of deposits, and demand for financial
products such as loans.

Our
success significantly depends upon the growth in population, income levels, deposits and
housing stats in our markets, primarily the Charleston, Myrtle Beach and Hilton Head
metropolitan areas. If the communities in which we operate do not grow or if prevailing
economic conditions locally or nationally are unfavorable, our business may not succeed.
An economic downturn would likely contribute to the deterioration of the credit quality of
our loan portfolio and reduce our level of customer deposits, which in turn would hurt our
business. Interest received on loans represented approximately 92.5% of our interest
income for the year ended December 31, 2006. If an economic downturn occurs in the economy
as a whole, or in the Charleston, Myrtle Beach or Hilton Head metropolitan markets,
borrowers may be less likely to repay their loans as scheduled or at all. Moreover, the
value of real estate or other collateral that may secure our loans could be adversely
affected. Unlike many larger institutions, we are not able to spread the risks of
unfavorable local economic conditions across a large number of diversified economies and
geographic locations.

17

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An economic downturn could,
therefore, result in losses that could materially and adversely affect our business.

The lack of seasoning of
our loan portfolio makes it difficult to assess the adequacy of our loan loss reserves
accurately.

We
attempt to maintain an appropriate allowance for loan losses to provide for potential
losses in our loan portfolio. We periodically determine the amount of the allowance based
on consideration of several factors, including:

| |  | an ongoing review of the quality,
mix, and size of our overall loan portfolio;
| | - | ------------------------------------------------------------------------------

| |  | our historical loan loss experience;
| | - | ------------------------------------

| |  | evaluation of economic conditions;
| | - | ----------------------------------

| |  | regular reviews of loan delinquencies and loan
portfolio quality; and
| | - | ---------------------------------------------------------------------

| |  | the amount and quality of collateral, including guarantees,
securing the loans.
| | - | -------------------------------------------------------------------------------

However,
there is no precise method of predicting credit losses, since any estimate of loan losses
is necessarily subjective and the accuracy depends on the outcome of future events. In
addition, due to our rapid growth over the past several years and our limited operating
history, a large portion of the loans in our loan portfolio was originated recently. In
general, loans do not begin to show signs of credit deterioration or default until they
have been outstanding for some period of time, a process referred to as
seasoning. As a result, a portfolio of older loans will usually perform more
predictably than a newer portfolio. As of December 31, 2006, we had only two loans on
nonaccrual status totaling approximately $2.0 million. In addition, we have not
charged-off any loans since our inception. Because our loan portfolio is relatively new,
the current level of delinquencies and defaults may not be representative of the level
that will prevail when the portfolio becomes more seasoned, which may be higher than
current levels. If charge-offs in future periods increase, we may be required to increase
our provision for loan losses, which would decrease our net income and possibly our
capital.

Our decisions regarding
credit risk and reserves for loan losses may materially and adversely affect our business.

Making
loans and other extensions of credit is an essential element of our business. Although we
seek to mitigate risks inherent in lending by adhering to specific underwriting practices,
our loans and other extensions of credit may not be repaid. The risk of nonpayment is
affected by a number of factors, including:

| |  | the duration of the credit;
| | - | ---------------------------

| |  | the credit profile of a particular customer;
| | - | --------------------------------------------

| |  | the changes in economic
and industry conditions; and
| | - | ----------------------------------------------------

| |  | in the case of a collateralized
loan, risks resulting from uncertainties about the future value of the collateral.
| | - | ------------------------------------------------------------------------------------------------------------------

While
we generally underwrite the loans in our portfolio in accordance with our own internal
underwriting guidelines and regulatory supervisory guidelines, in certain circumstances we
have made loans which exceed either our internal underwriting guidelines, supervisory
guidelines, or both. As of December 31, 2006, approximately $37.6 million, or 13.8%, of
our loans had loan-to-value ratios that exceeded regulatory supervisory guidelines, of
which nine loans totaling approximately $3.3 million had loan-to-value ratios of 100% or
more. In addition, supervisory limits on commercial loan to value exceptions are set at
30% of our banks capital. At December 31, 2006, $19.6 million of our commercial
loans, or 38.5% of our banks capital, exceeded the supervisory loan to value ratio.
The number of loans in our portfolio with loan-to-value ratios in excess of supervisory
guidelines, our internal guidelines, or both could increase the risk of delinquencies and
defaults in our portfolio.

18

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A significant portion of
our loan portfolio is secured by real estate, and events that negatively impact the real
estate market could hurt our business.

A
significant portion of our loan portfolio is secured by real estate. As of December 31,
2006, approximately 90.4% of our loans had real estate as a primary or secondary component
of collateral. The real estate collateral in each case provides an alternate source of
repayment in the event of default by the borrower and may deteriorate in value during the
time the credit is extended. A weakening of the real estate market in our primary market
area could result in an increase in the number of borrowers who default on their loans and
a reduction in the value of the collateral securing their loans, which in turn could have
an adverse effect on our profitability and asset quality. If we are required to liquidate
the collateral securing a loan to satisfy the debt during a period of reduced real estate
values, our earnings and capital could be adversely affected. Acts of nature, including
hurricanes, tornados, earthquakes, fires and floods, which may cause uninsured damage and
other loss of value to real estate that secures these loans, may also negatively impact
our financial condition.

A large percentage of the
loans in our portfolio currently include exceptions to our loan policies and supervisory
guidelines.

All
of the loans that we make are subject to written loan policies adopted by our board of
directors and to supervisory guidelines imposed by our regulators. Our loan policies are
designed to reduce the risks associated with the loans that we make by requiring our loan
officers to take certain steps that vary depending on the type and amount of the loan,
prior to closing a loan. These steps include, among other things, making sure the proper
liens are documented and perfected on property securing a loan, and requiring proof of
adequate insurance coverage on property securing loans. Loans that do not fully comply
with our loan policies are known as exceptions. We categorize exceptions as
policy exceptions, financial statement exceptions and collateral exceptions. As of
December 31, 2006, approximately 10.44% of the loans in our portfolio included collateral
exceptions to our loan policies, which exceeds the 10% suggested by our regulators. As a
result of these exceptions, such loans may have a higher risk of loan loss than the other
loans in the portfolio that fully comply with our loan policies. In addition, we may be
subject to regulatory action by federal or state banking authorities if they believe the
number of exceptions in our loan portfolio represents an unsafe banking practice. Although
we have recently taken steps to reduce the number of exceptions in our loan portfolio, we
may not be successful in further reducing and managing the number of exceptions in our
loan portfolio.

Changes in interest rates
may reduce our profitability.

Our
profitability depends in large part on our net interest income, which is the difference
between interest income from interest-earning assets, such as loans and investment
securities, and interest expense on interest-bearing liabilities, such as deposits and
other borrowings. Approximately 67.1% of our loans were variable rate loans at December
31, 2006, and we were liability sensitive at December 31, 2006. During 2007, we expect to
be liability sensitive over the one year horizon, which means that our net interest income
will generally decrease in higher interest rate environments and rise in lower interest
rate environments. Our net interest income will be adversely affected if market interest
rates change such that the interest we earn on loans and investments decreases faster than
the interest we pay on deposits and borrowings. Many factors cause changes in interest
rates, including governmental monetary policies and domestic and international economic
and political conditions. While we intend to manage the effects of changes in interest
rates by adjusting the terms, maturities, and pricing of our assets and liabilities, our
efforts may not be effective and our financial condition and results of operations could
suffer.

We
face strong competition for customers, which could prevent us from obtaining customers
and may cause us to pay higher interest rates to attract customers.

The
banking business is highly competitive, and we experience competition in our market from
many other financial institutions. We compete with commercial banks, credit unions,
savings institutions, mortgage banking firms, consumer finance

19

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companies, securities brokerage
firms, insurance companies, money market funds, and other mutual funds, as well as other
super-regional, national, and international financial institutions that operate offices in
our primary market areas and elsewhere.

We
compete with these institutions both in attracting deposits and in making loans. In
addition, we have to attract our customer base from other existing financial institutions
and from new residents. Many of our competitors are well-established, larger financial
institutions, such as BB&T, Bank of America, Wachovia, and Carolina First Bank. These
institutions offer some services, such as extensive and established branch networks and
trust services that we do not provide. We also compete with local community banks in our
market. There is a risk that we will not be able to compete successfully with other
financial institutions in our market, and that we may have to pay higher interest rates to
attract deposits and pay higher wages for new employees, resulting in reduced
profitability. In addition, competitors that are not depository institutions are generally
not subject to the extensive regulations that apply to us.

We may not be able to
compete with our larger competitors for larger customers because our lending limits are
lower than theirs.

We
are limited in the amount we can loan a single borrower by the amount of the banks
capital. Our legal lending limit is 15% of the banks capital and surplus, or $7.6
million at December 31, 2006. Our internal lending limit was $5.0 million at December 31,
2006. Even though our legal lending limit increased after we raised net proceeds of $16.4
million in a public stock offering in October 2006, it is still significantly less than
the limit for our larger competitors and may affect our ability to seek relationships with
larger businesses in our market area.

We are subject to
extensive regulation that could limit or restrict our activities.

We
operate in a highly regulated industry and are subject to examination, supervision, and
comprehensive regulation by the South Carolina Board of Financial Institutions, the FDIC,
and the Federal Reserve Board. Our compliance with these regulations is costly and
restricts certain of our activities, including payment of dividends, mergers and
acquisitions, investments, loans and interest rates charged, interest rates paid on
deposits, and locations of offices. We must also meet regulatory capital requirements. If
we fail to meet these capital and other regulatory requirements, our financial condition,
liquidity, and results of operations would be materially and adversely affected. Our
failure to remain well capitalized for regulatory purposes could affect
customer confidence, our ability to grow, our cost of funds and FDIC insurance, our
ability to pay dividends on common stock, and our ability to make acquisitions.

The
laws and regulations applicable to the banking industry could change at any time, and we
cannot predict the effects of these changes on our business and profitability. For
example, new legislation or regulation could limit the manner in which we may conduct our
business, including our ability to obtain financing, attract deposits, and make loans.
Many of these regulations are intended to protect depositors, the public, and the FDIC,
not shareholders. In addition, the burden imposed by these regulations may place us at a
competitive disadvantage compared to competitors who are less regulated. The laws,
regulations, interpretations, and enforcement policies that apply to us have been subject
to significant change in recent years, sometimes retroactively applied, and may change
significantly in the future. Our cost of compliance could adversely affect our ability to
operate profitably. See Supervision and Regulation.

Our future growth may require
us to raise additional capital in the future, but that capital may not be available when
it is needed.

We
are required by regulatory authorities to maintain adequate levels of capital to support
our operations. We anticipate that our capital levels will satisfy our regulatory
requirements for the foreseeable future. We may at some point, however, need to raise
additional capital to support our continued growth. Our ability to raise additional
capital will depend in part on conditions in the capital markets at that time, which are
outside our control, and our financial performance. Accordingly, we may be unable to raise
additional capital, if and when needed, on terms acceptable to us, or at all. If we cannot
raise additional capital when

20

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needed, our ability to further expand
our operations through internal growth and acquisitions could be materially impaired. In
addition, if we decide to raise additional equity capital, your interest could be diluted.

We will face risks with
respect to future expansion and acquisitions or mergers.

Although
we do not have any current plans to do so, we may seek to acquire other financial
institutions or parts of those institutions. We may also expand into new markets or lines
of business or offer new products or services. These activities would involve a number of
risks, including:

| |  | taking additional time and creating expense associated with identifying and evaluating potential acquisitions and merger
              partners;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------

| |  | using inaccurate estimates and judgments to evaluate credit, operations, management, and market risks with respect to the
              target institution or assets;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | diluting our existing
shareholders in an acquisition;
| | - | -----------------------------------------------------

| |  | taking additional time and creating expense associated with evaluating new markets for
expansion, hiring experienced local management, and opening new offices, as there may be a
substantial time lag between these activities before we generate sufficient assets and
deposits to support the costs of the expansion;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | taking a significant amount of time negotiating a transaction or working on expansion
plans, resulting in managements attention being diverted from the operation of our
existing business;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | taking time and creating expense
integrating the operations and personnel of the combined businesses;
| | - | -----------------------------------------------------------------------------------------------------

| |  | creating an adverse
short-term effect on our results of operations; and
| | - | -----------------------------------------------------------------------

| |  | losing key employees and customers
as a result of an acquisition that is poorly received.
| | - | -----------------------------------------------------------------------------------------

We
have never acquired another institution before, so we lack experience in handling any of
these risks. There is also a risk that any expansion effort will not be successful.

Efforts to comply with
Sarbanes-Oxley Act will involve significant expenditures, and non-compliance with the
Sarbanes-Oxley Act may adversely affect us.

The
Sarbanes-Oxley Act of 2002, and the related rules and regulations promulgated by the
Securities and Exchange Commission that are now applicable to us, have increased the
scope, complexity, and cost of corporate governance, reporting, and disclosure practices.
We have experienced, and we expect to continue to experience, greater compliance costs,
including costs related to internal controls, as a result of the Sarbanes-Oxley Act. For
example, for the year ending December 31, 2007, we will be required to comply with Section
404 of the Sarbanes-Oxley Act and our management will be required to issue a report on our
internal controls over financial reporting. We expect the applicability of these rules and
regulations to us will continue to increase our accounting, legal, and other costs, and to
make some activities more difficult, time consuming and costly. In the event that we are
unable to maintain or achieve compliance with the Sarbanes-Oxley Act and related rules, we
may be adversely affected.

We
are evaluating our internal control systems in order to allow management to report on, and
our independent registered public accounting firm to attest to, our internal control over
financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. If we identify
significant deficiencies or material weaknesses in our internal control over financial
reporting that we cannot remediate in a timely manner, or if we are unable to receive a
positive attestation from our independent registered public accounting firm with respect
to our internal control over financial reporting, the trading price of our common stock
could decline, our ability to obtain any necessary equity or debt financing could suffer,
and our common stock could ultimately be delisted from the NASDAQ Global Market. In this
event, the liquidity of our common stock would be severely limited and the market price of
our common stock would likely decline significantly.

In
addition, the rules adopted as a result of the Sarbanes-Oxley Act could make it more
difficult or more costly for us to obtain certain types of insurance, including
directors and officers liability insurance, which could make it more difficult
for us

21

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to attract and retain qualified
persons to serve on our board of directors or as executive officers.

We are currently undertaking a
number of construction projects which could divert the time and attention of our senior
management.

We
are currently engaged in several simultaneous construction projects relating to the
improvement of our current facilities and the addition of new facilities expected to last
over the next 12 months. These projects include the construction of four traditional
stand-alone branches, two of which will replace current store-front branches, and the
renovation of our operations center. We rely on our chief executive officer, chief
financial officer and other senior management to oversee these construction projects.
Generally, these officers do not have experience in managing construction projects. As a
result, there is a risk that such projects may take longer or result in greater expenses
than we intend. In addition, the time required to oversee such projects could result in
managements attention being materially diverted from the operations of our business.
This could result in an adverse effect on our near-term results of operations.

Given the geographic
concentration of our operations, we could be significantly affected by any natural
disaster that affects coastal South Carolina.

Our
operations are concentrated in and our loan portfolio consists almost entirely of loans to
persons and businesses located in coastal South Carolina. Similarly, the collateral for
many of our loans consists of real and personal property located in this same geographic
area. This area is susceptible to natural disasters which could cause extensive damage to
the general region. Specifically, disaster conditions resulting from any hurricane that
hits in this area would adversely affect the local economies and real estate markets,
which could negatively impact our business. Adverse economic conditions resulting from
such a disaster could also negatively impact the ability of our customers to repay their
loans and could affect the value of the collateral securing these loans. Furthermore,
damage resulting from any natural disaster could also result in continued economic
uncertainty that could negatively impact businesses in those areas. Consequently, our
ability to continue to originate loans may be impaired by adverse changes in local and
regional economic conditions in this area following any natural disaster.

22

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# Item 2. Description of
Property.

Our
main office facility is located at 875 Lowcountry Boulevard in Mount Pleasant, South
Carolina. The building is a full service banking facility with two drive-through banking
stations and an ATM. The lease has an initial term of 10 years from March 29, 2004 with
options for two additional five year renewal periods. We paid approximately $178,000 in
rent this year. Our annual rent payments will increase to $190,000 in 2007, and then
subsequently increase in accordance with a formula based on the Consumer Price Index.

Our
Summerville facility is located at 105-C Burton Avenue in Summerville, South Carolina. It
is a temporary full service banking facility which does not have drive-through windows or
an ATM. We have an initial term of 12 months from September 7, 2004 with monthly
extensions after that time. We currently pay approximately $3,300 per month in rent
although our payments are subject to future increase in accordance with a formula based on
the Consumer Price Index. We intend to use this facility as a temporary banking office
until we open a suitable permanent branch location, which will open in mid 2007.

On
February 1, 2005, the bank entered into an agreement to purchase property, including a
4,340 square foot building, in the Park West section of Mount Pleasant for $1.6 million.
We will open as a full service banking facility in the first half of 2007.

On
February 10, 2005, the bank entered into a lease agreement for an office located at 4420
Oleander Drive in Myrtle Beach, South Carolina. This space will be utilized as a temporary
full service banking facility while we construct facilities suitable for a permanent full
service branch. This lease has an initial term of two years with a renewal option for an
additional 12 months. The lease has been extended thru June 9, 2007 at a monthly expense
of $3,000.

On
August 26, 2005, the bank purchased property and a facility for $1.3 million at 840
Lowcountry Boulevard in Mount Pleasant, South Carolina. In January 2007, this facility was
occupied by our operations departments.

On
December 22, 2005, the bank entered into a land lease for a West Ashley location with the
intent of building and opening a branch in 2007. The lease has an initial twenty-year term
and may be extended at the banks option for four additional five-year terms. The
lease requires monthly payments of $5,833 for the first five years, which increases 12%
every fifth year thereafter. Rent commences on the earlier of 18 months from the lease
commencement date noted above or on the date the facility opens for business. In addition,
the bank leases office space for the West Ashley loan production location. The lease was
originated on June 30, 2006 and has an initial one-year term. The lease may be extended at
the banks option for an additional 12 month term. The lease requires monthly
payments of $1,185 per month. Rental expense under these operating lease agreements were
$12,155 for the year ended December 31, 2006.

On
September 28, 2006, the bank entered into a lease for office space for its Bluffton loan
production office. The lease has an initial one-year term and may be extended at the
banks option for an additional 12 month term. The lease requires monthly payments of
$2,575 per month. Rental expense under this operating lease agreement was $10,300 for the
year ended December 31, 2006.

We
believe that all of our properties are adequately covered by insurance.

# Item 3. Legal
Proceedings.

Neither
the company nor the bank is a party to, nor is any of their property the subject of, any
material pending legal proceedings incidental to the business of the company or the bank.

# 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.

23

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# PART II

# Item 5. Market for
Common Equity and Related Stockholder Matters.

In
connection with our public offering in October 2006, our common stock was approved for
listing on the NASDAQ Global Market under the symbol TDBK. Prior to October
2006, our common stock was quoted on the OTC Bulletin Board under the symbol
TDBK.OB. As of December 31, 2006, we had approximately 612 shareholders of
record.

The
following table shows the reported high and low closing prices for shares of our common
stock published by NASDAQ beginning with the fourth quarter of 2006. For the prior periods
indicated, the table shows the reported high and low bid information on the OTC Bulletin
Board. The OTC Bulletin Board prices are quotations, which reflect inter-dealer prices,
without retail mark-up, mark-down or commission, and may not represent actual
transactions. Prior to our listing on NASDAQ, there was limited trading, at widely varying
prices, and trading had not created an active market for our common stock. Thus, the
prices at which trades occurred may not be representative of the actual value of our
common stock. On a number of days during this period, there were no trades at all in our
common stock.

|               |  | 
|-------------- |  | 
|               |  | 
|2006           |  | 
|Fourth Quarter |  | 
|Third Quarter  |  | 
|Second Quarter |  | 
|First Quarter  |  | 
|2005           |  | 
|Fourth Quarter |  | 

We
have not declared or paid any cash dividends on our common stock since our inception. For
the foreseeable future we do not intend to declare cash dividends. We intend to retain
earnings to grow our business and strengthen our capital base. Our ability to pay
dividends depends on the ability of our subsidiary, Tidelands Bank, to pay dividends to
us. As a South Carolina state bank, Tidelands Bank may only pay dividends out of its net
profits, after deducting expenses, including losses and bad debts. In addition, the bank
is prohibited from declaring a dividend on its shares of common stock until its surplus
equals its stated capital. At December 31, 2006, the bank was no longer prohibited from
declaring a dividend because it had accumulated retained earnings of approximately
$670,000.

24

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# Item 6.
Managements Discussion and Analysis or Plan of Operation.

The
following discussion reviews our results of operations and assesses our financial
condition. You should read the following discussion and analysis in conjunction with our
consolidated financial statements and the related notes included elsewhere in this report.
Our discussion and analysis for the years ended December 31, 2006, 2005 and 2004 is based
on our audited financial statements for such periods. The following discussion describes
our results of operations for the year ended December 31, 2006 as compared to December 31,
2005 and 2004, and also analyzes our financial condition as of December 31, 2006 as
compared to December 31, 2005.

# Overview

We
were incorporated in March 2002 to organize and serve as the holding company for Tidelands
Bank. Since we opened our bank in October 2003, we have grown total assets to $336.6
million, loans to $273.2 million, and deposits to $259.1 million.

Like
most community banks, we derive the majority of our income from interest received on our
loans and investments. Our primary source of funds for making these loans and investments
is our deposits, on which we pay interest. Consequently, one of the key measures of our
success is our amount of net interest income, or the difference between the income on our
interest-earning assets, such as loans and investments, and the expense on our
interest-bearing liabilities, such as deposits and borrowings. Another key measure is the
spread between the yield we earn on these interest-earning assets and the rate we pay on
our interest-bearing liabilities, which is called our net interest spread.

There
are risks inherent in all loans, so we maintain an allowance for loan losses to absorb
probable losses on existing loans that may become uncollectible. We maintain this
allowance by charging a provision for loan losses against our operating earnings for each
period. We have included a detailed discussion of this process, as well as several tables
describing our allowance for loan losses.

In
addition to earning interest on our loans and investments, we earn income through fees and
other charges to our customers. We have also included a discussion of the various
components of this noninterest income, as well as of our noninterest expense.

The
following discussion and analysis also identifies significant factors that have affected
our financial position and operating results during the periods included in the
accompanying financial statements. We encourage you to read this discussion and analysis
in conjunction with our financial statements and the other statistical information
included in this report.

# Critical Accounting
Policies

We
have adopted various accounting policies that govern the application of accounting
principles generally accepted in the United States and with general practices within the
banking industry in the preparation of our financial statements. Our significant
accounting policies are described in the footnotes to our audited consolidated financial
statements as of December 31, 2006.

Certain
accounting policies involve significant judgments and assumptions by us that have a
material impact on the carrying value of certain assets and liabilities. We consider these
accounting policies to be critical accounting policies. The judgment and assumptions we
use are based on historical experience and other factors, which we believe to be
reasonable under the circumstances. Because of the nature of the judgment and assumptions
we make, actual results could differ from these judgments and estimates that could have a
material impact on the carrying values of our assets and liabilities and our results of
operations.

We
believe the allowance for loan losses is the critical accounting policy that requires the
most significant judgment and estimates used in preparation of our consolidated financial
statements. Some of the more critical judgments supporting the amount of our allowance for
loan losses include judgments about the credit worthiness of borrowers, the estimated
value of the underlying collateral, the assumptions about cash flow, determination of loss
factors for estimating credit losses, the impact of current

25

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events, and conditions and other
factors impacting the level of probable inherent losses. Under different conditions or
using different assumptions, the actual amount of credit losses incurred by us may be
different from managements estimates provided in our consolidated financial
statements. Refer to the portion of this discussion that addresses our allowance for loan
losses for a more complete discussion of our processes and methodology for determining our
allowance for loan losses.

# Results of Operations

Income Statement Review

Summary

Our
net income was approximately $1.5 million, $40,000 and a loss of $803,000 for the years
ended December 31, 2006, 2005 and 2004, respectively. Net income before income tax expense
was $2.4 million and $60,000 for the years ended December 31, 2006 and 2005, respectively,
compared to a net loss before income tax benefit of $1.2 million for the year ended
December 31, 2004. In comparing year-ends December 31, 2006 and 2005, the $2.3 million
increase in net income before tax expense resulted from increases of $4.7 million in net
interest income and $312,000 in other income partially offset by a $3.1 million increase
in noninterest expense. Noninterest income increased from $475,000 for the year ended
December 31, 2005 to $787,000 for the year ended December 31, 2006. For the years ended
December 31, 2005 and 2004, the $1.3 million increase in net income before tax expense
resulted from increases of $3.6 million in net interest income and $147,000 in other
income partially offset by a $1.5 million increase in noninterest expense. Noninterest
income increased from $328,000 for the year ended December 31, 2004 to $475,000 for the
year ended December 31, 2005. We also recorded provisions for loan losses of $1.2 million,
$1.5 million and $565,000 for the years ended December 31, 2006, 2005 and 2004,
respectively.

Net Interest Income

Our
level of net interest income is determined by the level of earning assets and the
management of our net interest margin. The growth in our loan portfolio is the primary
driver of the increase in net interest income. During the years ended December 31, 2006
and 2005, our loan portfolio increased $93.5 million and $124.4 million, respectively. We
anticipate the growth in loans will continue to drive the growth in assets and the growth
in net interest income. Since loans typically provide higher interest yields than other
types of interest-earning assets, we invest a substantial percentage of our earning assets
in our loan portfolio. However, no assurance can be given that we will be able to continue
to increase loans at the same growth rate as we have experienced in the past.

Our
decision to grow the loan portfolio at the current pace has created the need for a higher
level of capital and the need to increase deposits and borrowings. This loan growth
strategy also resulted in a significant portion of our assets being in higher earning
loans than in lower yielding investments. At December 31, 2006, loans represented 81.2% of
total assets, while securities and federal funds sold represented 12.2% of total assets.
While we plan to continue our focus on increasing the loan portfolio, we also anticipate
increasing the size of the investment portfolio.

The
current low interest rate environment by historical measures has allowed us to obtain
short-term borrowings and wholesale certificates of deposit at rates that were typically
lower than certificate of deposit rates being offered in our local market. This funding
strategy allowed us to continue to operate in one location, maintain a smaller staff, and
not incur significant marketing costs to advertise deposit rates, which in turn allowed us
to focus on growing our loan portfolio. At December 31, 2006, retail deposits represented
$119.5 million, or 40.7% of total funding, which includes total deposits plus securities
sold under agreements to repurchase and other borrowings. Commercial deposits represented
$28.9 million, or 9.9% of total funding, borrowings represented $34.2 million, or 11.7% of
total funding, and wholesale out-of-market deposits represented $110.7 million, or 37.7%
of total funding.

We
have converted two of our loan production offices into temporary full service banking
facilities, one in the second

26

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quarter of 2005 and the other in the
fourth quarter of 2005. We also opened loan production offices in the West Ashley area of
Charleston, South Carolina in September 2006 and in the Hilton Head area of South Carolina
in October 2006. We have begun constructing permanent facilities in Myrtle Beach and
Summerville which we plan to open in mid 2007. In addition, we plan to open a new full
service branch office in the Park West area of Mount Pleasant and convert the loan
production office in the West Ashley area of Charleston to a full service branch by the
end of the third quarter of 2007. We plan to focus our efforts at these branch locations
on obtaining lower cost deposits that are less affected by rising rates. We plan to
continue to offer aggressive rates on investment checking and money market accounts. Based
on prior experience, we anticipate the majority of these funds to be retained as core
deposits. Our goal is to maintain a higher than average percentage of assets being funded
by in market retail deposits and to increase the percentage of low-cost
transaction accounts to total deposits. No assurance can be given that these objectives
will be achieved. Although we anticipate that these additional retail deposit offices will
assist us in meeting these objectives, we also anticipate that the current deposit
strategies and the opening of the new offices will have a dampening effect on earnings
through the end of 2007. However, we believe that these two strategies will provide
additional customers in our new markets and will provide a lower alternative cost of
funding in a higher or rising interest rate environment.

In
addition to the growth in both assets and liabilities, and the timing of repricing of our
assets and liabilities, net interest income is also affected by the ratio of
interest-earning assets to interest-bearing liabilities and the changes in interest rates
earned on our assets and interest rates paid on our liabilities. Our net interest income
for the year ended December 31, 2006 increased because we had more interest-earning assets
than interest-bearing liabilities. For the years ended December 31, 2006, 2005 and 2004,
average interest-earning assets exceeded average interest-bearing liabilities by $27.6
million, $22.0 million and $8.9 million, respectively.

The
impact of the Federal Reserves recent interest rate increases resulted in an
increase in both the yields on our variable rate assets and the rates that we paid for our
short-term deposits and borrowings. The net interest spread and net interest margin
decreased during the year ended December 31, 2006 as a result of the bank having more
interest-earning liabilities than interest-bearing assets that repriced as market rates
began to increase over the period. Our net interest margins for the year ended December
31, 2006, 2005 and 2004 were 3.63%, 3.75% and 3.11%, respectively. During the year ended
December 31, 2005, the net interest spread and net interest margin increased as a result
of the bank having more interest-earning assets than interest-bearing liabilities that
repriced as market rates began to increase over the period. We anticipate that additional
increases in short-term rates will result in an increase in loan yields, while higher
rates on our interest deposits and borrowings will also result in a higher cost of funds
to us.

We
have included a number of unaudited tables to assist in our description of various
measures of our financial performance. For example, the Average Balances
tables show the average balance of each category of our assets and liabilities as well as
the yield we earned or the rate we paid with respect to each category during 2006, 2005
and 2004. Our loans typically provide higher interest yields than do other types of
interest-earning assets, which is why we direct a substantial percentage of our earning
assets into our loan portfolio. Similarly, the Rate/Volume Analysis tables
help demonstrate the effect of changing interest rates and changing volume of assets and
liabilities on our financial condition during the periods shown. We also track the
sensitivity of our various categories of assets and liabilities to changes in interest
rates, and we have included tables to illustrate our interest rate sensitivity with
respect to interest-earning accounts and interest-bearing accounts. Finally, we have
included various tables that provide detail about our investment securities, our loans,
our deposits and other borrowings.

27

---

Years Ended December 31,
2006, 2005 and 2004

The
following table sets forth information related to our average balance sheet, average
yields on assets, and average costs of liabilities. We derived these yields by dividing
income or expense by the average balance of the corresponding assets or liabilities. We
derived average balances from the daily balances throughout the periods indicated. During
the three years ended December 31, 2006, 2005 and 2004, we had no securities purchased
with agreements to resell. All investments were owned at an original maturity of over one
year.

|                                   | Average Balances, Income and Expenses, and Rates
|---------------------------------- | ------------------------------------------------
|
|
|
|
|
|Earning assets:                    |                                                 
|Interest bearing balances          |                                                 
|Federal funds sold                 |                                                 
|Taxable investment securities      |                                                 
|Non-taxable investment             |                                                 
|securities                         |                                                 
|Loans receivable                   |                                                 
|                                   |                                                 
|Total earning assets               |                                                 
|                                   |                                                 
|Nonearning assets:                 |                                                 
|Cash and due from banks            |                                                 
|Mortgage loans held for sale       |                                                 
|Premises and equipment, net        |                                                 
|Other assets                       |                                                 
|Allowance for loan losses          |                                                 
|                                   |                                                 
|Total nonearning assets            |                                                 
|                                   |                                                 
|Total assets                       |                                                 
|                                   |                                                 
|Interest-bearing liabilities:      |                                                 
|Interest bearing transaction       |                                                 
|accounts                           |                                                 
|Savings & money market             |                                                 
|Time deposits less than            |                                                 
|$                          100,000 |                                                 
|Time deposits greater than         |                                                 
|$                          100,000 |                                                 
|Junior subordinated debentures     |                                                 
|Advances from FHLB                 |                                                 
|Securities sold under              |                                                 
|repurchase agreement               |                                                 
|Federal funds purchased            |                                                 
|Other borrowings                   |                                                 
|                                   |                                                 
|Total interest-bearing liabilities |                                                 
|                                   |                                                 
|Noninterest-bearing liabilities:   |                                                 
|Demand deposits                    |                                                 
|Other liabilities                  |                                                 
|Shareholders' equity               |                                                 
|                                   |                                                 
|Total liabilities and              |                                                 
|shareholders' equity               |                                                 
|                                   |                                                 
|Net interest income                |                                                 
|                                   |                                                 
|Net interest spread                |                                                 
|                                   |                                                 
|Net interest margin                |                                                 
|                                   |                                                 

28

---

Our
net interest spread was 3.14%, 3.19% and 2.75% for the years ended December 31, 2006, 2005
and 2004, respectively. The net interest spread is the difference between the yield we
earn on our interest-earning assets and the rate we pay on our interest-bearing
liabilities.

The
net interest margin is calculated as net interest income divided by average
interest-earning assets. Our net interest margin for the years ended December 31, 2006,
2005 and 2004 was 3.63%, 3.75% and 3.11%, respectively. During 2006, interest-earning
assets averaged $273.2 million, compared to $138.3 million in 2005 and $49.3 million in
2004. During the same periods, average interest-bearing liabilities were $245.5 million,
$116.3 million and $40.3 million, respectively.

The
net interest spread and net interest margin decreased during the year ended December 31,
2006 as a result of the bank having more interest-earning liabilities than
interest-bearing assets that repriced as market rates began to increase over the period
and the banks increased reliance on higher rate wholesale funding sources. However,
the net interest spread and net interest margin increased during the year ended December
31, 2005 as a result of the bank having more interest-earning assets than interest-bearing
liabilities that repriced as market rates began to increase over the period.

Net
interest income, the largest component of our income, was $9.9 million, $5.2 million and
$1.5 million for the years ended December 31, 2006, 2005 and 2004, respectively. The
significant increase in 2006 and 2005 resulted from higher levels of both average earning
assets and interest-bearing liabilities, rather than from any increase in the net interest
spread.

The
$4.7 million increase in net interest income for the year ended December 31, 2006 compared
to the same period in 2005 resulted from a $12.5 million increase in interest income
offset by a $7.8 million increase in interest expense. The $3.6 million increase in net
interest income for the year ended December 31, 2005 compared to the same period in 2004
resulted from a $6.9 million increase in interest income offset by a $3.2 million increase
in interest expense.

Interest
income for the year ended December 31, 2006 was $21.8 million, consisting primarily of
$20.1 million on loans, $1.3 million on investments and interest bearing balances, and
$323,000 on federal funds sold. Interest income for the year ended December 31, 2005 was
$9.2 million, consisting of $8.4 million on loans, $632,000 on investments and $215,000 on
federal funds sold. Interest income for the year ended December 31, 2004 was $2.4 million,
consisting of $1.7 million on loans, $592,000 on investments and $65,000 on federal funds
sold. Interest and fees on loans represented 92.5%, 90.8% and 72.1% of total interest
income for the years ended December 31, 2006, 2005 and 2004, respectively. Meanwhile,
income from investments and federal funds sold represented 7.5%, 9.2% and 27.9% of total
interest income for the years ended December 31, 2006, 2005 and 2004, respectively. The
high percentage of interest income from loans related to our strategy to maintain a
significant portion of our assets in higher earning loans compared to lower yielding
investments. Average loans represented 88.7%, 85.7% and 63.6% of average interest-earning
assets for the years ended December 31, 2006, 2005 and 2004, respectively.

Interest
expense for the year ended December 31, 2006 was $11.8 million, consisting primarily of
$10.4 million related to deposits, $424,000 related to securities sold under repurchase
agreements, $85,000 federal funds purchased and other borrowings, $470,000 related to
junior subordinated debentures and $423,000 related to FHLB advances. Interest expense for
the year ended December 31, 2005 was approximately $4.1 million, consisting of $3.8
million related to deposits, $236,000 related to securities sold under repurchase
agreements and $58,000 federal funds purchased and other borrowings. Interest expense for
the year ended December 31, 2004 was approximately $820,000, consisting of $704,000
related to deposits and $116,000 related to securities sold under repurchase agreements
and other borrowings. Interest expense on deposits for the years ended December 31, 2006,
2005 and 2004 represented 88.2%, 92.8% and 85.8%, respectively, of total interest expense.
Meanwhile, interest expense on borrowings represented 11.8%, 7.2% and 14.2% of total
interest expense at December 31, 2006, 2005 and 2004, respectively. During the year ended
December 31, 2006, average interest-bearing liabilities were higher by $129.2 million than
for the same period in 2005, while other borrowings and federal funds purchased averaged
$339,000 million higher, FHLB advances averaged $7.8 million higher, junior subordinated

29

---

debentures averaged $7.1 million higher and securities sold under repurchase agreement
averaged $1.3 million higher than for the same period ended December 31, 2005. During the
year ended December 31, 2005, average interest-bearing liabilities were higher by $76.0
million than for the same period in 2004, while other borrowings averaged $989,000 higher
during the year ended December 31, 2004.

Rate/Volume Analysis

Net
interest income can be analyzed in terms of the impact of changing interest rates and
changing volume. The following tables set forth the effect which the varying levels of
interest-earning assets and interest-bearing liabilities and the applicable rates have had
on changes in net interest income for the periods presented.

|                                  | Year Ended | Year Ended
|--------------------------------- | ---------- | ----------
|
|
|
|
|
|Interest income                   |            |           
|Loans                             |            |           
|Taxable investment securities     |            |           
|Non-taxable investment securities |            |           
|Federal funds sold                |            |           
|Interest bearing balances         |            |           
|                                  |            |           
|Total interest income             |            |           
|                                  |            |           
|Interest expense                  |            |           
|Deposits                          |            |           
|Junior subordinated debentures    |            |           
|Advances from FHLB                |            |           
|Securities sold under repurchase  |            |           
|agreements                        |            |           
|Federal funds purchased           |            |           
|Other borrowings                  |            |           
|                                  |            |           
|Total interest expense            |            |           
|                                  |            |           
|Net interest income               |            |           
|                                  |            |           

Provision for Loan Losses

We
have established an allowance for loan losses through a provision for loan losses charged
as an expense on our statement of operations. We review our loan portfolio periodically to
evaluate our outstanding loans and to measure both the performance of the portfolio and
the adequacy of the allowance for loan losses. Please see the discussion below under
- Balance Sheet Review  Provision and Allowance for Loan Losses for a
description of the factors we consider in determining the amount of the provision we
expense each period to maintain this allowance.

Included
in the statement of operations for the years ended December 31, 2006, 2005 and 2004 is a
noncash expense related to the provision for loan losses of $1.2 million, $1.5 million and
$565,000, respectively. The allowance for loan losses increased by the entire provision
expense for loan losses because we did not incur any net charge-offs during these periods.
The increases in the allowance relates to our decision to increase the allowance in
response to the $93.5 million, $124.4 million and $45.4 million growth in loans for the
years ended December 31, 2006, 2005 and 2004, respectively. The allowance for loan losses
was $3.5 million, $2.2 million and $700,000 as of December 31, 2006, 2005 and 2004,
respectively. The allowance for loan losses as a percentage of gross loans was 1.27% at
December 31, 2006, 1.25% at December 31, 2005 and 1.27% at December 31, 2004. We had two
nonperforming loans totaling approximately $2.0 million at December 31, 2006.

30

---

Noninterest Income

The
following table sets forth information related to our noninterest income:

|                                          | Years Ended December 31,
|----------------------------------------- | ------------------------
|
|
|Service fees on deposit accounts          |                         
|Residential mortgage origination fees     |                         
|Origination income on mortgage loans sold |                         
|Loss on sale of investment securities     |                         
|Gain on sale of property and equipment    |                         
|Other service fees and commissions        |                         
|Other                                     |                         
|                                          |                         
|Total noninterest income                  |                         
|                                          |                         

Noninterest
income for the year ended December 31, 2006 was approximately $787,000, an increase of
$312,000 compared to noninterest income of $475,000 during the same period in 2005.
Noninterest income for the year ended December 31, 2005 was approximately $475,000, an
increase of $147,000 compared to noninterest income of $328,000 during the same period in
2004. The increase was attributable to an increase in mortgage origination income, other
service fees and other income. Residential mortgage origination fees increased
approximately $236,000 from 2005 and $75,000 from 2004.

Residential
mortgage origination fees consist primarily of late charge fees and mortgage origination
fees we receive on residential loans funded and closed by a third party. Residential
mortgage origination fees were $573,000, $337,000 and $262,000 for the years ended
December 31, 2006, 2005 and 2004, respectively. The additional $236,000 in 2006 and
$75,000 in 2005 related primarily to increased volume in the mortgage department as we
expanded this line of business with additional originators. Origination income on mortgage
loans sold includes the interest income collected on mortgage payments prior to selling
these loans to investors. Accordingly, we received $91,000 of origination income on
mortgage loans sold in 2006 compared to $62,000 in 2005 and $33,000 in 2004. We anticipate
that the level of mortgage origination fees will decrease if the mortgage refinancing
business declines due to higher long term interest rates.

Service
fees on deposit accounts consist primarily of service charges on our checking, money
market, and savings accounts. Such fees were $24,000, $13,000 and $6,000 for the years
ended December 31, 2006, 2005, and 2004, respectively. The additional $11,000 in income
for 2006 and $7,000 for 2005 resulted from a larger number of customer accounts.

During
the fourth quarter of 2006, we restructured a portion of our investment portfolio,
incurring a pre-tax charge of $137,000 against current earnings. In addition to the loss
on sale of investment securities, we recognized a gain of $14,000 on the sale of real
estate.

Other
service fees, commissions, and the fee income received from customer non-sufficient funds
transactions increased $89,000 to $144,000 for the year ended December 31, 2006 and
increased $32,000 to $55,000 for the year ended December 31, 2005. The increase is
attributed to the growing number of customers to whom we provide financial services.

Other
income consists primarily of income received on bank owned life insurance, fees received
on debit and credit card transactions, income from sales of checks, and the fees received
on wire transfers. Other income was $78,000, $8,000 and $4,000 for the years ended
December 31, 2006, 2005 and 2004, respectively. The additional $70,000 in other income
from 2005 to 2006 was related primarily to the $59,000 income received from bank owned
life insurance obtained in the fourth quarter of 2006.

31

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Noninterest Expense

The
following table sets forth information related to our noninterest expense.

|                                         | Years Ended December 31,
|---------------------------------------- | ------------------------
|
|
|Salaries and benefits                    |                         
|Occupancy                                |                         
|Furniture and equipment expense          |                         
|Professional fees                        |                         
|Advertising and marketing                |                         
|Insurance                                |                         
|Data processing and related costs        |                         
|Telephone                                |                         
|Postage                                  |                         
|Office supplies, stationery and printing |                         
|Other                                    |                         
|                                         |                         
|Total noninterest expense                |                         
|                                         |                         

We
incurred noninterest expense of $7.1 million for the year ended December 31, 2006 compared
to $4.1 million for the year ended December 31, 2005 and $2.5 million for the year ended
December 31, 2004. For the year ended December 31, 2006, the $2.2 million increase in
salaries and benefits and $273,000 increase in professional fees accounted for 80.0% of
the $3.1 million increase in noninterest expense for the year ended December 31, 2006
compared to the same period in 2005. The increase was due to additional personnel and
facilities to better service our customers. The remaining $625,000 increase resulted
primarily from increases of $151,000 in occupancy, $33,000 in furniture and equipment
expense, $125,000 in marketing costs, $36,000 in insurance costs, $55,000 in data
processing and related costs, and $225,000 in other expense. For the year ended December
31, 2005, the $858,000 increase in salaries and benefits and $98,000 increase in furniture
and equipment expense accounted for 62.2% of the $1.5 million increase in noninterest
expense for the year ended December 31, 2005 compared to the same period in 2004. The
increase was due to additional personnel and facilities to better service our customers.
The remaining $581,000 increase resulted primarily from increases of $111,000 in
occupancy, $90,000 in professional fees, $59,000 in marketing costs, $50,000 in insurance
costs, $18,000 in data processing and related costs, and $253,000 in other expense. A
significant portion of the increase in professional fees is related to additional legal,
audit and compliance expenses. The increase in marketing expense relates to expanding our
market awareness in the Charleston, Myrtle Beach and Hilton Head markets, while a
significant portion of the increase in other expense was due to increased costs of
postage, office supplies, and additional staff education and training.

Salaries
and benefits expense was $4.5 million, $2.3 million and $1.5 million for the years ended
December 31, 2006, 2005 and 2004, respectively. Salaries and benefits represented 62.9%,
57.0% and 57.7% of our total noninterest expense for the years ended December 31, 2006,
2005 and 2004, respectively. The $2.2 million increase in salaries and benefits expense in
2006 compared to 2005 resulted primarily from increases of $1.3 million in base
compensation, $389,000 in additional incentive compensation, $248,000 in stock
compensation expense and $283,000 in higher benefits costs. The $1.3 million increase in
base compensation expense related to the cost of employing 21 additional employees in
2006, as well as annual salary increases. The $858,000 increase in salaries and benefits
expense in 2005 compared to 2004 resulted primarily from increases of $571,000 in base
compensation, $85,000 in additional incentive compensation, and $202,000 in higher
benefits costs. The $571,000 increase in base compensation expense related to the cost of
employing 17 additional employees in 2005, as well as annual salary increases.

Data
processing and related costs were $179,000, $124,000 and $106,000 for the years ended
December 31, 2006, 2005 and 2004, respectively. During the year ended December 31, 2006,
our data processing costs for our core processing system were $113,000 compared to $84,000
for the year ended December 31, 2005 and $59,000 for the year ended December 31, 2004.

32

---

We
have contracted with an outside computer service company to provide our core data
processing services.

Data
processing costs increased $55,000, or 44.4%, for the year ended December 31, 2006
compared to the same period in 2005. Data processing costs increased $18,000, or 17.0%,
for the year ended December 31, 2005 compared to the same period in 2004. A significant
portion of the fee charged by our third party processor is directly related to the number
of loan and deposit accounts and the related number of transactions, all of which have
grown commensurate with the overall growth of the banks assets and liabilities.

Income
tax expense was $874,000 and $20,000 for the year ended December 31, 2006 and 2005,
respectively. We recorded a tax benefit of $414,000 in 2004. The income tax expense is
based on an effective tax rate of 37.0%, 34.0% and 34.0% for the year ended December 31,
2006, 2005 and 2004, respectively.

Balance Sheet Review

General

At
December 31, 2006, we had total assets of $336.6 million, consisting principally of $269.7
million in net loans, $2.6 million in loans held for sale, $38.7 million in securities,
$2.5 million in federal funds sold, $8.8 million in net premises, furniture and equipment,
and $2.9 million in cash and due from banks. Our liabilities at December 31, 2006 totaled
$294.8 million, consisting principally of $259.1 million in deposits, $10.0 million in
securities sold under agreements to repurchase, $8.2 million in junior subordinated
debentures and $16.0 million in FHLB advances. At December 31, 2006, our
shareholders equity was $41.8 million.

Federal Funds Sold

At
December 31, 2006, our $2.5 million in short-term investments in federal funds sold on an
overnight basis comprised 0.75% of total assets, compared to $6.4 million, or 3.1% of
total assets, at December 31, 2005.

Investments

At
December 31, 2006, the $37.5 million in our available for sale investment securities
portfolio represented approximately 11.1% of our total assets. We held U.S. Government
agency securities, municipals and mortgage-backed securities with a fair value of $37.5
million and an amortized cost of $37.4 million for a net unrealized gain of $150,000. As a
result of the historical low rate environment during the last two years, we have utilized
the investment portfolio to provide additional income and absorb liquidity on occasion. We
anticipate maintaining an investment portfolio to provide both increased earnings and
liquidity.

Contractual
maturities and yields on our investments at December 31, 2006 are shown in the following
table. Expected maturities may differ from contractual maturities because issuers may have
the right to call or prepay obligations with or without call or prepayment penalties.

|                           | One to Five Years | Five to Ten Years | Over 10 Years | Total
|-------------------------- | ----------------- | ----------------- | ------------- | -----
|
|
|Available for Sale:        |                   |                   |               |      
|U.S. Government/government |                   |                  
|sponsored enterprises      |                   |                   | $             | 4,558
|Mortgage-backed securities |                   |                   |               | -    
|Municipals                 |                   |                   |               | -    
|                           |                   |                   |               |      
|Total                      |                   |                   | $             | 4,558
|                           |                   |                   |               |      

33

---

At
December 31, 2006, our investments included U.S. government agency bonds issued by the
Federal Farm Credit Bank with an amortized cost of approximately $3.0 million. Government
sponsored enterprises consist of securities issued by the Federal Home Loan Bank, Federal
Home Loan Mortgage Corporation and Federal National Mortgage Association with amortized
costs of approximately $12.1 million, $7.0 million, and $5.5 million, respectively.
Mortgage-backed securities consist of securities issued by the Federal National Mortgage
Association with amortized costs of approximately $6.1 million. Municipals consist of
securities issued by eight different municipalities with an amortized cost of $3.6
million.

Other
nonmarketable equity securities at December 31, 2006 consisted of Federal Home Loan Bank
stock with a cost of $1,132,100 and other investments of $50,000.

The
amortized costs and the fair value of our investments at December 31, 2006 and 2005 are
shown in the following table.

|                                 | December 31, 2006 | December 31, 2005
|-------------------------------- | ----------------- | -----------------
|
|
|
|Available for Sale:              |                   |                  
|U.S. Government agencies         |                   |                  
|Government-sponsored enterprises |                   |                  
|Mortgage-backed securities       |                   |                  
|Municipals                       |                   |                  
|                                 |                   |                  
|Total                            |                   |                  
|                                 |                   |                  

# Loans

Since
loans typically provide higher interest yields than other types of interest-earning
assets, a substantial percentage of our earning assets are invested in our loan portfolio.
Average loans for the years ended December 31, 2006 and 2005 were $242.3 million and
$118.5 million, respectively. Before the allowance for loan losses, total loans
outstanding at December 31, 2006 and 2005 were $273.2 million and $179.7 million,
respectively.

Loans
secured by real estate mortgages are the principal component of our loan portfolio. Most
of our real estate loans are secured by residential or commercial property. We do not
generally originate traditional long term residential mortgages for the portfolio, but we
do issue traditional second mortgage residential real estate loans and home equity lines
of credit. We obtain a security interest in real estate whenever possible, in addition to
any other available collateral. This collateral is taken to increase the likelihood of the
ultimate repayment of the loan. Generally, we limit the loan-to-value ratio on loans we
make to 85%. Due to the short time our portfolio has existed, the current mix may not be
indicative of the ongoing portfolio mix. We attempt to maintain a relatively diversified
loan portfolio to help reduce the risk inherent in concentration in certain types of
collateral.

34

---

The following table summarizes the
composition of our loan portfolio at December 31, 2006, 2005, 2004 and 2003:

|                               | 2006 | 2005 | 2004 | 2003   
|------------------------------ | ---- | ---- | ---- | -------
|
|
|Commercial                     |      |      |      |        
|Commercial and                 |      |     
|Industrial                     |      |      | $    | 24,631 
|Real Estate                    |      |     
|Mortgage                       |      |      |      | 124,715
|Construction                   |      |      |      | 122,210
|                               |      |      |      |        
|Total real estate              |      |      |      | 246,925
|                               |      |      |      |        
|Consumer                       |      |     
|Consumer                       |      |      |      | 1,901  
|                               |      |      |      |        
|Deferred origination fees, net |      |      |      | (247   
|                               |      |      |      |        
|                               |      |      |      |        
|Total gross loans, net of      |      |     
|deferred fees                  |      |      |      | 273,210
|                               |      |      |      |        
|Less - allowance for loan      |      |     
|Losses                         |      |      |      | (3,467 
|                               |      |      |      |        
|Total loans, net               |      |      | $    | 269,743
|                               |      |      |      |        

Maturities and
Sensitivity of Loans to Changes in Interest Rates

The
information in the following table is based on the contractual maturities of individual
loans, including loans that may be subject to renewal at their contractual maturity.
Renewal of such loans is subject to review and credit approval, as well as modification of
terms upon maturity. Actual repayments of loans may differ from the maturities reflected
below because borrowers have the right to prepay obligations with or without prepayment
penalties.

The
following table summarizes the loan maturity distribution by type and related interest
rate characteristics at December 31, 2006.

|                                          |  | After one |   |        
|----------------------------------------- |  | --------- | - | -------
|
|
|
|Commercial                                |  |           | $ | 7,119  
|Real estate                               |  |           |   | 115,075
|Consumer                                  |  |           |   | 931    
|Deferred origination fees, net            |  |           |   | (61    
|                                          |  |           |   |        
|Total gross loans, net of deferred fees . |  |           | $ | 123,064
|                                          |  |           |   |        
|Loans maturing after one year with:       |  |          
|Fixed interest rates                      |  |           |   |        
|Floating interest rates                   |  |           |   |        
|                                          |  |           |   |        
|Total                                     |  |           |   |        
|                                          |  |           |   |        

35

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Provision and Allowance
for Loan Losses

We
have established an allowance for loan losses through a provision for loan losses charged
to expense on our statement of operations. The allowance for loan losses represents an
amount which we believe will be adequate to absorb probable losses on existing loans that
may become uncollectible. Our judgment as to the adequacy of the allowance for loan losses
is based on a number of assumptions about future events, which we believe to be
reasonable, but which may or may not prove to be accurate. Our determination of the
allowance for loan losses is based on evaluations of the collectibility of loans,
including consideration of factors such as the balance of impaired loans, the quality,
mix, and size of our overall loan portfolio, economic conditions that may affect the
borrowers ability to repay, the amount and quality of collateral securing the loans,
our historical loan loss experience, and a review of specific problem loans. We also
consider subjective issues such as changes in the lending policies and procedures, changes
in the local/national economy, changes in volume or type of credits, changes in
volume/severity of problem loans, quality of loan review and board of director oversight,
concentrations of credit, and peer group comparisons. Due to our limited operating
history, the provision for loan losses has been made primarily as a result of our
assessment of general loan loss risk compared to banks of similar size and maturity.
Periodically, we adjust the amount of the allowance based on changing circumstances.
Although we have not incurred any loan losses as of December 31, 2006, we would recognize
loan losses to the allowance and add subsequent recoveries back to the allowance for loan
losses. There can be no assurance that charge-offs of loans in future periods will not
exceed the allowance for loan losses as estimated at any point in time or that provisions
for loan losses will not be significant to a particular accounting period.

The
following table summarizes the activity related to our allowance for loan losses.

|                                         | December 31,
|---------------------------------------- | ------------
|
|
|
|Balance, beginning of year               |             
|Net loan losses                          |             
|Provision for loan losses                |             
|                                         |             
|Balance, end of year                     |             
|                                         |             
|Total loans outstanding at end of period |             
|Allowance for loan losses to gross loans |             
|Net charge-offs to average loans         |             

We
do not allocate the allowance for loan losses to specific categories of loans. Instead, we
evaluate the adequacy of the allowance for loan losses on an overall portfolio basis
utilizing our credit grading system that we apply to each loan. We have retained an
independent consultant to review the loan files on a test basis to confirm the grading of
each loan.

Nonperforming Assets

As
of December 31, 2005 and 2004, we did not have any nonperforming assets and no loans past
due 30 days or more. At December 31, 2006, 2005, and 2004, the allowance for loan losses
was $3,467,000, $2,245,000, and $700,000, respectively, or 1.27%, 1.25%, and 1.27%,
respectively, of outstanding loans. As of December 31, 2006, we had two loans with a
current principal balance of $853,121 on the watch list.

At
December 31, 2006, we had two loans with a current principal balance of approximately $2.0
million on nonaccrual status. The loans were placed in nonaccrual as a result of the death
of the borrower. A review of the collateral leads us to believe that there is sufficient
value to protect the bank from any loss. We believe the situation will be satisfactorily
resolved by the end of the first quarter of this year. Generally, a loan is placed on
nonaccrual status when it becomes 90 days past due as to principal or interest, or when we
believe, after considering economic and business conditions and collection efforts, that
the borrowers financial condition is such that collection of the loan is doubtful. A
payment of interest on a loan that is classified as nonaccrual is applied against the
principal balance. We have approximately $69,000 in foregone interest income related to
loans on nonaccrual status.

36

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Deposits and Other
Interest-Bearing Liabilities

Our
primary source of funds for loans and investments is our deposits. National and local
market trends over the past several years suggest that consumers have moved an increasing
percentage of discretionary savings funds into investments such as annuities, stocks, and
mutual funds. Accordingly, it has become more difficult to attract local deposits. We have
chosen to obtain a portion of our certificates of deposits from areas outside of our
market, through various brokered deposit arrangements. The deposits obtained outside of
our market area generally have lower rates than rates being offered for certificates of
deposits in our local market. We also utilize out-of-market deposits in certain instances
to obtain longer-term deposits than are readily available in our local market. We
anticipate that the ratio of out-of-market deposits will decline after we open additional
retail deposit offices. The amount of out-of-market deposits was $110.7 million, or 42.7%
of total deposits, at December 31, 2006 compared to $34.9 million, or 20.0% of total
deposits, at December 31, 2005.

We
anticipate being able to either renew or replace these out-of-market deposits when they
mature, although we may not be able to replace them with deposits with the same terms or
rates. Our loan-to-deposit ratio was 105.4% and 102.9% at December 31, 2006 and 2005,
respectively.

The
following table shows the average balance amounts and the average rates paid on deposits
held by us for the years ended December 31, 2006 and 2005.

|                                    | December 31, 2006 | December 31, 2005
|----------------------------------- | ----------------- | -----------------
|
|
|Noninterest bearing demand deposits |                   |                  
|Interest bearing demand deposits    |                   |                  
|Savings and money market accounts   |                   |                  
|Time deposits less than $100,000    |                   |                  
|Time deposits greater than $100,000 |                   |                  
|                                    |                   |                  
|Total deposits                      |                   |                  
|                                    |                   |                  

All
of our time deposits are certificates of deposits. The maturity distribution of our time
deposits of $100,000 or more at December 31, 2006 and 2005 is as follows:

|                              | 2006 | 2005
|----------------------------- | ---- | ----
|
|Three months or less          |      |     
|Over three through six months |      |     
|Over six though twelve months |      |     
|Over twelve months            |      |     
|                              |      |     
|Total                         |      |     
|                              |      |     

The
decrease in time deposits of $100,000 or more for the year ended December 31, 2006
compared to the same period in 2005 resulted from our funding the growth of the bank with
a variety of deposits products and the utilization of deposits that were obtained outside
of our primary market.

37

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# Borrowings

The
following table outlines our various sources of borrowed funds during the years ended
December 31, 2006 and 2005, the amounts outstanding at the end of each period, at the
maximum point for each component during the periods and on average for each period, and
the average interest rate that we paid for each borrowing source. The maximum month-end
balance represents the high indebtedness for each component of borrowed funds at any time
during each of the periods shown.

|                                              |  |  | Maximum |        | 
|--------------------------------------------- |  |  | ------- | ------ | 
|
|
|
|
|At or for the year                            |  |  |         |        | 
|ended December 31, 2006:                      |  | 
|Note payable                                  |  |  | $       | -      | 
|Securities sold under agreement to repurchase |  |  |         | 10,000 | 
|Junior subordinated debentures                |  |  |         | 8,248  | 
|Advances from FHLB                            |  |  |         | 16,000 | 
|Other borrowings                              |  |  |         | -      | 
|Federal funds purchased                       |  |  |         | -      | 
|At or for the year                            |  | 
|ended December 31, 2005:                      |  | 
|Note payable                                  |  |  | $       | 1,541  | 
|Securities sold under agreement to repurchase |  |  |         | 6,500  | 
|Junior subordinated debentures                |  |  |         | -      | 
|Advance from FHLB                             |  |  |         | -      | 
|Other borrowings                              |  |  |         | 30     | 
|Federal funds purchased                       |  |  |         | -      | 

# Capital Resources

Total
shareholders equity was $41.8 million at December 31, 2006 and $23.1 million at
December 31, 2005. The increase is attributable to net proceeds of $16.4 million from the
issuance of 1,200,000 shares of common stock in the public stock offering and proceeds
from the exercise of stock options of $257,625, plus an increase of $277,734 in the fair
value of available for sale securities, stock-based compensation expense of $247,586 and
net income of $1,488,806 for the year ended December 31, 2006. Since our inception, we
have not paid any cash dividends.

The
following table shows the return on average assets (net income divided by average total
assets), return on average equity (net income divided by average equity), and equity to
assets ratio (average equity divided by average total assets) for the years ended December
31, 2006, 2005 and 2004:

|                         | 2006 | 2005 | 2004
|------------------------ | ---- | ---- | ----
|Return on average assets |      |      |     
|Return on average equity |      |      |     
|Equity to assets ratio   |      |      |     

The
Federal Reserve and bank regulatory agencies require bank holding companies and financial
institutions to maintain capital at adequate levels based on a percentage of assets and
off-balance sheet exposures, adjusted for risk weights ranging from 0%

38

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to 100%. The Federal Reserve
guidelines contain an exemption from the capital requirements for small bank holding
companies. On February 27, 2006, the Federal Reserve approved a new rule expanding
the definition of a small bank holding company. The new definition will
include bank holding companies with less than $500 million in total assets. Bank holding
companies will not qualify under the new definition if they (i) are engaged in significant
nonbanking activities either directly or indirectly through a subsidiary, (ii) conduct
significant off-balance sheet activities, including securitizations or managing or
administering assets for third parties, or (iii) have a material amount of debt or equity
securities (including trust preferred securities) outstanding that are registered with the
SEC. The new rule will be effective on March 30, 2006. Although we have less than $500
million in assets, it is unclear at this point whether we otherwise meet the requirements
for qualifying as a small bank holding company. According to the Federal
Reserve Board, the revision of the criterion to exclude any bank holding company that has
outstanding a material amount of SEC-registered debt or equity securities reflects the
fact that SEC registrants typically exhibit a degree of complexity of operations and
access to multiple funding sources that warrants excluding them from the new policy
statement and subjecting them to the capital guidelines. In the adopting release for the
new rule, the Federal Reserve Board stated that what constitutes a material
amount of SEC-registered debt or equity for a particular bank holding company depends on
the size, activities and condition of the relevant bank holding company. In lieu of using
fixed measurable parameters of materiality across all institutions, the rule provides the
Federal Reserve with supervisory flexibility in determining, on a case-by-case basis, the
significance or materiality of activities or securities outstanding such that a bank
holding company should be excluded from the policy statement and subject to the capital
guidelines. Until the Federal Reserve provides further guidance on the new rules, it will
be unclear whether our holding company will be subject to the exemption from the capital
requirements for small bank holding companies. Regardless, our bank is subject to these
minimum capital requirements as set per bank regulatory agencies.

Under
the capital adequacy guidelines, regulatory capital is classified into two tiers. These
guidelines require an institution to maintain a certain level of Tier 1 and Tier 2 capital
to risk-weighted assets. Tier 1 capital consists of common shareholders equity,
excluding the unrealized gain or loss on securities available for sale, minus certain
intangible assets. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0%
to 100% based on the risks believed to be inherent in the type of asset. Tier 2 capital
consists of Tier 1 capital plus the general reserve for loan losses, subject to certain
limitations. Our bank is required to maintain capital at a minimum level based on total
average assets, which is known as the Tier 1 leverage ratio.

To
be considered well-capitalized, we must maintain total risk-based capital of
at least 10%, Tier 1 capital of at least 6%, and a leverage ratio of at least 5%. To be
considered adequately capitalized under capital guidelines, we must maintain a
minimum total risk-based capital of 8%, with at least 4% being Tier 1 capital. In
addition, we must maintain a minimum Tier 1 leverage ratio of at least 4%.

The
following table sets forth the companys various capital ratios at December 31, 2006
and 2005. For all periods, the company was considered well capitalized.

|                                | 2006 | 2005
|------------------------------- | ---- | ----
|Leverage ratio                  |      |     
|Tier 1 risk-based capital ratio |      |     
|Total risk-based capital ratio  |      |     

39

---

The
following table sets forth the banks various capital ratios at December 31, 2006 and
2005. For all periods, the bank was considered well capitalized.

|                                | 2006 | 2005
|------------------------------- | ---- | ----
|Leverage ratio                  |      |     
|Tier 1 risk-based capital ratio |      |     
|Total risk-based capital ratio  |      |     

We
intend to maintain a capital level for the bank that exceeds the FDIC requirements to be
classified as a well capitalized bank. To provide the additional capital
needed to support our banks growth in assets, during the first quarter of 2005 we
borrowed $2.1 million under a short-term holding company line of credit. On March 31,
2005, we completed a private placement of 1,712,000 shares at $9.35 to increase the
capital of the bank. Net proceeds from the offering were approximately $14.9 million. Upon
closing the transaction, the holding company line of credit was repaid in full. On
February 22, 2006, Tidelands Statutory Trust, a non-consolidated subsidiary of the
company, issued and sold floating rate capital securities of the trust, generating
proceeds of $8.0 million. The trust loaned these proceeds to the company to use for
general corporate purposes, primarily to provide capital to the bank. The junior
subordinated debentures qualify as Tier 1 capital under Federal Reserve Board guidelines.
On October 10, 2006, we closed a public offering in which 1,200,000 shares of our common
stock were issued at a purchase price of $15.00 per share. Net proceeds after deducting
the underwriters discount and expenses were $16.4 million. We plan to use the
proceeds from the offering to support the growth of the company and the bank. We
anticipate that our current capital resources will be sufficient to continue our growth at
current rates for the next 18 months.

# Effect of Inflation and
Changing Prices

The
effect of relative purchasing power over time due to inflation has not been taken into
account in our consolidated financial statements. Rather, our financial statements have
been prepared on an historical cost basis in accordance with generally accepted accounting
principles.

Unlike
most industrial companies, our assets and liabilities are primarily monetary in nature.
Therefore, the effect of changes in interest rates will have a more significant impact on
our performance than will the effect of changing prices and inflation in general. In
addition, interest rates may generally increase as the rate of inflation increases,
although not necessarily in the same magnitude. As discussed previously, we seek to manage
the relationships between interest sensitive assets and liabilities in order to protect
against wide rate fluctuations, including those resulting from inflation.

# Off-Balance Sheet Risk

Commitments
to extend credit are agreements to lend to a customer as long as the customer has not
violated any material condition established in the contract. Commitments generally have
fixed expiration dates or other termination clauses and may require the payment of a fee.
At December 31, 2006, unfunded commitments to extend credit were $57.4 million. A
significant portion of the unfunded commitments related to consumer equity lines of
credit. Based on historical experience, we anticipate that a significant portion of these
lines of credit will not be funded. We evaluate each customers credit worthiness on
a case-by-case basis. The amount of collateral obtained, if deemed necessary by us upon
extension of credit, is based on our credit evaluation of the borrower. The type of
collateral varies but may include accounts receivable, inventory, property, plant and
equipment, and commercial and residential real estate.

At
December 31, 2006, there were commitments totaling $1,210,000 under letters of credit. The
credit risk and collateral involved in issuing letters of credit is essentially the same
as that involved in extending loan facilities to customers. Since most of the letters of
credit are expected to expire without being drawn upon, they do not necessarily represent
future cash requirements.

40

---

Except
as disclosed in this report, we are not involved in off-balance sheet contractual
relationships, unconsolidated related entities that have off-balance sheet arrangements,
or transactions that could result in liquidity needs or other commitments that
significantly impact earnings.

# Market Risk

Market
risk is the risk of loss from adverse changes in market prices and rates, which
principally arises from interest rate risk inherent in our lending, investing, deposit
gathering, and borrowing activities. Other types of market risk, such as foreign currency
exchange rate risk and commodity price risk, do not generally arise in the normal course
of our business.

We
actively monitor and manage our interest rate risk exposure principally by measuring our
interest sensitivity gap, which is the positive or negative dollar difference
between assets and liabilities that are subject to interest rate repricing within a given
period of time. Interest rate sensitivity can be managed by repricing assets or
liabilities, selling securities available for sale, replacing an asset or liability at
maturity, or adjusting the interest rate during the life of an asset or liability.
Managing the amount of assets and liabilities repricing in this same time interval helps
to hedge the risk and minimize the impact on net interest income of rising or falling
interest rates. We generally would benefit from increasing market rates of interest when
we have an asset-sensitive gap position and generally would benefit from decreasing market
rates of interest when we are liability-sensitive.

Approximately
67.1% of our loans were variable rate loans at December 31, 2006, and we were liability
sensitive during the year ended December 31, 2006. At December 31, 2006, 97.9% of
interest-bearing liabilities reprice within one year. A substantial portion of our loans
reprice within the first three months of the year but a larger majority of our deposits
will reprice within a 12-month period. However, our gap analysis is not a precise
indicator of our interest sensitivity position. The analysis presents only a static view
of the timing of maturities and repricing opportunities, without taking into consideration
that changes in interest rates do not affect all assets and liabilities equally. For
example, rates paid on a substantial portion of core deposits may change contractually
within a relatively short time frame, but those rates are viewed by us as significantly
less interest-sensitive than market-based rates such as those paid on noncore deposits.
Net interest income may be affected by other significant factors in a given interest rate
environment, including changes in the volume and mix of interest-earning assets and
interest-bearing liabilities.

# Liquidity and Interest
Rate Sensitivity

Liquidity
represents the ability of a company to convert assets into cash or cash equivalents
without significant loss, and the ability to raise additional funds by increasing
liabilities. Liquidity management involves monitoring our sources and uses of funds in
order to meet our day-to-day cash flow requirements while maximizing profits. Liquidity
management is made more complicated because different balance sheet components are subject
to varying degrees of management control. For example, the timing of maturities of our
investment portfolio is fairly predictable and subject to a high degree of control at the
time investment decisions are made. However, net deposit inflows and outflows are far less
predictable and are not subject to the same degree of control.

At
December 31, 2006 and 2005, our liquid assets, which consist of cash and due from banks
and federal funds sold, amounted to $5.4 million and $8.2 million, or 1.6% and 4.0% of
total assets, respectively. Our available for sale securities at December 31, 2006 and
2005 amounted to $37.5 million and $11.8 million, or 11.1% and 5.7% of total assets,
respectively. Investment securities traditionally provide a secondary source of liquidity
since they can be converted into cash in a timely manner. However, approximately $15.6
million of these securities are pledged against outstanding debt or borrowing lines of
credit. Therefore, the related debt would need to be repaid prior to the securities being
sold in order for these securities to be converted to cash.

Our
ability to maintain and expand our deposit base and borrowing capabilities serves as our
primary source of liquidity. We plan to meet our future cash needs through the liquidation
of temporary investments and the generation of deposits. In addition, we

41

---

will receive cash upon the maturity
and sale of loans and the maturity of investment securities. During most of 2005 and 2006,
as a result of historically low rates that were being earned on short-term investments, we
chose to maintain a lower than normal level of short-term securities. In addition, we
maintain four federal funds purchased lines of credit with correspondent banks totaling
$26.0 million. We are also a member of the Federal Home Loan Bank of Atlanta, from which
applications for borrowings can be made for leverage or liquidity purposes. The FHLB
requires that securities, qualifying mortgage loans, and stock of the FHLB owned by the
bank be pledged to secure any advances. At December 31, 2006, we had $16.0 million in
total advances and letters of credit from the FHLB with an excess lendable collateral
value of approximately $16.0 million.

Asset/liability
management is the process by which we monitor and control the mix and maturities of our
assets and liabilities. The essential purposes of asset/liability management are to ensure
adequate liquidity and to maintain an appropriate balance between interest sensitive
assets and liabilities in order to minimize potentially adverse impacts on earnings from
changes in market interest rates. Our asset/liability management committee monitors and
considers methods of managing exposure to interest rate risk. The asset/liability
management committee is responsible for maintaining the level of interest rate sensitivity
of our interest sensitive assets and liabilities within board-approved limits.

The
following table sets forth information regarding our rate sensitivity, as of December 31,
2006, at each of the time intervals. The information in the table may not be indicative of
our rate sensitivity position at other points in time. In addition, the maturity
distribution indicated in the table may differ from the contractual maturities of the
earning assets and interest-bearing liabilities presented due to consideration of
prepayment speeds under various interest rate change scenarios in the application of the
interest rate sensitivity methods described above.

|                                   | Within | After three | After one | After   |   
|---------------------------------- | ------ | ----------- | --------- | ------- | --
|
|
|
|Interest-earning assets:           |        |             |           |         |   
|Federal funds sold                 |        |             | $         | 2,514   |   
|Investment securities              |        |             |           | 3,823   |   
|Loans                              |        |             |           | 185,408 |   
|                                   |        |             |           |         |   
|Total interest-earning assets      |        |             | $         | 191,745 |   
|                                   |        |             |           |         |   
|Interest-bearing liabilities:      |        |            
|Money market and NOW               |        |             | $         | 144,667 |   
|Regular savings                    |        |             |           | 124     |   
|Time deposits                      |        |             |           | 44,601  |   
|Junior subordinated debentures     |        |             |           | 8,248   |   
|Other borrowings                   |        |             |           | 26,000  |   
|                                   |        |             |           |         |   
|Total interest-bearing liabilities |        |             | $         | 223,640 |   
|                                   |        |             |           |         |   
|Period gap                         |        |             | $         | (31,895 | ) 
|Cumulative gap                     |        |             | $         | (31,895 | ) 
|Ratio of cumulative gap to         |        |            
|total earning assets               |        |             |           | (10.18  | %)

42

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# Item 7: Financial
Statements.

# INDEX TO AUDITED
FINANCIAL STATEMENTS

# TIDELANDS BANCSHARES,
INC. AND SUBSIDIARY

|                                                                                           | 
|------------------------------------------------------------------------------------------ | 
|
|
|Report of Independent Registered Public Accounting Firm                                    | 
|Consolidated Balance Sheets as of December 31, 2006 and 2005                               | 
|Consolidated Statements of Operations for the years ended December 31, 2006, 2005 and 2004 | 
|Consolidated Statements of Changes in Shareholders Equity and Comprehensive Income        | 
|for the years ended December 31, 2006, 2005 and 2004                                       | 
|Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004 | 
|Notes to Consolidated Financial Statements                                                 | 

43

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# REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM

The Board of DirectorsTidelands
Bancshares, Inc.Mount Pleasant, South Carolina

We have audited the accompanying
consolidated balance sheets of Tidelands Bancshares, Inc. and its subsidiary as of
December 31, 2006 and 2005 and the related consolidated statements of operations, changes
in shareholders equity and comprehensive income, and cash flows for each of the
three years in the period ended December 31, 2006. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the 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 Tidelands Bancshares, Inc., and its subsidiary, as of December 31,
2006 and 2005 and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2006, in conformity with U.S. generally
accepted accounting principles.

Elliott Davis, LLCColumbia,
South CarolinaMarch 19, 2007

44

---

# Tidelands Bancshares,
Inc. and Subsidiary Consolidated Balance
Sheets

|                                                               | December 31, | December 31,
|-------------------------------------------------------------- | ------------ | ------------
|
|Assets:                                                        |              |             
|Cash and cash equivalents:                                     |              |             
|Cash and due from banks                                        |              |             
|Federal funds sold                                             |              |             
|                                                               |              |             
|Total cash and cash equivalents                                |              |             
|                                                               |              |             
|Securities available for sale                                  |              |             
|Nonmarketable equity securities                                |              |             
|                                                               |              |             
|Total securities                                               |              |             
|                                                               |              |             
|Mortgage loans held for sale                                   |              |             
|Loans receivable                                               |              |             
|Less allowance for loan losses                                 |              |             
|                                                               |              |             
|Loans, net                                                     |              |             
|                                                               |              |             
|Premises, furniture and equipment, net                         |              |             
|Accrued interest receivable                                    |              |             
|Bank owned life insurance                                      |              |             
|Other assets                                                   |              |             
|                                                               |              |             
|Total assets                                                   |              |             
|                                                               |              |             
|Liabilities:                                                   |              |             
|Deposits:                                                      |              |             
|Noninterest-bearing transaction accounts                       |              |             
|Interest-bearing transaction accounts                          |              |             
|Savings and money market                                       |              |             
|Time deposits $100,000 and over                                |              |             
|Other time deposits                                            |              |             
|                                                               |              |             
|Total deposits                                                 |              |             
|                                                               |              |             
|Note payable                                                   |              |             
|Securities sold under agreements to repurchase                 |              |             
|Junior subordinated debentures                                 |              |             
|Advances from Federal Home Loan Bank                           |              |             
|Other borrowings                                               |              |             
|Accrued interest payable                                       |              |             
|Other liabilities                                              |              |             
|                                                               |              |             
|Total liabilities                                              |              |             
|                                                               |              |             
|Commitments and contingencies                                  |              |             
|Shareholders' equity:                                          |              |             
|Preferred stock, $.01 par value, 10,000,000 shares authorized, |              |             
|none issued                                                    |              |             
|Common stock, $.01 par value, 10,000,000 shares                |              |             
|authorized; 4,272,385 and 3,044,054 shares issued and          |              |             
|outstanding at December 31, 2006 and December 31, 2005,        |              |             
|respectively                                                   |              |             
|Capital surplus                                                |              |             
|Retained deficit                                               |              |             
|Accumulated other comprehensive income (loss)                  |              |             
|                                                               |              |             
|Total shareholders' equity                                     |              |             
|                                                               |              |             
|Total liabilities and shareholders' equity                     |              |             
|                                                               |              |             

The accompanying notes are integral to these
financial statements.

F-45

---

# Tidelands Bancshares,
Inc. and Subsidiary Consolidated
Statements of Operations For the years ended
December 31, 2006, 2005 and 2004

|                                              | 2006 | 2005 | 2004
|--------------------------------------------- | ---- | ---- | ----
|Interest income:                              |      |      |     
|Loans, including fees                         |      |      | $   
|Securities available for sale, taxable        |      |      |     
|Securities available for sale, non-taxable    |      |      |     
|Federal funds sold                            |      |      |     
|Interest-bearing balances                     |      |      |     
|                                              |      |      |     
|Total interest income                         |      |      |     
|                                              |      |      |     
|Interest expense:                             |      |     
|Time deposits $100,000 and over               |      |      |     
|Other deposits                                |      |      |     
|Other borrowings                              |      |      |     
|                                              |      |      |     
|Total interest expense                        |      |      |     
|                                              |      |      |     
|Net interest income                           |      |      |     
|Provision for loan losses                     |      |      |     
|                                              |      |      |     
|Net interest income after                     |      |     
|provision for loan losses                     |      |      |     
|                                              |      |      |     
|Noninterest income:                           |      |     
|Service charges on deposit accounts           |      |      |     
|Residential mortgage origination fees         |      |      |     
|Loss on sale of securities available for sale |      |      |     
|Gain on sale of real estate                   |      |      |     
|Other service fees and commissions            |      |      |     
|Other                                         |      |      |     
|                                              |      |      |     
|Total noninterest income                      |      |      |     
|Noninterest expense:                          |      |     
|Salaries and employee benefits                |      |      |     
|Net occupancy                                 |      |      |     
|Furniture and equipment                       |      |      |     
|Other operating                               |      |      |     
|                                              |      |      |     
|Total noninterest expense                     |      |      |     
|                                              |      |      |     
|Income (loss) before income taxes             |      |      |     
|Income tax expense (benefit)                  |      |      |     
|                                              |      |      |     
|Net income (loss)                             |      |      | $   
|                                              |      |      |     
|Earnings (loss) per common share              |      |     
|Basic earnings (loss) per share               |      |      | $   
|                                              |      |      |     
|Diluted earnings (loss) per share             |      |      | $   
|                                              |      |      |     
|Weighted average common shares outstanding    |      |     
|Basic                                         |      |      |     
|                                              |      |      |     
|Diluted                                       |      |      |     
|                                              |      |      |     

The accompanying notes are integral to these
financial statements.

F-46

---

# Tidelands Bancshares,
Inc. and Subsidiary Consolidated
Statements of Changes in Shareholders Equity and Comprehensive Income For the years ended
December 31, 2006, 2005 and 2004

|                                  |  |  |  |           | Accumulated |  
|--------------------------------- |  |  |  | --------- | ----------- | -
|
|
|
|
|Balance, December 31, 2003        |  |  |  | 1,033,398 |             | $
|Proceeds from exercise of stock   |  | 
|options                           |  |  |  | 21,556    |             |  
|Net loss                          |  |  |  |           |             |  
|Other comprehensive income, net   |  | 
|of taxes of $22,872               |  |  |  |           |             |  
|Comprehensive loss                |  |  |  |           |             |  
|                                  |  |  |  |           |             |  
|Stock dividend in the form of a 5 |  | 
|for 4 stock split                 |  |  |  | 263,739   |             |  
|                                  |  |  |  |           |             |  
|Balance, December 31, 2004        |  |  |  | 1,318,693 |             | $
|                                  |  |  |  |           |             |  
|Proceeds from exercise of stock   |  | 
|options                           |  |  |  | 13,361    |             |  
|Net proceeds from issuance of     |  | 
|common stock                      |  |  |  | 1,712,000 |             |  
|Net income                        |  |  |  |           |             |  
|Other comprehensive loss, net of  |  | 
|taxes of $132,146                 |  |  |  |           |             |  
|                                  |  |  |  |           |             |  
|Comprehensive loss                |  |  |  |           |             |  
|                                  |  |  |  |           |             |  
|Balance, December 31, 2005        |  |  |  | 3,044,054 |             | $
|                                  |  |  |  |           |             |  
|Proceeds from exercise of stock   |  | 
|options                           |  |  |  | 28,331    |             |  
|Net proceeds from issuance of     |  | 
|public stock                      |  |  |  | 1,200,000 |             |  
|Stock based compensation expense  |  |  |  |           |             |  
|Net income                        |  |  |  |           |             |  
|Other comprehensive income, net   |  | 
|of taxes of $143,075              |  |  |  |           |             |  
|                                  |  |  |  |           |             |  
|Comprehensive income              |  |  |  |           |             |  
|                                  |  |  |  |           |             |  
|Balance, December 31, 2006        |  |  |  | 4,272,385 |             | $
|                                  |  |  |  |           |             |  

The accompanying notes are integral to these
financial statements.

F-47

---

# Tidelands Bancshares,
Inc. and Subsidiary Consolidated
Statements of Cash Flows For the years ended
December 31, 2006, 2005 and 2004

|                                                       | 2006 | 2005 | 2004
|------------------------------------------------------ | ---- | ---- | ----
|Cash flows from operating activities:                  |      |      |     
|Net income (loss)                                      |      |      | $   
|Adjustments to reconcile net income (loss) to net cash |      |     
|provided (used) by operating activities:               |      |     
|Provision for loan losses                              |      |      |     
|Depreciation and amortization expense                  |      |      |     
|Discount accretion and premium amortization            |      |      |     
|Stock based compensation expense                       |      |      |     
|Deferred income tax                                    |      |      |     
|Proceeds from sale of residential mortgages            |      |      |     
|Disbursements for residential mortgages held-for-sale  |      |      |     
|Increase in accrued interest receivable                |      |      |     
|Increase in accrued interest payable                   |      |      |     
|Increase in cash surrender value of life insurance     |      |      |     
|Loss from sale of securities available-for-sale        |      |      |     
|(Increase) decrease in other assets                    |      |      |     
|Increase (decrease) in other liabilities               |      |      |     
|                                                       |      |      |     
|Net cash provided (used) by operating activities       |      |      |     
|                                                       |      |      |     
|Cash flows from investing activities:                  |      |     
|Purchases of securities available-for-sale             |      |      |     
|Sales of securities available-for-sale                 |      |      |     
|Calls and maturities of securities available-for-sale  |      |      |     
|Net increase in loans receivable                       |      |      |     
|Purchase of bank owned life insurance                  |      |      |     
|Purchase of premises, furniture and equipment, net     |      |      |     
|                                                       |      |      |     
|Net cash used by investing activities                  |      |      |     
|                                                       |      |      |     
|Cash flows from financing activities:                  |      |     
|Net increase in demand deposits, interest-bearing      |      |     
|transaction accounts and savings accounts              |      |      |     
|Net increase in certificates of deposit and            |      |     
|other time deposits                                    |      |      |     
|Repayments on notes payable                            |      |      |     
|Proceeds from notes payable                            |      |      |     
|Increase in securities sold under agreements to        |      |     
|repurchase                                             |      |      |     
|Proceeds from junior subordinated debentures           |      |      |     
|Increase in FHLB advances                              |      |      |     
|Decrease in other borrowings                           |      |      |     
|Proceeds from issuance of common stock, net            |      |      |     
|Proceeds from exercise of stock options                |      |      |     
|                                                       |      |      |     
|Net cash provided by financing activities              |      |      |     
|                                                       |      |      |     
|Net increase (decrease) in cash and cash equivalents   |      |      |     
|Cash and cash equivalents, beginning of period         |      |      |     
|                                                       |      |      |     
|Cash and cash equivalents, end of period               |      |      | $   
|                                                       |      |      |     
|Cash paid during the period for:                       |      |     
|Income taxes                                           |      |      | $   
|                                                       |      |      |     
|Interest                                               |      |      | $   
|                                                       |      |      |     

The accompanying notes are integral to these
financial statements.

F-48

---

# NOTE 1  SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES

Organization
 Tidelands Bancshares, Inc. (the Company) was incorporated on January 31, 2002 to
serve as a bank holding company for its subsidiary, Tidelands Bank (the Bank). The Company
operated as a development stage company from January 31, 2002 to October 5, 2003.
Tidelands Bank commenced business on October 6, 2003. The principal business activity of
the Bank is to provide banking services to domestic markets, principally in Charleston,
Dorchester, Berkeley, Horry and Beaufort Counties in South Carolina. The Bank is a
state-chartered commercial bank, and its deposits are insured by the Federal Deposit
Insurance Corporation. The consolidated financial statements include the accounts of the
parent company and its wholly-owned subsidiary after elimination of all significant
intercompany balances and transactions. On February 22, 2006, the Company formed Tidelands
Statutory Trust for the purpose of issuing trust preferred securities. In accordance with
current accounting guidance, the Trust is not consolidated in these financial statements.

Managements
Estimates  The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the United States of America
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 income 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 losses on loans, including valuation allowances for impaired loans, 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 losses on loans and
foreclosed real estate, management obtains independent appraisals for significant
properties. Management must also make estimates in determining the estimated useful lives
and methods for depreciating premises and equipment.

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

Concentrations of Credit
Risk  Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of loans receivable, investment
securities, federal funds sold and amounts due from banks.

The Company makes loans to
individuals and small businesses for various personal and commercial purposes primarily in
the Charleston metropolitan area (which includes Charleston, Dorchester, and Berkeley
counties), Horry and Beaufort counties, and additional markets along the South Carolina
coast. The Companys loan portfolio is not concentrated in loans to any single
borrower or a relatively small number of borrowers. Additionally, management is not aware
of any concentrations of loans to classes of borrowers or industries that would be
similarly affected by economic conditions.

In addition to monitoring potential
concentrations of loans to particular borrowers or groups of borrowers, industries and
geographic regions, management monitors exposure to credit risk from concentrations of
lending products and practices such as loans that subject borrowers to substantial payment
increases (e.g. principal deferral periods, loans with initial interest-only periods,
etc), and loans with high loan-to-value ratios. Additionally, there are industry practices
that could subject the Company to increased credit risk should economic conditions change
over the course of a loans life. For example, the Company makes variable rate loans
and fixed rate principal-amortizing loans with maturities prior to the loan being fully
paid (i.e. balloon payment loans). These loans are underwritten and monitored to manage
the associated risks. Therefore, management believes that these particular practices do
not subject the Company to unusual credit risk.

49

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The Companys investment
portfolio consists principally of obligations of the United States and its agencies or its
corporations. In the opinion of management, there is no concentration of credit risk in
its investment portfolio. The Company places its deposits and correspondent accounts with
and sells its federal funds to high quality institutions. Management believes credit risk
associated with correspondent accounts is not significant.

Securities
Available-for-Sale Securities available-for-sale are carried at amortized
cost and adjusted to estimated market value by recognizing the aggregate unrealized gains
or losses in a valuation account. Aggregate market valuation adjustments are recorded in
shareholders equity net of deferred income taxes. Reductions in market value
considered by management to be other than temporary are reported as a realized loss and a
reduction in the cost basis of the security. The adjusted cost basis of investments
available-for-sale is determined by specific identification and is used in computing the
gain or loss upon sale.

Nonmarketable Equity
Securities  Nonmarketable equity securities include the cost of the
Companys investment in the stock of the Federal Home Loan Bank and $50,000 of stock
in a community bank holding company. The Federal Home Loan Bank stock has no quoted market
value and no ready market exists. Investment in the Federal Home Loan Bank is a condition
of borrowing from the Federal Home Loan Bank, and the stock is pledged to collateralize
such borrowings. At December 31, 2006 and 2005, the Companys investment in Federal
Home Loan Bank stock was $1,132,100 and $150,600, respectively. Dividends received on this
stock are included as interest income on securities available for sale.

Loans Receivable
 Loans are stated at their unpaid principal balance. Interest income on loans is
computed based upon the unpaid principal balance. Interest income is recorded in the
period earned.

The accrual of interest income is
generally discontinued when a loan becomes contractually 90 days past due as to principal
or interest. Management may elect to continue the accrual of interest when the estimated
net realizable value of collateral exceeds the principal balance and accrued interest.

Loan origination and commitment fees
are deferred and amortized to income over the contractual life of the related loans or
commitments, adjusted for prepayments, using the straight-line method, which approximates
the interest method.

Under Statement of Financial
Accounting Standards (SFAS) No. 114, Accounting by Creditors for the Impairment of a
Loan,and SFAS No. 118, Accounting by Creditors for Impairment of a Loan 
Income Recognition and Disclosures, loans are defined as impaired when it is probable
that a creditor will be unable to collect all amounts due according to the contractual
terms of the loan agreement. All loans are subject to this criteria except for
smaller balance homogeneous loans that are collectively evaluated for
impairment and loans measured at fair value or at the lower of cost or fair
value. The Company considers its consumer installment portfolio, credit card loans,
and home equity lines as such exceptions. Therefore, the real estate and commercial loan
portfolios are primarily affected by these statements.

Impairment of a loan is measured
based on the present value of expected future cash flows discounted at the loans
effective interest rate or the fair value of the collateral if the loan is collateral
dependent. When management determines that a loan is impaired, the difference between the
Companys investment in the related loan and the present value of the expected future
cash flows, or the fair value of the collateral, is charged to bad debt expense with a
corresponding entry to the allowance for loan losses. The accrual of interest is
discontinued on an impaired loan when management determines the borrower may be unable to
meet payments as they become due. There were no impaired loans as of December 31, 2006 or
2005.

Allowance for Loan
Losses  An allowance for loan losses is maintained at a level deemed
appropriate by management to provide adequately for known and inherent losses in the loan
portfolio. The allowance for loan losses represents an amount which we believe will be
adequate to absorb probable losses on existing loans that may become uncollectible in the
future. Our judgment as to the adequacy of the allowance for loan losses is based on a
number of assumptions about future events, which we believe to be reasonable,

50

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but which may or may not prove to be
accurate. Our determination of the allowance for loan losses is based on evaluations of
the collectibility of loans, including consideration of factors such as the balance of
impaired loans, the quality, mix, and size of our overall loan portfolio, economic
conditions that may affect the borrowers ability to repay, the amount and quality of
collateral securing the loans, our historical loan loss experience, and a review of
specific problem loans. We also consider subjective issues such as changes in the lending
policies and procedures, changes in the local/national economy, changes in volume or type
of credits, changes in volume/severity of problem loans, quality of loan review and board
of director oversight, concentrations of credit, and peer group comparisons. Loans which
are deemed to be uncollectible are charged off and deducted from the allowance. The
provision for loan losses and recoveries of loans previously charged off are added to the
allowance.

Residential Mortgage Loans
Held-for-Sale  The Companys residential mortgage lending
activities for sale in the secondary market are comprised of accepting residential
mortgage loan applications, qualifying borrowers to standards established by investors,
funding residential mortgage loans and selling mortgage loans to investors under
pre-existing commitments. Funded residential mortgages held temporarily for sale to
investors are recorded at the lower of cost or market value. Application and origination
fees collected by the Company are recognized as income upon sale to the investor.

The Company issues rate lock
commitments to borrowers based on prices quoted by secondary market investors. When rates
are locked with borrowers, a sales commitment is immediately entered (on a best efforts
basis) at a specified price with a secondary market investor. Accordingly, any potential
liabilities associated with rate lock commitments are offset by sales commitments to
investors.

Premises, Furniture and
Equipment  Premises, furniture and equipment are stated at cost, less
accumulated depreciation. The provision for depreciation is computed by the straight-line
method, based on the estimated useful lives for furniture and equipment of 5 to 10 years
and buildings of 40 years. Leasehold improvements are amortized over the life of the
leases, which range from 1 to 10 years. The cost of assets sold or otherwise disposed of
and the related allowance for depreciation are eliminated from the accounts and the
resulting gains or losses are reflected in the income statement when incurred. Maintenance
and repairs are charged to current expense. The costs of major renewals and improvements
are capitalized.

Securities Sold Under
Agreements to Repurchase  The Bank enters into sales of securities
under agreements to repurchase. Fixed-coupon repurchase agreements are treated as
financing, with the obligation to repurchase securities sold being reflected as a
liability and the securities underlying the agreements remaining as assets.

Income Taxes
 Income taxes are the sum of amounts currently payable to taxing authorities and the
net changes in income taxes payable or refundable in future years. Income taxes deferred
to future years are determined utilizing a liability approach. This method gives
consideration to the future tax consequences associated with differences between financial
accounting and tax bases of certain assets and liabilities which are principally the
allowance for loan losses, depreciable premises and equipment, and the net operating loss
carry forward.

Advertising
Expense  Advertising and public relations costs are generally
expensed as incurred. External costs incurred in producing media advertising are expensed
the first time the advertising takes place. External costs relating to direct mailing
costs are expensed in the period in which the direct mailings are sent. Advertising and
public relations costs of $226,749, $102,722 and $50,411, were included in the
Companys results of operations for 2006, 2005 and 2004, respectively.

Retirement Plan
 The Company has a 401(k) profit sharing plan, which provides retirement benefits to
substantially all officers and employees who meet certain age and service requirements.
The plan includes a salary reduction feature pursuant to Section 401(k) of the
Internal Revenue Code. At its discretion, the Bank can make matching contributions of $.25
for every dollar contributed up to 6% of the participants annual compensation.
Expenses charged to earnings for the 401(k) profit sharing plan were approximately
$28,338, $14,902 and $9,319 in 2006, 2005 and 2004, respectively.

51

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Earnings (Loss) Per
Share  Basic earnings (loss) per share represent income available to
shareholders divided by the weighted-average number of common shares outstanding during
the period. Dilutive earnings (loss) per share reflect additional common shares that would
have been outstanding if dilutive potential common shares had been issued. Potential
common shares that may be issued by the Company relate solely to outstanding stock options
and are determined using the treasury stock method.

Comprehensive Income Accounting principles generally require that recognized income, expenses,
gains, and losses be included in net income. Although certain changes in assets and
liabilities, such as unrealized gains and losses on available-for-sale securities, are
reported as a separate component of the equity section of the balance sheet, such items,
along with net income, are components of comprehensive income.

The components of other comprehensive
income and related tax effects are as follows:

|                                                           | Year Ended December 31,
|---------------------------------------------------------- | -----------------------
|
|Unrealized gains (losses) on securities available-for-sale |                        
|Reclassification adjustment for loss                       |                        
|realized in net income                                     |                        
|                                                           |                        
|Net unrealized gains (losses) on securities                |                        
|Tax effect                                                 |                        
|                                                           |                        
|Net-of-tax amount                                          |                        
|                                                           |                        

Statements of Cash
Flows  For purposes of reporting cash flows in the financial
statements, the Company considers certain highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents. Cash equivalents include amounts
due from banks and federal funds sold. Generally, federal funds are sold for one-day
periods.

Changes in the valuation account of
securities available-for-sale, including the deferred tax effects, are considered noncash
transactions for purposes of the statement of cash flows and are presented in detail in
the notes to the consolidated financial statements.

Off-Balance-Sheet Financial
Instruments  In the ordinary course of business, the Company enters
into off-balance-sheet financial instruments consisting of commitments to extend credit
and letters of credit. These financial instruments are recorded in the financial
statements when they become payable by the customer.

Recently Issued Accounting
Pronouncements  In February 2006, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting (SFAS) No.
155, Accounting for Certain Hybrid Financial Instrumentsan amendment of FASB
Statements No. 133 and 140. This Statement amends SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, and SFAS No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.
This Statement resolves issues addressed in SFAS No. 133 Implementation Issue No. D1,
Application of Statement 133 to Beneficial Interests in Securitized Financial
Assets. FAS 155 permits fair value re-measurement for any hybrid financial
instrument that contains an embedded derivative that otherwise would require bifurcation,
clarifies which interest only-strips and principal-only strips are not subject to the
requirements of Statement 133, establishes a requirement to evaluate interests in
securitized financial assets to identify interests that are freestanding derivatives or
that are hybrid financial instruments that contain an embedded derivative requiring
bifurcation, clarifies that concentrations of credit risk in the form of subordination are
not embedded derivatives, and amends Statement 140 to eliminate the prohibition on a
qualifying special purpose entity from holding a derivative financial instrument that
pertains to a beneficial interest other than another derivative financial instrument. SFAS
No. 155 is effective for all financial instruments acquired or issued after the beginning
of an entitys first fiscal year that begins after September 15, 2006. The Company
does not believe that the adoption of SFAS No. 155 will have a material impact on its
financial position, results of operations or cash flows.

52

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In March 2006, the FASB issued SFAS
No. 156, Accounting for Servicing of Financial Assetsan amendment of FASB
Statement No. 140. This Statement amends FASB No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with
respect to the accounting for separately recognized servicing assets and servicing
liabilities. SFAS No. 156 requires an entity to recognize a servicing asset or servicing
liability each time it undertakes an obligation to service a financial asset by entering
into a servicing contract; requires all separately recognized servicing assets and
servicing liabilities to be initially measured at fair value, if practicable; permits an
entity to choose its subsequent measurement methods for each class of separately
recognized servicing assets and servicing liabilities; at its initial adoption, permits a
one-time reclassification of available-for-sale securities to trading securities by
entities with recognized servicing rights, without calling into question the treatment of
other available-for-sale securities under Statement 115, provided that the
available-for-sale securities are identified in some manner as offsetting the
entitys exposure to changes in fair value of servicing assets or servicing
liabilities that a servicer elects to subsequently measure at fair value; and requires
separate presentation of servicing assets and servicing liabilities subsequently measured
at fair value in the statement of financial position and additional disclosures for all
separately recognized servicing assets and servicing liabilities. An entity should adopt
SFAS No. 156 as of the beginning of its first fiscal year that begins after September 15,
2006. The Company does not believe the adoption of SFAS No. 156 will have a material
impact on its financial position, results of operations or cash flows.

In July 2006, the FASB issued FASB
Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income
Taxes. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in
enterprises financial statements in accordance with FASB Statement No. 109,
Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and
measurement attributable for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim periods,
disclosures and transitions. FIN 48 is effective for fiscal years beginning after December
15, 2006. The Company is currently analyzing the effects of FIN 48 its financial position,
results of operations and cash flows.

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

In September 2006, the FASB issued
SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans (SFAS 158), which amends SFAS 87 and SFAS 106 to
require recognition of the overfunded or underfunded status of pension and other
postretirement benefit plans on the balance sheet. Under SFAS 158, gains and losses, prior
service costs and credits, and any remaining transition amounts under SFAS 87 and SFAS 106
that have not yet been recognized through net periodic benefit cost will be recognized in
accumulated other comprehensive income, net of tax effects, until they are amortized as a
component of net periodic cost. The measurement date  the date at which the benefit
obligation and plan assets are measured  is required to be the companys fiscal
year end. SFAS 158 is effective for publicly-held companies for fiscal years ending after
December 15, 2007, except for the measurement date provisions, which are effective for
fiscal years ending after December 15, 2008. The Company does not have a defined benefit
pension plan. Therefore, SFAS 158 will not impact the Companys financial conditions
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
addresses employer accounting for endorsement split-dollar life insurance arrangements
that provide a benefit to an employee that extends to postretirement periods should
recognize a liability for future benefits in accordance with SFAS No. 106,
Employers Accounting for Postretirement Benefits Other Than Pensions,or Accounting Principles Board (APB) Opinion No. 12, Omnibus
Opinion1967".EITF 06-4 is effective for fiscal years beginning after
December 15, 2007. Entities should recognize the effects of applying EITF 06-4 through
either (a) a change in accounting principle through a cumulative-effect adjustment to
retained earnings or to other components of equity or net assets in the statement of
financial position as of the beginning of the

53

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year of adoption or (b) a change in
accounting principle through retrospective application to all prior periods. The Company
does not believe the adoption of EITF 06-4 will have a material impact on its financial
position, results of operations or cash flows.

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

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

In December 2006, the FASB issued a
Staff Position (FSP) on EITF 00-19-2, Accounting for Registration
Payment Arrangements (FSP EITF 00-19-2). This FSP specifies that the
contingent obligation to make future payments or otherwise transfer consideration under a
registration payment arrangement, whether issued as a separate agreement or included as a
provision of a financial instrument or other agreement, should be separately recognized
and measured in accordance with SFAS No. 5, Accounting for Contingencies. If
the transfer of consideration under a registration payment arrangement is probable and can
be reasonably estimated at inception, the contingent liability under the registration
payment arrangement is included in the allocation of proceeds from the related financing
transaction (or recorded subsequent to the inception of a prior financing transaction)
using the measurement guidance in SFAS No. 5. This FSP is effective immediately for
registration payment arrangements and the financial instruments subject to those
arrangements that are entered into or modified subsequent to the issuance of the FSP. For
prior arrangements, the FSP is effective for financial statements issued for fiscal years
beginning after December 15, 2006 and interim periods within those years. The Company does
not believe the adoption of this FSP will have a material impact on its financial
position, results of operations and cash flows.

In February 2007, the FASB issued
SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities
 Including an amendment of FASB Statement No. 115. This statement permits, but
does not require, entities to measure many financial instruments at fair value. The
objective is to provide entities with an opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without having to
apply complex hedge accounting provisions. Entities electing this option will apply it
when the entity first recognizes an eligible instrument and will report unrealized gains
and losses on such instruments in current earnings. This statement 1) applies to all
entities, 2) specifies certain election dates, 3) can be applied on an
instrument-by-instrument basis with some exceptions, 4) is irrevocable and 5) applies only
to entire instruments. One exception is demand deposit liabilities which are explicitly
excluded as qualifying for fair value. With respect to SFAS 115, available-for-sale and
held-to-maturity securities at the effective date are eligible for the fair value option
at that date. If the fair value option is elected for those securities at the effective
date, cumulative unrealized gains and losses at that date shall be included in the
cumulative-effect adjustment and thereafter, such securities will be accounted for as
trading securities. SFAS 159 is effective for

54

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the Company on January 1, 2008.
Earlier adoption is permitted in 2007 if the Company also elects to apply the provisions
of SFAS 157, Fair Value Measurement. The Company is currently analyzing the
fair value option provided under SFAS 159.

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 and
cash flows.

Risks and
Uncertainties  In the normal course of its business, the Company
encounters two significant types of risks: economic and regulatory. There are three main
components of economic risk: interest rate risk, credit risk and market risk. The Company
is subject to interest rate risk to the degree that its interest-bearing liabilities
mature or reprice at different speeds, or on different basis, than its interest-earning
assets. Credit risk is the risk of default on the loan portfolio that results from
borrowers inability or unwillingness to make contractually required payments. Market
risk reflects changes in the value of collateral underlying loans receivable and the
valuation of real estate held by the Company.

The Company is subject to the
regulations of various governmental agencies. These regulations can and do change
significantly from period to period. Periodic examinations by the regulatory agencies may
subject the company to further changes with respect to asset valuations, amounts of
required loss allowances and operating restrictions from the regulators judgments
based on information available to them at the time of their examination.

Reclassifications
 Certain captions and amounts in the 2004 and 2005 financial statements were
reclassified to conform to the 2006 presentation.

Stock-Based
Compensation  On January 1, 2006, the Company adopted the fair value
recognition provisions of SFAS No. 123(R), Share-Based Payment (SFAS
123(R)) to account for compensation costs under its stock option plans. The Company
previously utilized the intrinsic value method under Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees (as amended)(APB 25).
Under the intrinsic value method prescribed by APB 25, no compensation costs were
recognized for the Companys stock options because the option exercise price in its
plans equals the market price on the date of grant. Prior to January 1, 2006, the Company
only disclosed the pro forma effects on net income and earnings per share as if the fair
value recognition provisions of SFAS 123(R) had been utilized.

In adopting SFAS No. 123(R), the
Company elected to use the modified prospective method to account for the transition from
the intrinsic value method to the fair value recognition method. Under the modified
prospective method, compensation cost is recognized from the adoption date forward for all
new stock options granted and for any outstanding unvested awards as if the fair value
method had been applied to those awards as of the date of grant. See Note 21 for
assumptions used to estimate the grant-date per share fair value of the options in the
table below. The following table illustrates the effect on net income and earnings per
share as if the fair value based method had been applied in each period.

55

---

|                                                | Year Ended December 31,
|----------------------------------------------- | -----------------------
|
|Net income (loss), as reported                  |                        
|Add: Stock-based employee compensation          |                        
|expense included in reported net income, net of |                        
|related tax effects                             |                        
|Deduct, Total stock-based employee              |                        
|compensation expense determined                 |                        
|under fair value based method                   |                        
|for all awards, net of related tax effects      |                        
|                                                |                        
|Pro forma net income (loss)                     |                        
|                                                |                        
|Earnings (loss) per share:                      |                        
|Basic - as reported                             |                        
|                                                |                        
|Basic - pro forma                               |                        
|                                                |                        
|Diluted - as reported                           |                        
|                                                |                        
|Diluted - pro forma                             |                        
|                                                |                        

# NOTE 2  CASH AND
DUE FROM BANKS

The Company maintains cash balances
with its correspondent banks to meet reserve requirements determined by the Federal
Reserve. At December 31, 2006 and 2005, the requirement was met by the cash balance in the
vault.

# NOTE 3  INVESTMENT
SECURITIES

The amortized cost and estimated fair
values of securities available for sale were:

|                                 | Amortized | Gross Unrealized | Estimated
|-------------------------------- | --------- | ---------------- | ---------
|
|December 31, 2006                |           |                  |          
|U.S. agency securities           |           |                  | $        
|Government-sponsored enterprises |           |                  |          
|Mortgage-backed securities       |           |                  |          
|Municipals                       |           |                  |          
|                                 |           |                  |          
|Total                            |           |                  | $        
|                                 |           |                  |          
|December 31, 2005                |           |                 
|U.S. agency securities           |           |                  | $        
|Government-sponsored enterprises |           |                  |          
|Mortgage-backed securities       |           |                  |          
|Municipals                       |           |                  |          
|                                 |           |                  |          
|Total                            |           |                  | $        
|                                 |           |                  |          

The amortized cost and estimated fair values
are based on the contractual maturity dates. Actual maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations with or
without penalty.

56

---

Maturity schedule:

|                         | One to Five Years | Five to Ten Years | Over 10 Years | Total
|------------------------ | ----------------- | ----------------- | ------------- | -----
|
|
|Available for Sale:      |                   |                   |               |      
|U.S. agency/ Government- |                   |                  
|sponsored enterprises    |                   |                   | $             | 4,558
|Mortgage-backed          |                   |                  
|securities               |                   |                   |               | -    
|Municipals               |                   |                   |               | -    
|                         |                   |                   |               |      
|Total                    |                   |                   | $             | 4,558
|                         |                   |                   |               |      

At December 31, 2006 and 2005,
investment securities with book values of $10,979,693 and $6,155,522 and market values of
$11,017,268 and $5,995,117, respectively, were pledged as collateral for securities sold
under agreements to repurchase. Gross proceeds from the sale of investment securities
totaled $11,428,559 for the year ended 2006 resulting in a realized loss of $136,628.
There were no sales of securities in 2005 or 2004.

The following table shows gross
unrealized losses and fair value, aggregated by investment category, and length of time
that individual securities have been in a continuous unrealized loss position, at December
31, 2006 and 2005.

Securities available-for-sale:

|                                 | Less than |  |   |            | 
|-------------------------------- | --------- |  | - | ---------- | 
|
|
|
|December 31, 2006                |           |  |   |            | 
|U.S. government agencies         |           |  | $ | 2,980,937  | 
|Government-sponsored enterprises |           |  |   | 8,162,453  | 
|Mortgage-backed securities       |           |  |   | -          | 
|Municipals                       |           |  |   | 788,839    | 
|                                 |           |  |   |            | 
|                                 |           |  | $ | 11,932,229 | 
|                                 |           |  |   |            | 
|December 31, 2005                |           | 
|U.S. government agencies         |           |  | $ | -          | 
|Government-sponsored enterprises |           |  |   | 1,482,187  | 
|Mortgage-backed securities       |           |  |   | 4,865,385  | 
|Municipals                       |           |  |   | -          | 
|                                 |           |  |   |            | 
|                                 |           |  | $ | 6,347,570  | 
|                                 |           |  |   |            | 

57

---

Securities classified as
available-for-sale are recorded at fair market value. Approximately 11.06% of the
unrealized losses, or one security, consisted of securities in a continuous loss position
for twelve months or more. The Company has the ability and intent to hold these securities
until such time as the value recovers or the securities mature. The Company believes,
based on industry analyst reports and credit ratings, that the deterioration in value is
attributable to changes in market interest rates and is not in the credit quality of the
issuer and therefore, these losses are not considered other-than-temporary.

# NOTE 4  LOANS
RECEIVABLE

Major classifications of loans
receivable are summarized as follows:

|                               | December 31,
|------------------------------ | ------------
|
|Real estate - construction     |             
|Real estate - mortgage         |             
|Commercial and industrial      |             
|Consumer and other             |             
|Deferred origination fees, net |             
|                               |             
|Total loans receivable, gros   |             
|Less allowance for loan loss   |             
|                               |             
|Total loans receivable, net    |             
|                               |             

The composition of gross loans by
rate type is as follows:

|                    | December 31,
|------------------- | ------------
|
|Variable rate loans |             
|Fixed rate loans    |             
|                    |             
|Total gross loans   |             
|                    |             

Transactions in the allowance for loan
losses during 2006, 2005 and 2004 are summarized below:

|                                       | 2006 | 2005 | 2004
|-------------------------------------- | ---- | ---- | ----
|Balance, beginning of year             |      |      | $   
|Provision charged to operations        |      |      |     
|                                       |      |      |     
|Balance, end of year                   |      |      | $   
|                                       |      |      |     
|Gross loans outstanding, end of period |      |      | $   
|                                       |      |      |     

The allowance for loan losses, as a
percent of gross loans outstanding, was 1.27%, 1.25% and 1.27% at December 31, 2006, 2005
and 2004, respectively. At December 31, 2006, the Bank had two loans totaling $1,964,983,
or 0.72% of gross loans, in nonaccrual status. Furthermore, there were no loans
contractually past due ninety days or more still accruing interest at December 31, 2006 or
2005.

58

---

# NOTE 5  PREMISES,
FURNITURE AND EQUIPMENT

Premises, furniture and equipment
consist of the following:

|                                       | December 31,
|-------------------------------------- | ------------
|
|Land and land improvements             |             
|Building and leasehold improvements    |             
|Furniture and equipment                |             
|Software                               |             
|Construction in progress               |             
|                                       |             
|Total                                  |             
|Less, accumulated depreciation         |             
|                                       |             
|Premises, furniture and equipment, net |             
|                                       |             

Depreciation expense for the years
ended December 31, 2006, 2005 and 2004 amounted to $278,129, $233,413 and $159,600,
respectively. Construction in progress relates to the construction of future branch
locations in Summerville, West Ashley, Myrtle Beach and Park West.

# NOTE 6  DEPOSITS

At December 31, 2006, the scheduled
maturities of certificates of deposit were as follows:

|Maturing:                   | Amount
|--------------------------- | ------
|Within one year             |       
|After one through two years |       
|Greater than two years      |       
|                            |       
|Total                       |       
|                            |       

# NOTE 7  SECURITIES
SOLD UNDER REPURCHASE AGREEMENTS

Securities sold under repurchase
agreements are summarized as follows for the years ended December 31, 2006 and 2005:

|                                           | 2006 | 2005
|------------------------------------------ | ---- | ----
|Amount outstanding at year end             |      |     
|Average amount outstanding during year     |      |     
|Maximum outstanding at any month-end       |      |     
|Weighted average rate paid at year-end     |      |     
|Weighted average rate paid during the year |      |     

The Bank has entered into sales of
securities under agreements to repurchase. These obligations to repurchase securities sold
are reflected as liabilities in the consolidated balance sheets. The dollar amounts of
securities underlying the agreements are book entry securities. U.S. Government agency
securities with book values of $10,979,693 and $6,155,522 and fair values of $11,017,268
and $5,995,117 at December 31, 2006 and 2005, respectively, are used as collateral for the
agreements.

59

---

# NOTE 8  NOTE
PAYABLE

On February 3, 2005, the Company
executed a note with Nexity Bank to borrow $2,100,000. Proceeds from the note were used to
provide short term capital to the Bank. The note was paid off on April 4, 2005 following
the March 30, 2005 private placement of 1,712,000 shares of Company stock. On July 12,
2005, the Company executed a note with Nexity Bank to borrow $1,680,000 to purchase
property for future branch use. The principal balance was paid off on July 12, 2006.

# NOTE 9  JUNIOR
SUBORDINATED DEBENTURES

On February 22, 2006, Tidelands
Statutory Trust (the Trust), a non-consolidated subsidiary of the Company,
issued and sold floating rate capital securities of the trust (the Capital
Securities), generating proceeds of $8.0 million. The Trust loaned these proceeds to
the Company to use for general corporate purposes, primarily to provide capital to the
Bank. The debentures qualify as Tier 1 capital under Federal Reserve Board guidelines.

The Capital Securities in the
transaction accrue and pay distributions quarterly at a rate per annum equal to the
three-month LIBOR plus 138 basis points, which was 6.75% at December 31, 2006. The
distribution rate payable on the Capital Securities is cumulative and payable quarterly in
arrears. The Company has the right, subject to events of default, to defer payments of
interest on the Capital Securities for a period not to exceed 20 consecutive quarterly
periods, provided that no extension period may extend beyond the maturity date of March
30, 2036. The Company has no current intention to exercise its right to defer payments of
interest on the Capital Securities.

The Capital Securities mature or are
mandatorily redeemable upon maturity on March 30, 2036 and or upon earlier optional
redemption as provided in the indenture. The Company has the right to redeem the Capital
Securities in whole or in part, on or after February 22, 2009. The Company may also redeem
the capital securities prior to such dates upon occurrence of specified conditions and the
payment of a redemption premium.

# NOTE 10  ADVANCES
FROM FEDERAL HOME LOAN BANK

On June 27, 2006, the Bank borrowed
$10.0 million under a two year prime based advance from the Federal Home Loan Bank
(FHLB). Additionally, on July 21, 2006, the Bank borrowed $6.0 million under a
seven year convertible advance from the FHLB. At December 31, 2006, the variable interest
rates were 5.40% and 5.07% for the $10.0 million and $6.0 million advances, respectively.

# NOTE 11  OTHER
OPERATING EXPENSES

Other operating expenses for the
years ended December 31, 2006, 2005 and 2004 are summarized below:

|                                          | 2006 | 2005 | 2004
|----------------------------------------- | ---- | ---- | ----
|Professional fees                         |      |      | $   
|Telephone expenses                        |      |      |     
|Office supplies, stationery, and printing |      |      |     
|Insurance                                 |      |      |     
|Postage                                   |      |      |     
|Data processing                           |      |      |     
|Advertising and marketing                 |      |      |     
|Other                                     |      |      |     
|                                          |      |      |     
|Total                                     |      |      | $   
|                                          |      |      |     

60

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# NOTE 12  INCOME
TAXES

For the years ended December 31,
2006, 2005 and 2004 income tax expense (benefit) consisted of the following:

|                             | 2006 | 2005 | 2004
|---------------------------- | ---- | ---- | ----
|Current portion Federal      |      |      | $   
|State                        |      |      |     
|                             |      |      |     
|Total current                |      |      |     
|                             |      |      |     
|Deferred income taxes        |      |      |     
|                             |      |      |     
|Income tax expense (benefit) |      |      | $   
|                             |      |      |     

The gross amounts of deferred tax
assets and deferred tax liabilities are as follows:

|                                                 | December 31,
|------------------------------------------------ | ------------
|
|Deferred tax assets:                             |             
|Allowance for loan losses                        |             
|Net operating loss carry forward                 |             
|Organization and start-up costs                  |             
|Loan fees and costs                              |             
|Unrealized loss on securities available for sale |             
|Interest on nonaccrual loans                     |             
|Other                                            |             
|                                                 |             
|Total deferred tax assets                        |             
|                                                 |             
|Deferred tax liabilities:                        |             
|Accumulated depreciation                         |             
|Prepaid expenses                                 |             
|Unrealized gain on securities available for sale |             
|                                                 |             
|Total deferred tax liabilities                   |             
|                                                 |             
|Net deferred tax asset                           |             
|                                                 |             

Deferred tax assets represent the future
tax benefit of deductible differences and, if it is more likely than not that a tax asset
will not be realized, a valuation allowance is required to reduce the recorded deferred
tax assets to net realizable value. As of December 31, 2006 and 2005, management believes
it will fully realize 100% of the Companys deferred tax asset.

A reconciliation between the income
tax expense and the amount computed by applying the Federal statutory rate of 34% for
2006, 2005 and 2004 to income before income taxes follows:

|                                                   | 2006 | 2005 | 2004
|-------------------------------------------------- | ---- | ---- | ----
|Tax expense (benefit) at statutory rate            |      |      | $   
|State income tax, net of federal income tax effect |      |      |     
|Stock based compensation expense                   |      |      |     
|Other                                              |      |      |     
|                                                   |      |      |     
|Income tax expense (benefit)                       |      |      | $   
|                                                   |      |      |     

# NOTE 13  LEASES

The Bank renegotiated its lease
agreement for its main branch location in 2004. The lease was originated on March 29, 2004
and had an initial ten-year term. The lease requires monthly payments of $14,840 for the
first three years, increased nine percent in year four and three percent every year
thereafter. The lease is renewable at the banks option for two five-year terms.
Rental expense on this facility was $178,076, $178,076 and $157,257 for the years ended
December 31, 2006, 2005 and 2004, respectively.

61

---

The Bank also leases a building for
its temporary Summerville branch location. The lease was originated on September 7, 2004
and has an initial one-year term. The lease is now on a month-to-month basis. The lease
requires monthly payments of $3,303 per month. Rental expense under this operating lease
agreement was $54,121, $42,390 and $13,213 for the year ended December 31, 2006, 2005 and
2004 respectively.

The Bank also leases a building for
its temporary Myrtle Beach branch location. The lease was originated on February 10, 2005
and has an initial two-year term. The lease may be extended at the Banks option for
an additional 12 month term. The lease has been extended thru June 9, 2007 at a monthly
expense of $3,000. Rental expense under this operating lease agreement was $23,604 and
$22,367 for the year ended December 31, 2006 and 2005.

The Bank has entered into a land
lease for a West Ashley location with the intent of opening a branch in 2007. The lease
was originated on December 22, 2005 and has an initial twenty-year term. The lease may be
extended at the Banks option for four additional five-year terms. The lease requires
monthly payments of $5,833 for the first five years, increased twelve percent every fifth
year thereafter. Rent commences on the earlier of eighteen months from the lease
commencement date noted above or on the date the facility opens for business. In addition,
the Bank leases office space for the West Ashley loan production location. The lease was
originated on June 30, 2006 and has an initial one-year term. The lease may be extended at
the Banks option for an additional 12 month term. The lease requires monthly
payments $1,185 per month. Rental expense under these operating lease agreements were
$12,155 for the year ended December 31, 2006.

The Bank also leases office space for
its Bluffton loan production office. The lease was originated on September 28, 2006 and
has an initial one-year term. The lease may be extended at the Banks option for an
additional 12 month term. The lease requires monthly payments $2,575 per month. Rental
expense under this operating lease agreement was $10,300 for the year ended December 31,
2006.

Future minimum lease payments under
these operating leases are summarized as follows:

|           | 
|---------- | 
|2007       | 
|2008       | 
|2009       | 
|2010       | 
|2011       | 
|Thereafter | 
|           | 
|           | 
|           | 

# NOTE 14  RELATED
PARTY TRANSACTIONS

Certain parties (principally certain
directors and executive officers of the Company, their immediate families and business
interests) were loan customers of and had other transactions in the normal course of
business with the Company. Related party loans are made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for comparable
transactions with unrelated persons and do not involve more than the normal risk of
collectibility.

62

---

Related party loan transactions for
the years ended December 31, 2006 and 2005 are summarized below:

|                           | December 31,
|-------------------------- | ------------
|
|Balance, beginning of year |             
|New loans                  |             
|Less loan payments         |             
|                           |             
|Balance, end of year       |             
|                           |             

Deposits from directors and executive
officers and their related interests totaled $424,920 and $501,430, at December 31, 2006
and 2005, respectively.

# NOTE 15 
COMMITMENTS AND CONTINGENCIES

The Company is subject to claims and lawsuits
which arise primarily in the ordinary course of business. Management is not aware of any
legal proceedings which would have a material adverse effect on the financial position or
operating results of the Company.

# NOTE 16  EARNINGS
(LOSS) PER SHARE

Basic earnings (loss) per share is
computed by dividing net income (loss) by the weighted-average number of common shares
outstanding. Diluted earnings (loss) per share is computed by dividing net income (loss)
by the weighted-average number of common shares outstanding and dilutive common share
equivalents using the treasury stock method. Dilutive common share equivalents include
common shares issuable upon exercise of outstanding stock options. There was no dilution
in 2004, therefore, basic loss per share and diluted earnings per share were the same.
Losses per share have been adjusted to reflect the five for four stock split in 2004.

Basic and diluted earnings (loss) per
share are computed below:

|                                                   | Year Ended December 31,
|-------------------------------------------------- | -----------------------
|
|Basic earnings (loss) per share computation:       |                        
|Net income (loss) available to common shareholders |                        
|                                                   |                        
|Average common shares outstanding - basic          |                        
|                                                   |                        
|Basic net income (loss) per share                  |                        
|                                                   |                        
|Diluted earnings (loss) per share computation:     |                        
|Net income (loss) available to common shareholders |                        
|                                                   |                        
|Average common shares outstanding - basic          |                        
|Incremental shares from assumed conversions:       |                        
|Stock options                                      |                        
|                                                   |                        
|Average common shares outstanding - diluted        |                        
|                                                   |                        
|Diluted earnings (loss) per share                  |                        
|                                                   |                        

At December 31, 2006, outstanding
options to purchase 8,165 shares were excluded from this calculation because those options
are considered anti-dilutive. There were no anti-dilutive options at December 31, 2005 and
2004.

63

---

# NOTE 17 
REGULATORY MATTERS

The Company and Bank are subject to
various regulatory capital requirements administered by the 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
adverse material effect on the Companys or Banks financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective action, the
Company and Bank must meet specific capital guidelines that involve quantitative measures
of the Companys and Banks assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Companys and
Banks 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 Bank to maintain minimum
ratios of Tier 1 and total capital as a percentage of assets and off-balance-sheet
exposures, adjusted for risk weights ranging from 0% to 100%. Tier 1 capital consists of
common shareholders equity, excluding the unrealized gain or loss on securities
available-for-sale, minus certain intangible assets. Tier 2 capital consists of the
allowance for loan losses subject to certain limitations. Total capital for purposes of
computing the capital ratios consists of the sum of Tier 1 and Tier 2 capital. The
regulatory minimum requirements are 4% for Tier 1 and 8% for total risk-based capital.

The Company and Bank are also
required to maintain capital at a minimum level based on total assets, which is known as
the leverage ratio. Only the strongest institutions are allowed to maintain capital at the
minimum requirement of 3%. All others are subject to maintaining ratios 1% to 2% above the
minimum.

As of December 31, 2006 and 2005,
management believes it is categorized as well-capitalized under the regulatory framework
for prompt corrective action. There are no conditions or events that management believes
have changed the Companys and Banks category.

The following table summarizes the
capital amounts and ratios of the Company and the regulatory minimum requirements at
December 31, 2006 and 2005:

|                                         |  |  |   |            | To Be Well-
|---------------------------------------- |  |  | - | ---------- | -----------
|
|
|
|
|
|December 31, 2006                        |  |  |   |            |            
|Total capital (to risk-weighted assets)  |  |  | $ | 52,034,000 |            
|Tier 1 capital (to risk-weighted assets) |  |  |   | 48,567,000 |            
|Tier 1 capital (to average assets)       |  |  |   | 48,567,000 |            
|December 31, 2005                        |  | 
|Total capital (to risk-weighted assets)  |  |  | $ | 24,488,000 |            
|Tier 1 capital (to risk-weighted assets) |  |  |   | 22,243,000 |            
|Tier 1 capital (to average assets)       |  |  |   | 22,243,000 |            

64

---

The following table summarizes the
capital amounts and ratios of the Bank and the regulatory minimum requirements at December
31, 2006 and 2005:

|                                        |  |  |   |            | To Be Well-
|--------------------------------------- |  |  | - | ---------- | -----------
|
|
|
|
|December 31, 2006                       |  |  |   |            |            
|Total capital (to risk-weighted assets) |  |  | $ | 50,907,000 |            
|Tier 1 capital (to risk-weighted        |  |  |   | 47,440,000 |            
|assets)                                 |  | 
|Tier 1 capital (to average assets)      |  |  |   | 47,440,000 |            
|December 31, 2005                       |  | 
|Total capital (to risk-weighted assets) |  |  | $ | 24,183,000 |            
|Tier 1 capital (to risk-weighted        |  |  |   | 21,938,000 |            
|assets)                                 |  | 
|Tier 1 capital (to average assets)      |  |  |   | 21,938,000 |            

# NOTE 18  UNUSED
LINES OF CREDIT

As of December 31, 2006, the Company
had unused lines of credit to purchase federal funds from unrelated banks totaling $26.0
million. These lines of credit are available on a one to fourteen day basis for general
corporate purposes. In addition to these credit lines, unused credit availability at the
Federal Home Loan Bank amounted to $16.0 million at December 31, 2006.

# NOTE 19 
SHAREHOLDERS EQUITY

Stock Offering
 On March 30, 2005, the Company closed on a secondary stock offering whereby
1,712,000 shares of the Companys stock were issued at $9.35 per share. Net proceeds
after deducting placement agent fees and expenses were $14.9 million. Proceeds from the
offering were used to support the growth of the Company.

Public Stock
Offering  On October 10, 2006, the Company closed a public offering
in which 1,200,000 shares of the Companys common stock were issued at a purchase
price of $15.00 per share. Net proceeds after deducting underwriter discounts and expenses
were $16.4 million. Proceeds from the offering will be used to support the growth of the
Company.

Stock Dividends
 On December 13, 2004, the Board of Directors declared a stock dividend in the
effect of a five for four stock dividend payable on January 18, 2005, to shareholders of
record at January 4, 2005. As a result of the stock dividend, 263,739 shares were issued.
The financial statements as of December 31, 2004 have been adjusted to reflect such
transaction. All per share amounts have been adjusted to reflect this dividend.

Restrictions on
Dividends  South Carolina banking regulations restrict the amount of
dividends that can be paid to shareholders. All of the Banks dividends to Tidelands
Bancshares, Inc. are payable only from the undivided profits of the Bank. The Bank is
authorized to pay cash dividends up to 100% of net income in any calendar year without
obtaining the prior approval of the Commissioner of Banking provided that the Bank
received a composite rating of one or two at the last Federal or State regulatory
examination. Under Federal Reserve Board regulations, the amounts of loans or advances
from the Bank to the parent company are also restricted.

# NOTE 20  FINANCIAL
INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

The Company is a party to financial
instruments with off-balance-sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments consist of commitments to
extend credit and standby letters of credit. 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. A commitment involves, to varying degrees, elements of

65

---

credit and interest rate risk in excess of the amount recognized in the balance sheet. The
Companys exposure to credit loss in the event of nonperformance by the other party
to the instrument is represented by the contractual notional amount of the instrument.
Since certain commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The Company uses
the same credit policies in making commitments to extend credit as it does for
on-balance-sheet instruments. Standby letters of credit are conditional commitments issued
to guarantee a customers performance to a third party and have essentially the same
credit risk as other lending facilities.

Collateral held for commitments to
extend credit and letters of credit varies but may include accounts receivable, inventory,
property, plant, equipment and income-producing commercial properties.

The following table sets forth in
thousands the length of time until maturity for unused commitments to extend credit and
standby letters of credit at December 31, 2006.

|                             | Amount
|---------------------------- | ------
|Commitments to extend credit |       
|Standby letters of credit    |       
|                             |       
|Total                        |       
|                             |       

# NOTE 21  STOCK
COMPENSATION PLANS

On May 10, 2004, the Company
established the 2004 Tidelands Bancshares, Inc. Stock Incentive Plan (Stock
Plan) that provides for the granting of options to purchase twenty percent of the
outstanding shares of the Companys common stock to directors, officers, or employees
of the Company. The plan was amended during 2005 to provide for the designation of an
additional 348,997 shares as incentive stock options. The per-share exercise price of
incentive stock options granted under the Stock Plan may not be less than the fair market
value of a share on the date of grant and vest based on continued service with the Company
for a specified period, generally two to five years following the date of grant. The
per-share exercise price of stock options granted is determined by a committee appointed
by the Board of Directors. The expiration date of any option may not be greater than ten
years from the date of grant. Options that expire, unexercised or are forfeited become
available for reissuance. Options have been adjusted for the five for four stock split in
2004.

In calculating the pro forma
disclosures, the fair value of options granted is estimated as of the date granted using
the Binomial option valuation model with the following weighted-average assumptions used
for grants:

|                        | 2006 | 2005 | 2004
|----------------------- | ---- | ---- | ----
|Dividend yield          |      |      |     
|Expected volatility     |      |      |     
|Risk-free interest rate |      |      |     
|Expected life           |      |      |     

The weighted-average fair value of
options granted during the years 2006, 2005 and 2004 is $5.05, $2.36 and $2.07,
respectively. The total intrinsic value of options exercised during the years ended
December 31, 2006 and 2005, was $215,041and $8,263, respectively. For the year ended
December 31, 2004, there were no options exercised.

66

---

A summary of the status of the
Companys stock option plan as of December 31, 2006 and 2005 is presented below:

|                                 | 2006 | 2005
|-------------------------------- | ---- | ----
|
|
|
|
|Outstanding at beginning of year |      |     
|Granted                          |      |     
|Exercised                        |      |     
|Forfeited                        |      |     
|                                 |      |     
|Outstanding at end of year       |      |     
|                                 |      |     
|Options exercisable at year-end  |      |     
|                                 |      |     
|Shares available for grant       |      |     
|                                 |      |     

The aggregate intrinsic value in the
table above represents the total pre-tax intrinsic value (the difference between the
Companys closing stock price on the last trading day of 2006 and the exercise price,
multiplied by the number of in-the-money options) that would be received by the option
holders had all options holders exercised their options on December 31, 2006. This amount
changes based on the fair value of the Companys stock.

A summary of the status of the
Companys nonvested shares as of December 31, 2006 is presented below:

|                               |  | Weighted
|------------------------------ |  | --------
|
|
|
|Nonvested at beginning of year |  |         
|Granted                        |  |         
|Vested                         |  |         
|Forfeited                      |  |         
|                               |  |         
|Nonvested at end of year       |  |         
|                               |  |         

As of December 31, 2006, there was
$1.1 million of total unrecognized compensation cost related to nonvested share-based
compensation arrangements granted under the Plan. That cost is expected to be recognized
over a weighted-average period of 1.5 years. The total fair value of shares vested during
the years ended December 31, 2006, 2005 and 2004, was $136,506, $105,093 and $64,624,
respectively.

The following table summarizes
information about the stock options outstanding under the Companys plans at December
31, 2006:

|                 | Options Outstanding | Options Exercisable
|---------------- | ------------------- | -------------------
|
|
|
|
|$8.80 to $9.00   |                     |                    
|$9.01 to $10.00  |                     |                    
|$10.01 to $15.00 |                     |                    
|$15.01 to $17.65 |                     |                    
|                 |                     |                    
|                 |                     |                    
|                 |                     |                    

67

---

# NOTE 22  FAIR
VALUE OF FINANCIAL INSTRUMENTS

The fair value of a financial
instrument is the amount at which the asset or obligation could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation sale. Fair
value estimates are made at a specific point in time based on relevant market information
and information about the financial instruments. Because no market value exists for a
significant portion of the financial instruments, fair value estimates are based on
judgments regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. The following methods
and assumptions were used to estimate the fair value of significant financial instruments:

Cash and Due from
Banks  The carrying amount is a reasonable estimate of fair value.

Federal Funds
Sold  Federal funds sold are for a term of one day, and the carrying
amount approximates the fair value.

Securities The fair values of securities available-for-sale equal the carrying
amounts, which are the quoted market prices. If quoted market prices are not available,
fair values are based on quoted market prices of comparable securities. The carrying value
of nonmarketable equity securities approximates the fair value since no ready market
exists for the stocks.

Mortgage Loans Held for
Sale  The carrying value for mortgage loans held for sale is a
reasonable estimate for fair value considering the short time these loans are carried on
the books. Management determined that only minor fluctuations occurred in fixed rate
mortgage loans available for sale; therefore the carrying amount approximates fair value.

Loans Receivable
For certain categories of loans, such as variable rate loans which are repriced frequently
and have no significant change in credit risk, fair values are based on the carrying
amounts. The fair value of other types of loans is estimated by discounting the future
cash flows using the current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities.

Deposits
The fair value of demand deposits, savings, and money market accounts is the amount
payable on demand at the reporting date. The fair values of certificates of deposit are
estimated using a discounted cash flow calculation that applies current interest rates to
a schedule of aggregated expected maturities.

Note Payable
 The carrying amounts of variable rate notes are reasonable estimates of fair value
because they can be repriced frequently.

Securities Sold Under
Agreements to Repurchase  These repurchase agreements have variable
rates that reprice every ninety days. Due to the minor change in interest rates,
management estimates the carrying value to be a reasonable estimate of fair value.

Junior Subordinated DebenturesThe carrying value of junior subordinated
debentures approximates its fair value since the debentures were issued at a floating
rate.

Advances from Federal Home Loan
BankThe fair values of fixed rate borrowings
are estimated using a discounted cash flow calculation that applies the Companys
current borrowing rate from the Federal Home Loan Bank. The carrying amounts of variable
rate borrowings are reasonable estimates of fair value because they can be repriced
frequently.

Accrued Interest Receivable and
Payable  The carrying value of these instruments is a reasonable
estimate of fair value.

68

---

Off-Balance-Sheet Financial
Instruments  Fair values for off-balance sheet, credit-related
financial instruments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
counterparties credit standing.

The carrying values and estimated
fair values of the Companys financial instruments are as follows:

|                                  |  | December 31, |  
|--------------------------------- |  | ------------ | -
|
|
|
|Financial Assets:                 |  |              |  
|Cash and due from banks           |  |              | $
|Federal funds sold                |  |              |  
|Securities available-for-sale     |  |              |  
|Mortgage loans held for sale      |  |              |  
|Nonmarketable equity securities   |  |              |  
|Loans receivable                  |  |              |  
|Accrued interest receivable       |  |              |  
|Financial Liabilities:            |  |             
|Demand deposit, interest-bearing  |  |             
|transaction, and savings accounts |  |              | $
|Certificates of deposit and other |  |             
|time deposits                     |  |              |  
|Note payable                      |  |              |  
|Securities sold under agreements  |  |             
|to repurchase                     |  |              |  
|Junior subordinated debentures    |  |              |  
|Advances from Federal Home Loan   |  |             
|Bank                              |  |              |  
|Accrued interest payable          |  |              |  

|                                         |  | Estimated |   | Estimated 
|---------------------------------------- |  | --------- | - | ----------
|
|
|Off-Balance Sheet Financial Instruments: |  |           |   |           
|Commitments to extend credit             |  |           | $ | 56,163,050
|Letters of credit                        |  |           |   | 1,210,000 

69

---

# NOTE 23  TIDELANDS
BANCSHARES, INC. (PARENT COMPANY ONLY)

Presented below are the condensed
financial statements for Tidelands Bancshares, Inc. (Parent Company Only).

# Condensed Balance
Sheets

|                                           | December 31,
|------------------------------------------ | ------------
|
|Assets                                     |             
|Cash                                       |             
|Other equity securities                    |             
|Investment in banking subsidiary           |             
|Other assets                               |             
|                                           |             
|Total assets                               |             
|                                           |             
|Liabilities and shareholders' equity       |             
|Junior subordinated debentures             |             
|Shareholders' equity                       |             
|                                           |             
|Total liabilities and shareholders' equity |             
|                                           |             

# Condensed Statements
of Operations

|                                                | For the Years Ended December 31,
|----------------------------------------------- | --------------------------------
|
|Income                                          |                                 
|Income on trust preferred securities            |                                 
|Expenses                                        |                                 
|Stock based compensation expense                |                                 
|Other professional expense                      |                                 
|Other expenses                                  |                                 
|                                                |                                 
|Income (loss) before income taxes and equity in |                                 
|undistributed earnings of banking subsidiary    |                                 
|                                                |                                 
|Income tax benefit                              |                                 
|Equity in undistributed losses of banking       |                                 
|subsidiary                                      |                                 
|                                                |                                 
|Net income (loss)                               |                                 
|                                                |                                 

70

---

NOTE 23  TIDELANDS
BANCSHARES, INC. (PARENT COMPANY ONLY)- continued

# Condensed Statements of
Cash Flows

|                                                      | For the Years Ended December 31,
|----------------------------------------------------- | --------------------------------
|
|Cash flows from operating activities:                 |                                 
|Net income (loss)                                     |                                 
|Adjustments to reconcile net loss to net cash         |                                 
|used by operating activities:                         |                                 
|(Increase) decrease in other assets                   |                                 
|Equity in undistributed (income) losses of subsidiary |                                 
|Decrease in due from subsidiary                       |                                 
|(Increase) in deferred income taxes                   |                                 
|Increase in stock based compensation expense          |                                 
|                                                      |                                 
|Net cash provided (used) by operating activities      |                                 
|                                                      |                                 
|Cash flows from investing activities:                 |                                 
|Purchase of Tidelands Bank stock                      |                                 
|Purchase of equity securities                         |                                 
|                                                      |                                 
|Net cash used by operating activities                 |                                 
|                                                      |                                 
|Cash flows from financing activities:                 |                                 
|Proceeds from notes payable                           |                                 
|Repayments on notes payable                           |                                 
|Increase in junior subordinated debentures            |                                 
|Issuance of common stock                              |                                 
|Stock issuance costs                                  |                                 
|Proceeds from exercise of stock options               |                                 
|                                                      |                                 
|Net cash provided by financing activities             |                                 
|                                                      |                                 
|Net increase in cash and cash equivalents             |                                 
|Cash and cash equivalents, beginning of period        |                                 
|                                                      |                                 
|Cash and cash equivalents, end of period              |                                 
|                                                      |                                 

71

---

# NOTE 24 QUARTERLY
DATA (UNAUDITED)

|                          | For the Year Ended December 31, 2005 | For the Year Ended December 31, 2006
|------------------------- | ------------------------------------ | ------------------------------------
|
|
|
|Interest Income           |                                      |                                     
|Interest Expense          |                                      |                                     
|                          |                                      |                                     
|Net interest income       |                                      |                                     
|                          |                                      |                                     
|Provision for loan losses |                                      |                                     
|                          |                                      |                                     
|Net interest income after |                                      |                                     
|provision for loan losses |                                      |                                     
|Noninterest income        |                                      |                                     
|Noninterest expense       |                                      |                                     
|                          |                                      |                                     
|Income before taxes       |                                      |                                     
|                          |                                      |                                     
|Income tax expense        |                                      |                                     
|                          |                                      |                                     
|Net Income (loss)         |                                      |                                     
|                          |                                      |                                     
|Earnings per share:       |                                      |                                     
|Basic                     |                                      |                                     
|                          |                                      |                                     
|Diluted                   |                                      |                                     
|                          |                                      |                                     

72

---

# Item 8.  Changes in and Disagreements
with Accountants on Accounting and Financial Disclosure.

None

# Item 8A. Controls and
Procedures.

As
of the end of the period covered by this report, we carried out an evaluation, under the
supervision and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and
procedures as defined in Exchange Act Rule 13a-15(e). Based upon that evaluation, our
Chief Executive Officer and Chief Financial Officer have concluded that our current
disclosure controls and procedures are effective as of December 31, 2006. There have been
no significant changes in our internal controls over financial reporting during the fourth
fiscal quarter ended December 31, 2006 that have materially affected, or are reasonably
likely to materially affect, our internal controls over financial reporting.

The
design of any system of controls and procedures is based in part upon certain assumptions
about the likelihood of future events. There can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions, regardless of
how remote.

# Item 8B. Other
Information

None.

73

---

# PART III

# Item 9.  Directors,
Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act.

Information
required by Item 9 is hereby incorporated by reference from our proxy statement for our
2006 annual meeting of shareholders to be held on May 21, 2007.

# Item 10. Executive
Compensation.

Information
required by Item 10 is hereby incorporated by reference from our proxy statement for our
2006 annual meeting of shareholders to be held on May 21, 2007.

# Item 11.  Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder Matters.

Information
required by Item 11 is hereby incorporated by reference from our proxy statement for our
2006 annual meeting of shareholders to be held on May 21, 2007.

# Item 12. Certain
Relationships and Related Transactions.

Information
required by Item 12 is hereby incorporated by reference from our proxy statement for our
2006 annual meeting of shareholders to be held on May 21, 2007.

# Item 13. Exhibits.

|3.1. |  | Restated Articles of Incorporation (incorporated by reference as Exhibit 3.1 to
          the Companys Form SB-2 filed with the SEC, File No. 333-97035).
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|3.2. |  | Bylaws (incorporated by reference as Exhibit 3.2 to the Companys Form SB-2
          filed with the SEC, File No. 333-97035).
|---- |  | ------------------------------------------------------------------------------------------------------------------------------

|4.1. |  | See Exhibits 3.1 and 3.2 for provisions in Tidelands Bancshares, Inc.s
          Articles of Incorporation and Bylaws defining the rights of holders of the
          common stock (incorporated by reference as Exhibit 4.1 to the Companys
          Form SB-2 filed with the SEC, File No. 333-97035).
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.2 |  | Form of certificate of common stock (incorporated by reference as Exhibit 4.2 to
          the Companys Form SB-2 filed with the SEC, File No. 333-97035).
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------

|10.1 |  | Lease Agreement between Savings Associates and Tidelands Bank. (incorporated by reference as Exhibit      10.1 to the
Company's Form 10-KSB filed with the SEC for the period ended December 31, 2004,No. 000-50707).
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.2 |  | Amended and Restated Employment Agreement between Tidelands Bancshares, Inc. and Robert H. Mathewes. (incorporated by
         reference as Exhibit 10.9 to the Company's Form SB-2 filed with the SEC, File No. 333-97035).*
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.3 |  | Employment Agreement between Tidelands Bancshares, Inc. and Robert E. Coffee, Jr. (incorporated by reference as Exhibit
         10.10 to the Company's Form SB-2 filed with the SEC, File No. 333-97035).*
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.4 |  | Employment Agreement between Tidelands Bancshares, Inc. and Alan W. Jackson (incorporated by reference as Exhibit 10.2 to
         the Company's Form 10-QSB for the period ended September 30, 2003).*
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.5 |  | Tidelands Bancshares, Inc. 2004 Stock Incentive Plan and Form of Stock Option Agreement (incorporated by reference as
         Exhibit 10.11 to the Company's Form 10-K for the year ended December 31, 2003).*
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

74

---

|10.6 |  | Intercept Master Agreement for Provision of Hardware with Tidelands Bank dated July 30,
2003 (incorporated by reference as Exhibit 10.1 to the Companys Form 10-Q for the
period ended September 30, 2003).
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.7 |  | Amended and Restated Declaration of Trust among Tidelands Bancshares, Inc., as Depositor,
Wilmington Trust Company, as property trustee, Wilmington Trust Company, as Delaware
trustee, and the Administrators named therein, including exhibits containing the related
forms of the Tidelands Statutory Trust I Common Securities Certificate and the Preferred
Securities Certificate (incorporated by reference to Exhibit 10.1 to the Companys
Form 8-K filed on February 29, 2006).
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.8 |  | Guarantee Agreement between Tidelands Bancshares, Inc., as guarantor, and Wilmington Trust
Company, as guarantee trustee (incorporated by reference to Exhibit 10.2 to the
Companys Form 8-K filed on February 29, 2006).
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.9 |  | Agreement for Purchase and Sale between Park West Development, Inc. and Tidelands Bank (incorporated by reference to Exhibit
         10.1 to the Company's Form 10-QSB filed on August 15, 2005).
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.10 |  | Agreement to Buy and Sell Real Estate between Tidelands Bank and Frank W. Brumley, Patrick W. McKinney, Michael C. Robinson
         and Milton E. Morgan (incorporated by reference to Exhibit 10.2 to the Company's Form 10-QSB
filed on August 15, 2005).
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.11 |  | Addendum I to Agreement to Buy and Sell between Tidelands Bank and Frank W. Brumley, Patrick W. McKinney, Michael C. Robinson
         and Milton E. Morgan (incorporated by reference to Exhibit 10.3 to the Company's
Form 10-QSB filed on August 15, 2005).
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|21.1 |  | Subsidiaries of the
Company.
|---- |  | ----------------------------

|23 |  | Consent of Independent
Public Accounting Firm.
|-- |  | ----------------------------------------------

|24 |  | Power of
Attorney (contained on the signature page hereof).
|-- |  | -----------------------------------------------------------

|31.1 |  | Rule 13a-14(a)
 Certification of the Chief Executive Officer.
|---- |  | -------------------------------------------------------------

|31.2 |  | Rule 13a-14(a)
Certification of the Chief Financial Officer.
|---- |  | ------------------------------------------------------------

|32 |  | Section 1350
Certifications.
|-- |  | ----------------------------

| |  | _____________
*Management contract of compensatory plan or arrangement required to be filed as an Exhibit
to this Annual Report on Form 10-KSB.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------

# Item 14. Principal
Accountant Fees and Services

The
information required by Item 14 is hereby incorporated by reference from our proxy
statement for our 2006 annual meeting of shareholders to be held on May 21, 2007.

75

---

# SIGNATURES

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

| |  | TIDELANDS BANCSHARES, INC.
| |  | --------------------------

|Date:  March 19,2007 |  | By:   /s/  Robert E. Coffee, Jr.     
|-------------------- |  | -------------------------------------
|                     |  | Robert E. Coffee, Jr.                
|                     |  | President and Chief Executive Officer

KNOW
ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints Robert E. Coffee, Jr., his true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him and in his name, place and stead, in any
and all capacities, to sign any and all amendments to this Form 10-KSB, and to file the
same, with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto attorney-in-fact and agent full power
and authority to do and perform each and every act and thing requisite or necessary to be
done in and about the premises, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that attorney-in-fact and agent, or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

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

Signature Title Date

|Signature | Title | Date
|--------- | ----- | ----

|/s/ Michael W. Burrell
Michael W. Burrell | Director | March 19, 2007
|----------------------------------------- | -------- | --------------

|/s/ John N. Cagle, III, DMD
John N. Cagle, III, DMD | Director | March 19, 2007
|--------------------------------------------------- | -------- | --------------

|/s/ Alan D. Clemmons
Alan D. Clemmons | Director | March 19, 2007
|------------------------------------- | -------- | --------------

|/s/ Robert E. Coffee, Jr.
Robert E. Coffee, Jr. | Director, President, and Chief Executive Officer | March 19, 2007
|----------------------------------------------- | ------------------------------------------------ | --------------

|/s/ Richard L. Granger
Richard L. Granger | Director | March 19, 2007
|----------------------------------------- | -------- | --------------

|/s/ Alan W. Jackson
Alan W. Jackson | Principal Accounting andChief Financial Officer | March 19, 2007
|----------------------------------- | ----------------------------------------------- | --------------

76

---

|/s/ Barry I. Kalinsky
Barry I. Kalinsky | Director, Chairman | March 19, 2007
|--------------------------------------- | ------------------ | --------------

|/s/ Morris Kalinsky
Morris Kalinsky | Director | March 19, 2007
|----------------------------------- | -------- | --------------

|/s/ Paul J. Kerwin, DVM
Paul J. Kerwin, DVM | Director | March 19, 2007
|------------------------------------------- | -------- | --------------

|/s/ John T. Parker, Jr.
John T. Parker, Jr. | Director | March 19, 2007
|------------------------------------------- | -------- | --------------

|/s/ Tanya D. Robinson
Tanya D. Robinson | Director | March 19, 2007
|--------------------------------------- | -------- | --------------

77

---

# TIDELANDS BANCSHARES, INC.Exhibit List

|3.1. |  | Restated Articles of Incorporation (incorporated by reference as Exhibit 3.1 to
          the Companys Form SB-2 filed with the SEC, File No. 333-97035).
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|3.2. |  | Bylaws (incorporated by reference as Exhibit 3.2 to the Companys Form SB-2
          filed with the SEC, File No. 333-97035).
|---- |  | ------------------------------------------------------------------------------------------------------------------------------

|4.1. |  | See Exhibits 3.1 and 3.2 for provisions in Tidelands Bancshares, Inc.s
          Articles of Incorporation and Bylaws defining the rights of holders of the
          common stock (incorporated by reference as Exhibit 4.1 to the Companys
          Form SB-2 filed with the SEC, File No. 333-97035).
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.2 |  | Form of certificate of common stock (incorporated by reference as Exhibit 4.2 to
          the Companys Form SB-2 filed with the SEC, File No. 333-97035).
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------

|10.1 |  | Lease Agreement between Savings Associates and Tidelands Bank. (incorporated by reference as Exhibit      10.1 to the
Company's Form 10-KSB filed with the SEC for the period ended December 31, 2004,No. 000-50707).
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.2 |  | Amended and Restated Employment Agreement between Tidelands Bancshares, Inc. and Robert H. Mathewes. (incorporated by
         reference as Exhibit 10.9 to the Company's Form SB-2 filed with the SEC, File No. 333-97035).*
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.3 |  | Employment Agreement between Tidelands Bancshares, Inc. and Robert E. Coffee, Jr. (incorporated by reference as Exhibit
         10.10 to the Company's Form SB-2 filed with the SEC, File No. 333-97035).*
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.4 |  | Employment Agreement between Tidelands Bancshares, Inc. and Alan W. Jackson (incorporated by reference as Exhibit 10.2 to
         the Company's Form 10-QSB for the period ended September 30, 2003).*
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.5 |  | Tidelands Bancshares, Inc. 2004 Stock Incentive Plan and Form of Stock Option Agreement (incorporated by reference as
         Exhibit 10.11 to the Company's Form 10-K for the year ended December 31, 2003).*
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.6 |  | Intercept Master Agreement for Provision of Hardware with Tidelands Bank dated July 30,
2003 (incorporated by reference as Exhibit 10.1 to the Companys Form 10-Q for the
period ended September 30, 2003).
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.7 |  | Amended and Restated Declaration of Trust among Tidelands Bancshares, Inc., as Depositor,
Wilmington Trust Company, as property trustee, Wilmington Trust Company, as Delaware
trustee, and the Administrators named therein, including exhibits containing the related
forms of the Tidelands Statutory Trust I Common Securities Certificate and the Preferred
Securities Certificate (incorporated by reference to Exhibit 10.1 to the Companys
Form 8-K filed on February 29, 2006).
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.8 |  | Guarantee Agreement between Tidelands Bancshares, Inc., as guarantor, and Wilmington Trust
Company, as guarantee trustee (incorporated by reference to Exhibit 10.2 to the
Companys Form 8-K filed on February 29, 2006).
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.9 |  | Agreement for Purchase and Sale between Park West Development, Inc. and Tidelands Bank (incorporated by reference to Exhibit
         10.1 to the Company's Form 10-QSB filed on August 15, 2005).
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.10 |  | Agreement to Buy and Sell Real Estate between Tidelands Bank and Frank W. Brumley, Patrick W. McKinney, Michael C. Robinson
         and Milton E. Morgan (incorporated by reference to Exhibit 10.2 to the Company's Form 10-QSB
filed on August 15, 2005).
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.11 |  | Addendum I to Agreement to Buy and Sell between Tidelands Bank and Frank W. Brumley, Patrick W. McKinney, Michael C. Robinson
         and Milton E. Morgan (incorporated by reference to Exhibit 10.3 to the Company's
Form 10-QSB filed on August 15, 2005).
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|21.1 |  | Subsidiaries of the
Company.
|---- |  | ----------------------------

|23 |  | Consent of Independent
Public Accounting Firm.
|-- |  | ----------------------------------------------

78

---

|24 |  | Power of
Attorney (contained on the signature page hereof).
|-- |  | -----------------------------------------------------------

|31.1 |  | Rule 13a-14(a)
 Certification of the Chief Executive Officer.
|---- |  | -------------------------------------------------------------

|31.2 |  | Rule 13a-14(a)
Certification of the Chief Financial Officer.
|---- |  | ------------------------------------------------------------

|32 |  | Section 1350
Certifications.
|-- |  | ----------------------------

79