# 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, 2005
| | -------------------------------------------

| | 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.
000-50707

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:   None
Securities registered pursuant to Section 12(g) of the Act:

Check whether the issuer is not
required to file reports pursuant to Section 13 or 15(d) of the Exchange Act

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, 2005 was $9,706,630.

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 17, 2006, was
approximately $18,780,470. This calculation was based on the closing
price of our common stock on March 17, 2006 of $11.75.

The number of shares outstanding of
the issuers common stock was 3,044,054 at March 17, 2006.

# DOCUMENTS INCORPORATED
BY REFERENCE

|                                                       | 
|------------------------------------------------------ | 
|Proxy Statement for the Annual Meeting of Shareholders | 
|to be held on May 15, 2006                             | 

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; o 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 o 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, 2005, our assets totaled $206.4 million and our shareholders equity was $23.1
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.

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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 that is 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 late in 2006. The bank has entered into a land lease for a
West Ashley location with the intent of opening a full service branch in 2007.

Our
primary market area is the Charleston metropolitan area, which includes Charleston,
Dorchester, and Berkeley counties, and additional markets along the South Carolina coast.
The Charleston metropolitan area supports a well-diversified economy based on tourism, the
Port of Charleston, the medical community, and the military. According to the 2003 Census
Estimates, the population of the Charleston metropolitan area grew 12.8% from 1990 to 2003
to a total of 572,000. We expect this growth to continue as the 2003 Census Estimates
forecast the population to increase to 625,080 by 2015. Mount Pleasant, which is where we
are headquartered, grew by 58% from 1990 to 2000, and now ranks as the sixth largest city
in South Carolina with the third highest per capita income in the state. By 2010, it is
estimated that Mount Pleasant will be the fourth largest city in the State of South
Carolina. Our additional market areas along the South Carolina coast also are undergoing
significant growth. The population of Horry County, which includes Myrtle Beach, increased
31.6% from 144,000 in 1990 to an estimated 211,000 in 2003. We believe the combination of
residents and visitors in our market areas supports real estate development, construction,
healthcare, and education and favors the expansion of community-based banking services.

# Lending Activities

General.
          We emphasize a range of lending services, including real estate, commercial,
          consumer 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, 2005, we had total
          loans of $179.7 million, representing 90.8% 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, 2005, we had no nonperforming assets and no loans
          past due 30 days or more.

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 our
capital. As of December 31, 2005, $21.9 million, or 12.2%, of our loans had loan-to-value
ratios that exceeded regulatory supervisory guidelines, of which five loans totaling
approximately $3.7 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, 2005, $11.4 million, or 49.5% of capital, of our commercial loans exceed the
supervisory loan to value ratio. 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.

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 loan size of
approximately $187,000 as of December 31, 2005. 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, 2005, our 10 largest customer loan relationships represented
approximately $26.8 million, or 14.9% of our loan portfolio.

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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, 2005, loans secured
by first or second mortgages on real estate made up approximately $85.0 million, or 47.3%,
of our loan portfolio.

These
loans will generally fall into one of two categories: commercial real estate loans or
residential real estate loans. Most of our real estate loans are 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, 2005, our individual commercial real
estate loans ranged in size from approximately $9,000 to $1.7 million, as we have
participated credits in excess of our legal lending limit to correspondent banks. The
average commercial real estate loan size was approximately $327,000. 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 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, 2005, commercial real estate loans (other than construction loans) amounted
to $65.2 million, or approximately 36.3% 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, 2005, our individual residential real estate loans ranged in size from approximately
$36,000 to $1.5 million, with an average loan size of approximately $301,000. 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 originating and retaining these loans ourselves. We also
offer home equity lines of credit. At December 31, 2005, our individual home equity lines
of credit ranged in size from $600 to $838,000, with an average of approximately $83,000.
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, 2005, residential real
estate loans (other than construction loans) amounted to $19.8 million, or 11.0% of our
loan portfolio. Included in the residential real estate loans was $8.4 million, or 42.5%
of our residential loan portfolio, in first and second mortgages on individuals
homes, and $11.4 million, or 57.5% of our residential loan portfolio, in home equity
loans.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Real
Estate Construction and Land Development Loans.We offer adjustable and fixed rate
residential and commercial construction loans to builders and developers and to consumers
who wish to build their own homes. At December 31, 2005, our commercial construction and
development real estate loans ranged in size from approximately $7,000 to $2.5 million,
with an average loan size of approximately $338,000. At December 31, 2005, our individual
residential construction and development real estate loans ranged in size from
approximately $53,000 to $1.5 million, with an average loan size of approximately
$318,000. The duration 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:

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| |  | 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, 2005, total construction loans amounted to $81.9 million, or
45.5% of our total loan portfolio. Included in the $81.9 million total was $65.3 million
in construction and development loans, or 79.8% of our construction loan portfolio, that
were made to commercial construction developers, and approximately $16.6 million, or 20.2%
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. At
December 31, 2005, our individual commercial business loans ranged in size from
approximately $640 to $1.4 million, with an average loan size of approximately $52,000.
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, 2005, commercial business loans amounted to
$11.4 million, or 6.3% 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, 2005, 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, 2005, our individual consumer
loans ranged in size from approximately $80 to $155,000, with an average loan size of
approximately $12,000. Our installment loans typically amortize over periods up to 60
months. We will offer consumer loans with a single maturity date when a specific source of
repayment is available. We typically require monthly payments of interest and a portion of
the principal on our revolving loan products. 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, 2005, consumer
loans amounted to $1.7 million, or 0.9% 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 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 $1.0 million. If the loans exceed
$1.0 million, then a loan committee comprised of Mr. Coffee and four other 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

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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. We have hired an experienced Chief Credit Officer to oversea credit administration.
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, 2005, our legal lending limit was approximately
$3,700,000. We are able to sell participations in our larger loans to other financial
institutions, which allow 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.

# Deposit Products

We
offer a full range of deposit services that are typically available in most banks and
savings and loan associations, 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. The 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 and loan
associations, 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, 2005, there were 21 financial institutions other than us in the Charleston
metropolitan area and 18 in Horry County, where our Myrtle Beach office is located. 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

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networks and trust services, that 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 December 31, 2005, we had 38 full-time employees and 3 part-time employees.

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# SUPERVISION AND
REGULATION

Both
the company and the bank are subject to extensive state and federal banking laws and
regulations that impose specific requirements or restrictions on and provide for general
regulatory oversight of virtually all aspects of our operations. These laws and
regulations are generally intended to protect depositors, 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. Beginning with the enactment of the Financial Institutions Reform Recovery and
Enforcement Act in 1989 and followed by the FDIC Improvement Act in 1991 and the
Gramm-Leach-Bliley Act in 1999, numerous additional regulatory requirements have been
placed on the banking industry in the past several years, and additional changes have been
proposed. 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.

# USA PATRIOT Act of 2002

In
October 2002, the USA PATRIOT Act of 2002 was enacted in response to the terrorist attacks
in New York, Pennsylvania, and Washington D.C. that occurred on September 11, 2001. The
PATRIOT Act is intended to strengthen U.S. law enforcements and the intelligence
communities abilities to work cohesively to combat terrorism on a variety of fronts.
The potential impact of the PATRIOT Act on financial institutions is significant and wide
ranging. The PATRIOT Act contains sweeping anti-money laundering and financial
transparency laws and imposes various regulations, including standards for verifying
customer identification at account opening, and rules to promote cooperation among
financial institutions, regulators, and law enforcement entities in identifying parties
who may be involved in terrorism or money laundering.

# Check 21

On
October 28, 2003, President Bush signed into law the Check Clearing for the 21st Century
Act, also known as Check 21. Check 21 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 of Check 21 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;
| | - | -----------------------------------------------------------------------------------------------

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

This
legislation will likely affect bank capital spending as many financial institutions assess
whether technological or operational changes are necessary to stay competitive and take
advantage of the new opportunities presented by Check 21.

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# 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 and the South
Carolina Banking and Branching Efficiency Act.

The
Bank Holding Company Act. Under the Bank Holding Company Act, we are subject to
periodic examination by the Federal Reserve and are required to file periodic reports of
our operations and any additional information that the Federal Reserve may require. Our
activities at the bank and holding company levels are limited to:

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

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

| |  | engaging in other activities that the Federal Reserve determines to be so closely related
to banking and managing or controlling banks as to be a proper incident thereto.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Investments,
Control, and Activities. With certain limited exceptions, the Bank Holding Company Act
requires every bank holding company to obtain the prior approval of the Federal Reserve
before:

| |  | acquiring substantially all the assets of any bank;
| | - | ---------------------------------------------------

| |  | acquiring
direct or indirect ownership or control of any voting shares of any bank if after the
acquisition it would own or control more than 5% of the voting shares of such bank (unless
it already owns or controls the majority of such shares); or
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | merging or consolidating with another bank holding company.
| | - | -----------------------------------------------------------

In
addition, and subject to certain exceptions, the Bank Holding Company Act and the Change
in Bank Control Act, together with regulations promulgated thereunder, require Federal
Reserve approval prior to any person or company acquiring control of a 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 the Securities Exchange Act of 1934. The regulations
provide a procedure for rebutting control when ownership of any class of voting securities
is below 25%.

Under
the Bank Holding Company Act, a bank holding company is generally prohibited from engaging
in, or acquiring direct or indirect control of more than 5% of the voting shares of any
company engaged in, nonbanking activities unless the Federal Reserve Board, by order or
regulation, has found those activities to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. Some of the activities that the
Federal Reserve Board has determined by regulation to be proper incidents to the business
of a bank holding company include:

| |  | making or servicing loans and certain types of leases;
| | - | ------------------------------------------------------

| |  | engaging in certain insurance and
discount brokerage activities;
| | - | ----------------------------------------------------------------

| |  | performing certain data processing services;
| | - | --------------------------------------------

| |  | acting in
certain circumstances as a fiduciary or investment or financial adviser;
| | - | ----------------------------------------------------------------------------------

| |  | owning savings
associations; and
| | - | --------------------------------

| |  | making investments in certain corporations or projects designed primarily to promote
community welfare.
| | - | -------------------------------------------------------------------------------------------------------

The
Federal Reserve Board imposes certain capital requirements on the 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

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the bank, and these loans may be
repaid from dividends paid from the bank to the company. Our ability to pay dividends will
be 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.

Source
of Strength; Cross-Guarantee. 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.

The
Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act was signed into law on November 12,
1999. Among other things, the Act repealed the restrictions on banks affiliating with
securities firms contained in sections 20 and 32 of the Glass-Steagall Act. The Act also
permits bank holding companies that become financial holding companies to engage in a
statutorily provided list of financial activities, including insurance and securities
underwriting and agency activities, merchant banking, and insurance company portfolio
investment activities. The Act also authorizes activities that are
complementary to financial activities. We have not elected to become a
financial holding company.

The
Act is intended, in part, to grant to community banks certain powers as a matter of right
that larger institutions have accumulated on an ad hoc basis. Nevertheless, the Act may
have the result of increasing the amount of competition that we face from larger
institutions and other types of companies. In fact, it is not possible to predict the full
effect that the Act will have on us.

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 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.
Deposits in the bank are insured by the FDIC up to a maximum amount, which is generally
$100,000 per depositor subject to aggregation rules.

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;
| | - | -----------------------------------

9

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| |  | 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.

Under
the FDIC Improvement Act, all insured institutions must undergo regular on site
examinations by their appropriate banking agency. The cost of 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 Improvement Act directs the
FDIC to develop 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.
| | - | --------------

Holding
companies which have been registered or have undergone a change in control within the past
two years or which have been deemed by the Federal Reserve Board to be troubled
institutions must give the Federal Reserve Board 30 days prior notice of the
appointment of any senior executive officer or director. Within the 30 day period, the
Federal Reserve Board, as the case may be, may approve or disapprove any such appointment.

Deposit
Insurance. The FDIC has adopted a risk-based assessment system for determining an
insured depository institutions insurance assessment rate. The system takes into
account the risks attributable to different categories and concentrations of assets and
liabilities. An institution is placed into one of three capital categories: (1) well
capitalized; (2) adequately capitalized; or (3) undercapitalized. The FDIC also assigns an
institution to one of three supervisory subgroups, based on the FDICs determination
of the institutions financial condition and the risk posed to the deposit insurance
funds. Assessments range from 0 to 27 cents per $100 of deposits, depending on the
institutions capital group and supervisory subgroup. Our risk-based assessment rate
is currently zero but may change in the future. The FDIC may increase or decrease the
assessment rate schedule on a semiannual basis. An increase in the BIF assessment rate
could have a material adverse effect on our earnings, depending on the amount of the
increase. In addition, the FDIC imposes assessments to help pay off the $780.0 million in
annual interest payments on the $8.0 billion Financing Corporation (FICO) bonds issued in
the late 1980s as part of the government rescue of the thrift industry. Our annual FICO
assessment for the third quarter of 2005 was 0.33 basis points of total assessable
deposits. FICO assessments totaled $10,326 for the year ended December 31, 2005.

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

10

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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.

The
bank 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 recently 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 nonbank and nonsavings 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 limits the amount of loans that
could be purchased by a bank from an affiliate to not more than 100% of the banks
capital and surplus.

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.

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.

11

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The
Gramm-Leach-Bliley Act. Under the Gramm-Leach-Bliley Act, 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 Gramm-Leach-Bliley Act 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 Gramm-Leach-Bliley Act imposes new restrictions on transactions between a
bank and its financial subsidiaries similar to restrictions applicable to transactions
between banks and nonbank affiliates.

The
Gramm-Leach-Bliley Act also contains provisions regarding consumer privacy. These
provisions require financial institutions to disclose their policy for collecting and
protecting confidential information. Customers generally may prevent financial
institutions from sharing personal financial information with nonaffiliated third parties
except for third parties that market an institutions own products and services.
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 the consumer.

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 transactions, such
as:

| |  | 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, governing the use and provision of information to credit
           reporting agencies;
| | - | ------------------------------------------------------------------------------------------------------------------------------

| |  | 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 such federal laws.
| | - | ----------------------------------------------------------------------------------------------------------------------------

In
addition, the deposit operations of the bank 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 govern 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.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Capital
Regulations. The federal bank regulatory authorities have adopted risk-based capital
guidelines for banks and bank holding companies that are designed to make regulatory
capital requirements more sensitive to differences in risk profiles among banks and bank
holding companies and account for off-balance sheet items. The guidelines are minimums,
and the federal regulators have noted that banks and bank holding companies contemplating
significant expansion programs should not allow expansion to diminish their capital ratios
and should maintain ratios in excess of the minimums. We have not received any notice
indicating that either the company or the bank is subject to higher capital requirements.
The current guidelines require all bank holding companies and federally-regulated banks to
maintain a minimum risk-based total capital ratio equal to 8%, of which at least 4% must
be Tier 1 capital. Tier 1 capital includes common shareholders equity, qualifying
perpetual preferred stock, and minority interests in equity accounts of consolidated
subsidiaries, but excludes goodwill and most other intangibles and excludes the allowance
for loan and lease losses. Tier 2 capital includes

12

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the excess of any preferred stock not
included in Tier 1 capital, mandatory convertible securities, hybrid capital instruments,
subordinated debt and intermediate term-preferred stock, and general reserves for loan and
lease losses up to 1.25% of risk-weighted assets.

Under
these guidelines, banks and bank holding companies assets are given
risk-weights of 0%, 20%, 50%, or 100%. In addition, certain off-balance sheet items are
given credit conversion factors to convert them to asset equivalent amounts to which an
appropriate risk-weight applies. These computations result in the total risk-weighted
assets. Most loans are assigned to the 100% risk category, except for first mortgage loans
fully secured by residential property and, under certain circumstances, residential
construction loans, both of which carry a 50% rating. Most investment securities are
assigned to the 20% category, except for municipal or state revenue bonds, which have a
50% rating, and direct obligations of or obligations guaranteed by the United States
Treasury or United States Government agencies, which have a 0% rating.

The
federal bank regulatory authorities have also implemented a leverage ratio, which is equal
to Tier 1 capital as a percentage of average total assets less intangibles, to be used as
a supplement to the risk-based guidelines. The principal objective of the leverage ratio
is to place a constraint on the maximum degree to which a bank holding company may
leverage its equity capital base. The minimum required leverage ratio for top-rated
institutions is 3%, but most institutions are required to maintain an additional cushion
of at least 100 to 200 basis points.

The
FDIC Improvement Act established a new capital-based regulatory scheme designed to promote
early intervention for troubled banks which requires the FDIC to choose the least
expensive resolution of bank failures. The new capital-based regulatory framework contains
five categories of compliance with regulatory capital requirements, including well
capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized.
To qualify as a well capitalized institution, a bank must have a leverage
ratio of no less than 5%, a Tier 1 risk-based ratio of no less than 6%, and a total
risk-based capital ratio of no less than 10%, and the bank must not be under any order or
directive from the appropriate regulatory agency to meet and maintain a specific capital
level. At December 31, 2005, based on our calculations, we qualified as well
capitalized.

Under
the FDIC Improvement Act regulations, the applicable agency can treat an institution as if
it were in the next lower category if the agency determines (after notice and an
opportunity for hearing) that the institution is in an unsafe or unsound condition or is
engaging in an unsafe or unsound practice. The degree of regulatory scrutiny of a
financial institution increases, and the permissible activities of the institution
decreases, as it moves downward through the capital categories. Institutions that fall
into one of the three undercapitalized categories may be required to do some or all of the
following:

| |  | submit a capital restoration plan;
| | - | ----------------------------------

| |  | raise additional capital;
| | - | -------------------------

| |  | restrict their growth, deposit interest rates, and other activities;
| | - | --------------------------------------------------------------------

| |  | improve their
management;
| | - | -------------------------

| |  | eliminate management fees; or o divest themselves of all or a part of their
operations.
| | - | ---------------------------------------------------------------------------------------

These
capital guidelines can affect us in several ways. If we grow at a rapid pace, our capital
may be depleted too quickly, and a capital infusion from the holding company may be
necessary, which could impact our ability to pay dividends. Our capital levels currently
are more than adequate; however, rapid growth, poor loan portfolio performance, poor
earnings performance, or a combination of these factors could change our capital position
in a relatively short period of time.

Failure
to meet these capital requirements would mean that a bank would be required to develop and
file a plan with its primary federal banking regulator describing the means and a schedule
for achieving the minimum capital requirements. In addition, such a bank would generally
not receive regulatory approval of any application that requires the consideration of
capital adequacy, such as a branch or merger application, unless the bank could

13

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demonstrate a reasonable plan to meet
the capital requirement within a reasonable period of time. A bank that is not well
capitalized is also subject to certain limitations relating to so-called
brokered deposits. Bank holding companies controlling financial institutions
can be called upon to boost the institutions capital and to partially guarantee the
institutions performance under their capital restoration plans.

Enforcement
Powers. The Financial Institutions Reform Recovery and Enforcement Act expanded and
increased civil and criminal penalties available for use by the federal regulatory
agencies against depository institutions and certain institution-affiliated
parties. Institution-affiliated parties primarily include management, employees, and
agents of a financial institution, as well as independent contractors and consultants such
as attorneys and accountants and others who participate in the conduct of the financial
institutions affairs. 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 $1.0 million a day for
such violations. Criminal penalties for some financial institution crimes have been
increased to 20 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, indemnification 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.

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.

# Risk Factors

Our recent operating
results may not be indicative of our future operating results.

We
have grown rapidly in our two years of operation. 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 will not necessarily be 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 growthand
adversely affect our prospects.

14

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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 key
management personnel and experienced loan originators, including Alan W. Jackson, Robert
H. Mathewes, Jr., Milon C. Smith, James M. Bedsole, Michael W. Hambrick, Kenneth M.
Pickens, and James A. Kimbell, III. Competition for personnel is intense, and we may not
be successful in attracting or retaining qualified personnel. Our failure to compete for
these personnel, or the loss of the services of several of such key personnel, could
adversely affect our growth strategy and seriously harm our business, results of
operations, and financial condition. We maintain key man life insurance policies in the
amount of $1.0 million on each of Messrs. Coffee and Jackson.

An economic downturn,
especially one affecting the Charleston metropolitan area, 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 starts in our market, primarily in the Charleston metropolitan area. If the
community in which we operate does 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 deposits, which in turn would hurt our business. Interest received on
loans represented approximately 90.8% of our interest income for the year ended December
31, 2005. If an economic downturn occurs in the economy as a whole, or in the Charleston
metropolitan area, borrowers may be less likely to repay their loans as scheduled.
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. An economic downturn could, therefore, result in losses that
could materially and adversely affect our business.

Lack of seasoning of our
loan portfolio may increase the risk of credit defaults in the future.

Due
to our short operating history, all of the loans in our loan portfolio and of our lending
relationships are of recent origin. 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 behave more predictably than a newer portfolio. Because our loan portfolio is 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 delinquencies and defaults increase, we may be required to increase our
provision for loan losses, which would adversely affect our results of operations and
financial condition.

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. Interest
received on loans represented approximately 90.8% of our interest income for the year
ended December 31, 2005. 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, 2005, approximately $21.9 million, or 12.2%, of
our loans had loan-to-value ratios which exceeded regulatory

15

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supervisory guidelines, of which five
loans totaling approximately $3.7 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, 2005, $11.4 million, or 49.5% of capital, of our commercial loans
exceed 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. Any such
delinquencies or defaults could have an adverse effect on our results of operations and
financial condition.

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

| | There
is not a precise method of predicting credit losses; therefore, we face the risk that
charge-offs in future periods will exceed our allowance for loan losses and that
additional increases in the allowance for loan losses will be required. Additions to the
allowance for loan losses would result in a decrease of our net income, and possibly our
capital.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Changes in interest rates
may reduce our profitability.

Our
results of operations depend in large part upon the level of our net interest income,
which is the difference between interest income earned from interest-earning assets, such
as loans and mortgage-backed securities, and interest expense paid on interest-bearing
liabilities, such as deposits and other borrowings. Depending on the terms and maturities
of our assets and liabilities, a significant change in interest rates could have a
material adverse effect on our profitability. 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 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 various regulatory agencies. 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 are also subject to
capitalization guidelines established by our regulators, which require us to maintain
adequate capital to support our growth.

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. Because
government regulation greatly affects the business and financial results of all commercial
banks and bank holding companies, our cost of compliance could adversely affect our
ability to operate profitably.

Efforts to comply with
the 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,

16

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greater compliance costs, including
costs related to internal controls, as a result of the Sarbanes-Oxley Act. For example,
for the year ended December 31, 2006, 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 these new rules and regulations to
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 and our ability to obtain any necessary equity or debt financing could
suffer.

In
addition, the new 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 to attract and retain qualified persons to serve on our board of directors or as
executive officers.

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

We
are required by regulatory authorities to maintain adequate levels of capital to support
our operations. We may 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. Accordingly, we cannot assure you of
our ability to raise additional capital, if needed, on terms acceptable to us. If we
cannot raise additional capital when needed, our ability to further expand our operations
through internal growth and acquisitions could be materially impaired.

We face strong
competition for customers, which could prevent us from obtaining customers and may cause
us to payhigher 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 other commercial banks, credit unions,
savings and loan associations, mortgage banking firms, consumer finance companies,
securities brokerage firms, insurance companies, money market funds, and mutual funds, as
well as 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, 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 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:

17

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| |  | 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.

We may not be able to
compete with our larger competitors for larger customers because our lending limits arelower
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. Our
lending limit is significantly less than the limit for most of our competitors and may
affect our ability to seek relationships with larger businesses in our market area. We
intend to continue to accommodate larger loans by selling participations in those loans to
other financial institutions.

18

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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 expect to pay 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 limited branch 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 branch office until we open a suitable
permanent branch location.

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 limited
service facility while we construct facilities suitable for a permanent full service
branch. This lease has an initial term of two years, a renewal option for an additional 12
months, and rent of approximately $1,970 per month.

On
February 1, 2005, the bank entered into an agreement to purchase a property, including a
4,340 square foot building, in the Park West section of Mount Pleasant for $1.6 million.
We are leasing the site back to the seller for a period of 12 to 18 months and anticipate
opening a branch office at the site after this lease expires. During the term of this
lease, we have located a mortgage loan originator in this building.

On
August 26, 2005, the bank purchased property and a facility for $1.3 million at 840
Lowcountry Boulevard in Mount Pleasant, South Carolina. This facility is currently under
renovation and will house our operations departments.

On
December 22, 2005, the Bank entered into a land lease for a West Ashley location with the
intent of building a branch in 2006. The lease was originated 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,
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.

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.

19

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# PART II

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

Our
common stock is not listed on any exchange. However, the stock was approved for quotation
on the OTC Bulletin Board under the symbol TDBK in November 2005. Quotations
on the OTC Bulletin Board reflect inter-dealer prices, without retail mark-up, mark-down,
or commissions, and may not represent actual transactions. Because we were not approved
for quotation until November 2005, meaningful stock price data is unavailable for this
report. During 2005, management is aware of a few transactions in which our common stock
traded in the price range of $8.80 to $11.75 per share. However, management has not
ascertained that these transactions are the result of arms length negotiations
between the parties, and because of the limited number of shares involved, these prices
may not be indicative of the market value of our common stock.

As
of March 17, 2006, we had approximately 650 shareholders of record.

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, 2005, the bank was prohibited from declaring a
dividend because it had an accumulated deficit of approximately $1.3 million.

20

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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, 2005, 2004 and 2003 is based
on our audited financial statements for such periods. The following discussion describes
our results of operations for the year ended December 31, 2005 as compared to December 31,
2004 and also analyzes our financial condition as of December 31, 2005 as compared to
December 31, 2004. Since we did not commence banking operations until October 2003, the
following discussion is primarily focused on the period following the opening of the bank.

# 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 $206.4
million, loans to $179.7 million, and deposits to $174.6 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, 2005.

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

21

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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 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 $39,520 and our net loss was $803,415 for the years ended December 31, 2005
and 2004, respectively. Net income before income tax expense was $59,931 for the year
ended December 31, 2005 compared to a net loss before income tax benefit of $1.2 million
for the year ended December 31, 2004. The $1.3 million increase in net income before tax
benefits 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 $1.5 million and $565,000 for the years ended December 31, 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 year ended December 31, 2005,
our loan portfolio increased $124.4 million. We anticipate the growth in loans will
continue to drive the growth in assets and the growth in net interest income. 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, 2005, loans represented 87.0% of
total assets, while securities and federal funds sold represented 8.9% of total assets.
While we plan to continue our focus on increasing the loan portfolio, as rates on
investment securities begin to rise and additional capital and deposits are obtained, 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, 2005, retail deposits represented
$117.9 million, or 64.4% of total funding, which includes total deposits plus securities
sold under agreements to repurchase plus other borrowings. Commercial deposits represented
$22.1 million, or 12.1% of total funding, borrowings represented $8.1 million, or 4.4% of
total funding, and wholesale out-of-market deposits represented $34.9 million, or 19.1% of
total funding.

We
have converted our two loan production offices into full service branches, one in the
second quarter of 2005 and the other in the fourth quarter of 2005. We are currently
constructing permanent facilities in Myrtle Beach and Summerville which we plan to open in
early 2007. We plan to focus our efforts at these two locations on obtaining lower cost
transaction accounts that are less affected by rising rates. We plan to continue to offer
aggressive rates on investment checking accounts and money market accounts. Based on prior
experience, we

22

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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; however, we anticipate that the two
additional retail deposit offices will assist us in meeting these objectives. We also
anticipate the current deposit strategies and the opening of the two new offices will have
a dampening effect on earnings in the latter half of 2006 and early 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, which we believe will increase earnings in future periods.

As
more fully discussed in the - Market Risk and - Liquidity and Interest
Rate Sensitivity sections below, at December 31, 2005, 89.6% of our loans had
variable rates. Given our high percentage of rate-sensitive loans, our primary focus to
date has been to obtain short-term liabilities to fund our asset growth. This strategy
allows us to manage the impact on our earnings resulting from changes in market interest
rates. At December 31, 2005, 96.7% of interest-bearing liabilities reprice within one
year.

Upon
opening in October 2003, we entered into an agreement to repurchase securities sold for
$6.5 million. We collateralized this transaction with $7.0 million of bonds purchased with
proceeds from our initial public offering. This transaction allowed the bank to lock in
two spreads. One spread being the difference between the fixed rate on the bonds and the
capital raised and the second the difference between the variable rate loans put on the
books and the LIBOR based repurchase agreement which funded the loans. This transaction
has allowed us to leverage our balance sheet more quickly than may be typical while also
providing a balanced asset liability position.

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 (the 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.

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, 2005 increased because we had more interest-earning assets
than interest-bearing liabilities. For the years ended December 31, 2005 and 2004, average
interest-earning assets exceeded average interest-bearing liabilities by $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
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. Our net interest margins for the year ended December
31, 2005 and for the year ended December 31, 2004 were 3.75%, and 3.11%, respectively. 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 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

23

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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.

24

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Years Ended December 31,
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 two years ended December 31, 2005 and 2004, all investments were taxable. During the
same period, we had no securities purchased with agreements to resell. All investments
were owned at an original maturity of over one year. We have not experienced any
nonaccrual loans to date.

|                              | Average Balances, Income and Expenses, and Rates
|----------------------------- | ------------------------------------------------
|
|
|
|
|
|Earning assets:               |                                                 
|Interest bearing balances     |                                                 
|Federal funds sold            |                                                 
|Investment securities         |                                                 
|Loans receivable              |                                                 
|                              |                                                 
|Total earning assets          |                                                 
|                              |                                                 
|Nonearning assets:            |                                                 
|Cash and due from banks       |                                                 
|Mortgages held for sale       |                                                 
|Premises and equipment        |                                                 
|Other assets                  |                                                 
|Allowance for loan losses     |                                                 
|                              |                                                 
|Total nonearning assets       |                                                 
|                              |                                                 
|Total assets                  |                                                 
|                              |                                                 
|Interest-bearing liabilities: |                                                 
|                              |                                                 
|Interest bearing              |                                                 
|transactions accounts         |                                                 
|Savings & money market        |                                                 
|Time deposits less than       |                                                 
|$100,000                      |                                                 
|Time deposits greater         |                                                 
|than $100,000                 |                                                 
|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           |                                                 
|                              |                                                 

25

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Our
net interest spread was 3.19% for the year ended December 31, 2005, compared to 2.75% for
the year ended December 31, 2004. 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 year ended December 31, 2005 was
3.75%, compared to 3.11% for the year ended December 31, 2004. During 2005,
interest-earning assets averaged $138.3 million, compared to $49.3 million in 2004. During
the same periods, average interest-bearing liabilities were $116.3 million and $40.3
million, respectively.

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 $5.2 million and $1.5 million,
for the years ended December 31, 2005 and December 31, 2004, respectively. The significant
increase in 2005 resulted in the net effect of higher levels of both average earning
assets and interest-bearing liabilities and by an increase in the net interest margin.

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. The increases in net interest income were
derived by higher average earning assets and interest-bearing liabilities and aided by the
higher net interest margin.

Interest
income for the year ended December 31, 2005 was $9.2 million, consisting of $8.4 million
on loans, $633,000 on investments and interest bearing balances, 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 90.8% and 72.1%, respectively, of total
interest income for the year ended December 31, 2005, while income from investments and
federal funds sold represented 9.2% and 27.9% of total interest income for the year ended
December 31, 2004. 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 85.7% and 63.6% of average
interest-earning assets for the years ended December 31, 2005 and 2004, respectively.

Interest
expense for the year ended December 31, 2005 was $4.1 million, consisting of $3.8 million
related to deposits and $294,000 related to 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 other borrowings. Interest expense on deposits for the
years ended December 31, 2005 and 2004 represented 92.8% and 85.8%, respectively, of total
interest expense, while interest expense on borrowings represented 7.2% and 14.2%,
respectively, of total interest expense. 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.

26

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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
|------------------------- | ----------
|
|
|
|
|
|Interest income           |           
|Loans                     |           
|Investment securities     |           
|Federal funds sold        |           
|Interest bearing balances |           
|                          |           
|Total interest income     |           
|                          |           
|Interest expense          |           
|Deposits                  |           
|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, 2005 and 2004 is a noncash
expense related to the provision for loan losses of $1.5 million and $565,000,
respectively. The provision added to our allowance for loan losses in 2005 and in 2004
resulted in a net increase in the allowance for loan losses of $1.5 million for the year
ended December 31, 2005 and $565,000 for the year ended December 31, 2004. The allowance
for loan losses increased by the entire provision expense for loan losses because we did
not incur any net charge-offs. The $1.5 million and the $565,000 increases in the
allowance for the years ended December 31, 2005 and 2004, respectively, related to our
decision to increase the allowance in response to the $124.4 million and the $45.4 million
growth in loans for the years ended December 31, 2005 and 2004, respectively. The
allowance for loan losses was $2.2 million and $700,000 as of December 31, 2005 and 2004,
respectively. The allowance for loan losses as a percentage of gross loans was 1.25% at
December 31, 2005 and 1.27% at December 31, 2004. We had no nonperforming loans at
December 31, 2005 and 2004.

27

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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 |                         
|Other service fees and commissions        |                         
|Other                                     |                         
|                                          |                         
|Total noninterest income                  |                         
|                                          |                         

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
$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 $337,000 and $262,000 for the years ended December 31, 2005
and 2004, respectively. The additional $75,000 in 2005 related primarily to increased
volume in the mortgage department as we expanded this line of business with additional
originators. Accordingly, we received $62,000 of origination income on mortgage loans sold
in 2005 compared to $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 deposits consist primarily of service charges on our checking, money market, and
savings accounts. Deposit fees were $13,000 and $6,000 for the years ended December 31,
2005 and 2004, respectively. The additional $7,000 of income resulted from the larger
number of customer accounts.

Other
service fees, commissions, and the fee income received from customer non-sufficient funds
(NSF) transactions increased $32,000 to $55,000 for the year ended December
31, 2005.

Other
income consists primarily of fees received on debit and credit card transactions, income
from sales of checks, and the fees received on wire transfers. Other income was $8,000 and
$4,000 for the years ended December 31, 2005 and 2004, respectively.

28

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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 $4.1 million for the year ended December 31, 2005 compared
to $2.5 million for the year ended December 31, 2004. The $858,000 million 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
market, 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 $2.3 million and $1.5 million for the years ended December 31,
2005 and 2004, respectively. Salaries and benefits represented 57.0% and 57.7% of our
total noninterest expense for the years ended December 31, 2005 and 2004, respectively.
The $858,000 increase in salaries and benefits expense in 2005 compared to 2004 resulted
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 seventeen additional employees as
well as annual salary increases.

The
following tables set forth information related to our data processing and related costs.

|                                        | Years ended December 31,
|--------------------------------------- | ------------------------
|
|
|Data processing costs                   |                         
|ATM transaction expense                 |                         
|Other expenses                          |                         
|                                        |                         
|Total data processing and related costs |                         
|                                        |                         

Data
processing and related costs were $124,000 and $106,000 for the years ended December 31,
2005 and 2004, respectively. During the year ended December 31, 2005, our data processing
costs for our core processing system were $84,000 compared to $59,000 for the year ended
December 31, 2004. We have contracted with an outside computer service company to provide
our core data processing services.

29

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Data
processing costs increased $25,000, or 42.4%, 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.

Income
tax expense was $20,000 for the year ended December 31, 2005. We recorded an income tax
benefit of $414,000 in 2004. The income tax benefit is based on an effective tax rate of
34.0%. The decrease relates to the fact that for 2004 the tax benefit recorded was for
operating results since the inception of the company in January 2002.

Balance Sheet Review

General

At
December 31, 2005, we had total assets of $206.4 million, consisting principally of $177.4
million in net loans, $1.2 million in loans held for sale, $11.9 million in securities,
$6.4 million in federal funds sold, $5.5 million in net premises, furniture and equipment,
and $1.9 million in cash and due from banks. Our liabilities at December 31, 2005 totaled
$183.3 million, consisting principally of $174.6 million in deposits and $6.5 million in
securities sold under agreements to repurchase. At December 31, 2005, our
shareholders equity was $23.1 million.

Federal Funds Sold

At
December 31, 2005, our $6.4 million in short-term investments in federal funds sold on an
overnight basis comprised 3.1% of total assets, compared to $2.4 million, or 3.2% of total
assets, at December 31, 2004.

Investments

At
December 31, 2005, the $11.8 million in our available for sale investment securities
portfolio represented approximately 5.7% of our total assets. We held U.S. Government
agency securities and mortgage-backed securities with a fair value of $11.8 million and an
amortized cost of $12.1 million for a net unrealized loss of $275,000. 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. As
rates on investment securities rise and additional capital and deposits are obtained, we
anticipate maintaining the relative size of the investment portfolio.

Contractual
maturities and yields on our investments at December 31, 2005 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 |                   |                   |               |       | 
|agencies             |                   |                   | $             | -     | 
|Mortgage-backed      |                   |                   |               |       | 
|securities           |                   |                   |               | 1,008 | 
|                     |                   |                   |               |       | 
|Total                |                   |                   | $             | 1,008 | 
|                     |                   |                   |               |       | 

30

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At
December 31, 2005, our investments included U.S. government agency bonds issued by the
Federal Home Loan Bank, and mortgage-backed securities issued by the Federal Home Loan
Mortgage Corporation and the Federal National Mortgage Association with amortized costs of
approximately $1.5 million, $3.8 million, and $6.8 million, respectively.

Other
nonmarketable equity securities at December 31, 2005 consisted of Federal Home Loan Bank
stock with a cost of $150,600.

The
amortized costs and the fair value of our investments at December 31, 2005 and 2004 are
shown in the following table.

|                           | December 31, 2005 | December 31, 2004
|-------------------------- | ----------------- | -----------------
|
|
|Available for Sale:        |                   |                  
|U.S. Government/government |                   |                  
|sponsored agencies         |                   |                  
|Mortgage-backed securities |                   |                  
|                           |                   |                  
|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, 2005 and 2004 were $118.5 million and $31.3
million, respectively. Before the allowance for loan losses, total loans outstanding at
December 31, 2005 and 2004 were $179.7 million and $55.3 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.

31

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

|                                   | December 31, 2005 | December 31, 2004
|---------------------------------- | ----------------- | -----------------
|
|
|
|Commercial                         |                   |                  
|Commercial and industrial          |                   |                  
|                                   |                   |                  
|Real Estate                        |                   |                  
|Mortgage                           |                   |                  
|Construction                       |                   |                  
|                                   |                   |                  
|Total real estate                  |                   |                  
|                                   |                   |                  
|Consumer                           |                   |                  
|Consumer                           |                   |                  
|Deferred origination fees, net     |                   |                  
|                                   |                   |                  
|Total gross loans, net of deferred |                   |                  
|                                   |                   |                  
|Less - allowance for loan losses   |                   |                  
|                                   |                   |                  
|Total loans, net                   |                   |                  
|                                   |                   |                  

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, 2005.

|                                    |  | After one |   |       
|----------------------------------- |  | --------- | - | ------
|
|
|
|
|Commercial                          |  |           | $ | 5,743 
|Real estate                         |  |           |   | 68,369
|Consumer                            |  |           |   | 748   
|Deferred origination fees, net      |  |           |   | (127  
|                                    |  |           |   |       
|Total gross loans, net of           |  |           | $ | 74,733
|                                    |  |           |   |       
|Loans maturing after one year with: |  |           |   |       
|Fixed interest rates                |  |           |   |       
|Floating interest rates             |  |           |   |       
|                                    |  |           |   |       
|Total                               |  |           |   |       
|                                    |  |           |   |       

32

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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, 2005, 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 for the years ended
December 31, 2005, 2004 and 2003.

|                                         | 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

We
did not have any nonperforming assets at December 31, 2005 or 2004. At December 31, 2005
and 2004, the allowance for loan losses was $2,245,000 and $700,000, respectively, or
1.25% and 1.27%, respectively, of outstanding loans.

At
December 31, 2005 and 2004, we did not have any loans on nonaccrual status. 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. There has not been any foregone interest income
on nonaccrual loans.

As
of December 31, 2005, we had five loans with a current principal balance of $1,191,480 on
the watch list.

33

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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, primarily through internet sources. 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 $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 102.9% and 91.7% at December 31, 2005 and 2004,
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, 2005 and 2004.

|                                    | December 31, 2005 | December 31, 2004
|----------------------------------- | ----------------- | -----------------
|
|
|
|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                      |                   |                  
|                                    |                   |                  

Core
deposits, which exclude time deposits of $100,000 or more, provide a relatively stable
funding source for our loan portfolio and other earning assets. Our core deposits were
$151.2 million and $51.4 million at December 31, 2005 and 2004, respectively. This
represented 86.6% and 85.2% of total deposits, respectively.

All
of our time deposits are certificates of deposits. The maturity distribution of our time
deposits of $100,000 or more at December 31, 2005 and 2004 is as follows:

|                              | December 31, 2005 | December 31, 2004
|----------------------------- | ----------------- | -----------------
|
|Three months or less          |                   |                  
|Over three through six months |                   |                  
|Over six though twelve months |                   |                  
|Over twelve months            |                   |                  
|                              |                   |                  
|Total                         |                   |                  
|                              |                   |                  

The
increase in time deposits of $100,000 or more for the year ended December 31, 2005
compared to the same period in 2004 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.

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# Borrowings

The
following table outlines our various sources of borrowed funds during the years ended
December 31, 2005 and 2004, 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, 2005:        |  |  |         |      
|Securities sold under agreement |  |  |         |      
|to repurchase                   |  |  | $       | 6,500
|Other borrowings                |  |  |         | 30   
|Note payable                    |  |  |         | 1,541
|Federal funds purchased         |  |  |         | 0    
|At or for the year              |  |  |         |      
|ended December 31, 2004:        |  |  |         |      
|Securities sold under agreement |  |  |         |      
|to repurchase                   |  |  | $       | 6,500
|Other borrowings                |  |  |         | 40   
|Note payable                    |  |  |         | 0    

# Capital Resources

Total
shareholders equity was $23.1 million at December 31, 2005 and $8.3 million at
December 31, 2004. The increase is attributable to net proceeds of $14.9 million from the
issuance of 1,712,000 shares of common stock in the private placement and proceeds from
the exercise of stock options of $117,579, less a reduction of $256,520 in the fair value
of available for sale securities and net income of $39,520 for the year ended December 31,
2005.

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, 2005 and 2004. Since our inception, we have not paid any cash dividends.

|                         | December 31, 2005 | December 31, 2004 | December 31, 2003
|------------------------ | ----------------- | ----------------- | -----------------
|
|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% 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

35

---

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 falls under 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
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%. 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%.

The
following table sets forth the companys various capital ratios at December 31, 2005
and 2004. For all periods, the company was considered well capitalized.

| |  | December 31, 2005 | December 31, 2004              
| |  | ----------------- | -------------------------------
|
| |  |                   | Leverage ratio                 
| |  |                   | Tier 1 risk-based capital ratio
| |  |                   | Total risk-based capital ratio 

The
following table sets forth the banks various capital ratios at December 31, 2005 and
2004. For all periods, the bank was considered well capitalized.

| |  | December 31, 2005 | December 31, 2004              
| |  | ----------------- | -------------------------------
|
| |  |                   | Leverage ratio                 
| |  |                   | Tier 1 risk-based capital ratio
| |  |                   | Total risk-based capital ratio 

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,
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

36

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the Bank. The debentures qualify as
Tier 1 capital under Federal Reserve Board guidelines. We do not anticipate that our
current capital resources will be sufficient to continue our growth at current rates for
the next 15 months. For this reason, we anticipate that we will need to raise capital or
some other means within the next 15 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, 2005, unfunded commitments to extend credit were $51.0 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, 2005, there were commitments totaling $125,000 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.

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.

37

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Approximately
89.6% of our loans were variable rate loans at December 31, 2005, and we were asset
sensitive during the year ended December 31, 2005. We expect to be asset sensitive during
2006 because substantially all of our loans reprice within the first three months of the
year but a majority of our deposits will reprice over 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, 2005 and 2004, our liquid assets, which consist of cash and due from banks
and federal funds sold, amounted to $8.2 million and $3.8 million, or 4.0% and 5.0% of
total assets, respectively. Our available for sale securities at December 31, 2005 and
2004 amounted to $11.9 million and $14.3 million, or 5.8% and 18.9% 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 $6.0
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, the generation of deposits, and by raising additional capital.
In addition, we will receive cash upon the maturity and sale of loans and the maturity of
investment securities. During most of 2004 and 2005, as a result of historically low rates
that were being earned on short-term liquidity investments, we chose to maintain a lower
than normal level of short-term liquidity securities. In addition, we maintain four
federal funds purchased lines of credit with correspondent banks totaling $16.9 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.

We
believe that in addition to our stable base of core deposits, short-term repurchase
agreements, and other funding sources, we will need to raise additional capital to satisfy
our liquidity and capital needs for the next 12 months.

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.

38

---

The
following table sets forth information regarding our rate sensitivity, as of December 31,
2005, 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 but | After one but | After   |  
|---------------------------------- | ------ | --------------- | ------------- | ------- | -
|
|
|
|Interest-earning assets:           |        |                 |               |         |  
|                                   |        |                 |               |         |  
|Federal funds sold                 |        |                 | $             | 6,365   |  
|                                   |        |                 |               |         |  
|Investment securities              |        |                 |               | 467     |  
|                                   |        |                 |               |         |  
|Loans                              |        |                 |               | 161,597 |  
|                                   |        |                 |               |         |  
|Total earning assets               |        |                 | $             | 168,429 |  
|                                   |        |                 |               |         |  
|Interest-bearing liabilities:      |        |                 |               |         |  
|                                   |        |                 |               |         |  
|Money market and NOW               |        |                 | $             | 123,300 |  
|                                   |        |                 |               |         |  
|Regular savings                    |        |                 |               | 104     |  
|                                   |        |                 |               |         |  
|Time deposits                      |        |                 |               | 8,570   |  
|                                   |        |                 |               |         |  
|Other borrowings                   |        |                 | $             | 6,502   |  
|                                   |        |                 |               |         |  
|Total interest-bearing liabilities |        |                 | $             | 138,476 |  
|                                   |        |                 |               |         |  
|Period gap                         |        |                 | $             | 29,953  |  
|                                   |        |                 |               |         |  
|Cumulative gap                     |        |                 | $             | 29,953  |  
|                                   |        |                 |               |         |  
|Ratio of cumulative gap to         |        |                 |               |         |  
|total earning assets               |        |                 |               | 15.14   | %

39

---

# Item 7:   Financial
Statements.

# INDEX TO AUDITED
FINANCIAL STATEMENTS

# TIDELANDS BANCSHARES,
INC.

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

40

---

# 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, 2005 and 2004 and the related consolidated statements of operations, changes
in shareholders equity and comprehensive income, and cash flows for each of the
years in the three year period ended December 31, 2005. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting 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 financial
statements referred to above present fairly, in all material respects, the consolidated
financial position of Tidelands Bancshares, Inc., as of December 31, 2005 and 2004 and the
results of their operations and cash flows for each of the years in the three year period
ended December 31, 2005 in conformity with accounting principles generally accepted in the
United States of America.

/s/ Elliott Davis, LLC

Elliott Davis, LLCColumbia,
South Carolina February 1, 2006, except Note 22, as to
which the date is February 22, 2006

41

---

# TIDELANDS BANCSHARES,
INC. AND SUBSIDIARY

# Consolidated Balance
Sheets

|                                                               | 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                                    |             
|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                 |             
|Other borrowings                                               |             
|Accrued interest payable                                       |             
|Other liabilities                                              |             
|                                                               |             
|Total liabilities                                              |             
|                                                               |             
|Commitments and contingencies (Notes 12, 14 and 19)            |             
|                                                               |             
|Shareholders equity:                                          |             
|Preferred stock, $.01 par value, 10,000,000 shares authorized, |             
|none issued                                                    |             
|Common stock, $.01 par value, 10,000,000 shares                |             
|authorized; and 3,044,054 and 1,318,693 shares issued and      |             
|outstanding at December 31, 2005 and 2004, respectively        |             
|Capital surplus                                                |             
|Retained deficit                                               |             
|Accumulated other comprehensive income (loss)                  |             
|                                                               |             
|Total shareholders' equity                                     |             
|                                                               |             
|Total liabilities and shareholders' equity                     |             
|                                                               |             

The accompanying notes are an integral part of the consolidated financial statements.

42

---

# TIDELANDS BANCSHARES,
INC. AND SUBSIDIARY

# Consolidated
Statements of Operations For the years ended December 31, 2005, 2004 and 2003

|                                           | 2005 | 2004 | 2003
|------------------------------------------ | ---- | ---- | ----
|Interest income:                           |      |      |     
|Loans, including fees                      |      |      | $   
|Securities available for sale, taxable     |      |      |     
|Federal funds sold                         |      |      |     
|                                           |      |      |     
|Total                                      |      |      |     
|                                           |      |      |     
|Interest expense:                          |      |      |     
|Time deposits $100,000 and over            |      |      |     
|Other deposits                             |      |      |     
|Other borrowings                           |      |      |     
|                                           |      |      |     
|Total                                      |      |      |     
|                                           |      |      |     
|Net interest income                        |      |      |     
|                                           |      |      |     
|Provision for loan losses                  |      |      |     
|                                           |      |      |     
|Net interest income (loss) after           |      |      |     
|provision for loan losses                  |      |      |     
|                                           |      |      |     
|Noninterest income:                        |      |      |     
|Service charges on deposit accounts        |      |      |     
|Residential mortgage origination fees      |      |      |     
|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 (losses) per common share         |      |      |     
|Basic earnings (loss) per share            |      |      | $   
|                                           |      |      |     
|Diluted earnings (loss) per share          |      |      | $   
|                                           |      |      |     
|Weighted average common shares outstanding |      |      |     
|Basic                                      |      |      |     
|                                           |      |      |     
|Diluted                                    |      |      |     
|                                           |      |      |     

The accompanying notes are an integral part of the consolidated financial statements.

43

---

# TIDELANDS BANCSHARES,
INC. AND SUBSIDIARY

# Consolidated
Statements of Changes in Shareholders Equity and Comprehensive Income For the years ended
December 31, 2005, 2004 and 2003

|                                        |  |  |  |           | Accumulated |  
|--------------------------------------- |  |  |  | --------- | ----------- | -
|
|
|
|
|
|Balance, December 31, 2002              |  |  |  | 10        |             | $
|                                        |  |  |  |           |             |  
|Retirement of stock                     |  |  |  | (10       | )           |  
|                                        |  |  |  |           |             |  
|Proceeds from sale of stock             |  |  |  | 1,033,398 |             |  
|                                        |  |  |  |           |             |  
|Stock issuance costs                    |  |  |  |           |             |  
|                                        |  |  |  |           |             |  
|Net loss                                |  |  |  |           |             |  
|                                        |  |  |  |           |             |  
|Other comprehensive income, net         |  |  |  |           |             |  
|of taxes of $15,817                     |  |  |  |           |             |  
|                                        |  |  |  |           |             |  
|Comprehensive loss                      |  |  |  |           |             |  
|                                        |  |  |  |           |             |  
|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           |  |  |  | 1,712,000 |             |  
|common stock                            |  |  |  |           |             |  
|                                        |  |  |  |           |             |  
|Net income                              |  |  |  |           |             |  
|                                        |  |  |  |           |             |  
|Other comprehensive loss, net           |  |  |  |           |             |  
|of taxes of $132,146                    |  |  |  |           |             |  
|                                        |  |  |  |           |             |  
|Comprehensive loss                      |  |  |  |           |             |  
|                                        |  |  |  |           |             |  
|Balance, December 31, 2005              |  |  |  | 3,044,054 |             | $
|                                        |  |  |  |           |             |  

The accompanying notes are an integral part of the consolidated financial statements.

44

---

# TIDELANDS BANCSHARES,
INC. AND SUBSIDIARY

# Consolidated
Statements of Cash Flows For the years ended December 31, 2005, 2004 and 2003

|                                                      | 2005 | 2004 | 2003
|----------------------------------------------------- | ---- | ---- | ----
|Cash flows from operating activities:                 |      |      |     
|Net income (loss)                                     |      |      | $   
|Adjustments to reconcile net loss to net cash used by |      |      |     
|operating activities:                                 |      |      |     
|Provision for loan losses                             |      |      |     
|Depreciation and amortization expense                 |      |      |     
|Discount accretion and premium amortization           |      |      |     
|(Increase) decrease in deferred income tax benefit    |      |      |     
|Proceeds from sale of residential mortgages           |      |      |     
|Disbursements for residential mortgages held-for-sale |      |      |     
|Increase in accrued interest receivable               |      |      |     
|Increase in accrued interest payable                  |      |      |     
|(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            |      |      |     
|Calls and maturities of securities available-for-sale |      |      |     
|Net increase in loans receivable                      |      |      |     
|Purchase of premises, furniture and equipment         |      |      |     
|                                                      |      |      |     
|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                                   |      |     
|Proceeds from note payable                            |      |      |     
|Repayments on note payable                            |      |      |     
|Net increase in securities sold under agreements      |      |      |     
|to repurchase                                         |      |     
|Decrease in other borrowings                          |      |      |     
|Issuance of common stock                              |      |      |     
|Proceeds from exercise of stock options               |      |      |     
|Stock issuance costs                                  |      |      |     
|Retirement of stock                                   |      |      |     
|                                                      |      |      |     
|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              |      |      | $   
|                                                      |      |      |     

The accompanying notes are an integral part of the consolidated financial statements.

45

---

# TIDELANDS BANCSHARES,
INC. AND SUBSIDIARY

# 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 and Horry 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.

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, Berkeley and
Horry 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.

46

---

# TIDELANDS BANCSHARES,
INC. AND SUBSIDIARY

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 Federal Home Loan Bank. The 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, 2005 and 2004, the Companys
investment in Federal Home Loan Bank stock was $150,600 and $56,900, respectively.
Dividends received on this stock is 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 and 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, 2005 or
2004.

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. Since there is no prior loan loss history, management has elected to maintain
the allowance for loan losses at approximately 1.25% of gross loans. Management believes
this percentage is consistent with the industry and the market in which the Bank operates.
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.

47

---

# TIDELANDS BANCSHARES,
INC. AND SUBSIDIARY

Residential Mortgage Loan
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
carryforward.

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 expended in the period in which the direct mailings are sent. Advertising and
public relations costs of $102,722, $50,411 and $46,004, were included in the
Companys results of operations for 2005, 2004 and 2003, 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 $14,902
and $9,319 in 2005 and 2004, respectively. There were no expenses associated with the Plan
in 2003.

Earnings (Loss) Per
Share  Basic earnings (loss) per share represents income available to
shareholders divided by the weighted-average number of common shares outstanding during
the period. Dilutive earnings (loss) per share reflects 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. At December 31, 2003, the Company had
no instruments considered common stock equivalents. Losses per share have been restated to
reflect the five for four stock split.

48

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# TIDELANDS BANCSHARES,
INC. AND SUBSIDIARY

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 gains       |                        
|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.

Interest paid on deposits and other
borrowings totaled $3,745,377, $695,533 and $36,045 for the years ended December 31, 2005,
2004 and 2003, respectively.

There were no income tax payments
during the years ended December 31, 2005, 2004 and 2003.

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.

Recent Accounting
Pronouncements  In December 2004, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards
(SFAS) No. 123 (revised 2004), Share-Based Payment (SFAS No.
123(R)). SFAS No. 123(R) will require companies to measure all employee stock-based
compensation awards using a fair value method and record such expense in its financial
statements. In addition, the adoption of SFAS No. 123(R) requires additional accounting
and disclosures related to the income tax and cash flow effects resulting from share-based
payment arrangements. SFAS No. 123(R) is effective beginning as of the first annual
reporting period beginning after December 15, 2005. SFAS No. 123(R) allows for adoption
using either the modified prospective or modified retrospective methods. The Company
anticipates using the modified prospective method when this statement is adopted in the
first quarter of 2006. The Company has evaluated the impact upon adoption of SFAS No.
123(R) and has concluded that the adoption will result in additional charges to earnings
of approximately $87,185 in 2006.

In April 2005, the Securities and
Exchange Commissions Office of the Chief Accountant and its Division of Corporation
Finance issued Staff Accounting Bulletin (SAB) No.107 to provide guidance
regarding the application of SFAS No.123(R). SAB No. 107 provides interpretive guidance
related to the interaction between SFAS No.123(R) and certain SEC rules and regulations,
as well as the staffs views regarding the valuation of share-based payment arrangements
for public companies.  SAB No. 107 also reminds public companies of the importance

49

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# TIDELANDS BANCSHARES,
INC. AND SUBSIDIARY

Recent Accounting
Pronouncements (continued)  of including disclosures within
filings made with the SEC relating to the accounting for share-based payment transactions,
particularly during the transition to SFAS No.123(R).

In
December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets 
an amendment of APB Opinion No. 29. The standard is based on the principle that
exchanges of nonmonetary assets should be measured based on the fair value of the assets
exchanged and eliminates the exception under ABP Opinion No. 29 for an exchange of similar
productive assets and replaces it with an exception for exchanges of nonmonetary assets
that do not have commercial substance. A nonmonetary exchange has commercial substance if
the future cash flows of the entity are expected to change significantly as a result of
the exchange. The standard is effective for nonmonetary exchanges occurring in fiscal
periods beginning after June 15, 2005. The adoption of SFAS 153 is not expected to have a
material impact on the Companys financial position or results of operations.

In May 2005, the FASB issued SFAS No.
154, Accounting Changes and Error Corrections  a replacement of APB Opinion
No. 20 and FASB Statement No. 3". SFAS No. 154 establishes retrospective application
as the required method for reporting a change in accounting principle, unless it is
impracticable, in which case the changes should be applied to the latest practicable date
presented. SFAS No. 154 also requires that a correction of an error be reported as a prior
period adjustment by restating prior period financial statements. SFAS No. 154 is
effective for accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005.

In March 2004, the FASB issued
Emerging Issues Task Force (EITF) Issue No. 03-1, The Meaning of
Other-Than-Temporary Impairment and its Application to Certain Investments. This
issue addresses the meaning of other-than-temporary impairment and its application to
investments classified as either available for sale or held to maturity under SFAS No. 115
and it also provides guidance on quantitative and qualitative disclosures. The disclosure
requirements in paragraph 21 of this Issue were effective for annual financial statements
for fiscal years ending after December 15, 2003 and were adopted by the Company effective
December 31, 2003.

The recognition and measurement
guidance in paragraphs 6-20 of this Issue was to be applied to other-than-temporary
impairment evaluations in reporting periods beginning after June 15, 2004, but was delayed
by FASB action in October 2004 through the issuance of a proposed FASB Staff Position
(FSP) on the issue. In July 2005, the FASB issued FSP FAS 115-1 and FAS
124-1The Meaning of Other-Than-Temporary Impairment and its Application to
Certain Investments. This final guidance eliminated paragraphs10-18 of EITF-03-1
(paragraphs 19-20 have no material impact on the financial position or results of
operations of the Company) and will be effective for other-than-temporary impairment
analysis conducted in periods beginning after December 15, 2005. The Company has evaluated
the impact that the adoption of FSP FAS 115-1 and FAS 124-1 and has concluded that the
adoption will not have a material impact on financial position and results of operations
upon adoption.

In December 2005, the FASB issued FSP
SOP 94-6-1, Terms of Loan Products that May Give Rise to a Concentration of Credit
Risk. The disclosure guidance in this FSP is effective for interim and annual
periods ending after December 19, 2005. The FSP states that the terms of certain loan
products may increase a reporting entitys exposure to credit risk and thereby may
result in a concentration of credit risk as that term is used in SFAS No. 107, either as
an individual product type or as a group of products with similar features. SFAS No. 107
requires disclosures about each significant concentration, including information
about the (shared) activity, region, or economic characteristic that identifies the
concentration. The FSP suggests possible shared characteristics on which significant
concentrations may be determined which include, but are not limited to: borrowers subject
to significant payment increases, loans with terms that permit negative amortization and
loans with high loan-to-value ratios.

This FSP requires entities to provide
the disclosures required by SFAS No. 107 for loan products that are determined to
represent a concentration of credit risk in accordance with the guidance of this FSP for
all periods presented. The Company adopted this disclosure standard effective December 31,
2005.

50

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# TIDELANDS BANCSHARES,
INC. AND SUBSIDIARY

Recent Accounting
Pronouncements (continued)  Other accounting standards that have
been issued or proposed by the FASB or other standards-setting bodies that do not require
adoption until a future date are not expected to have a material impact on the
consolidated financial statements upon adoption.

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,
which 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 2003 and 2004 financial statements were
reclassified to conform to the 2005 presentation.

Stock-Based
Compensation  The Company adopted a stock-based employee compensation
plan in 2004 which is further described in Note 9. The Company accounts for the plan under
the recognition and measurement principles of Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations. No stock-based employee compensation cost is reflected in net
income, as all stock options granted under these plans had an exercise price equal to the
market value of the underlying common stock on the date of grant. The following table
illustrates the effect on net income and earnings per share as if the Company had applied
the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation.

|                                           | Year ended December 31,
|------------------------------------------ | -----------------------
|
|Net income (loss), as reported             |                        
|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                        |                        
|                                           |                        

51

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# TIDELANDS BANCSHARES,
INC. AND SUBSIDIARY

# NOTE 2  CASH AND
DUE FROM BANKS

The Company is required to maintain
cash balances with its correspondent banks to cover all cash letter transactions. At
December 31, 2005 and 2004, 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, 2005          |           |                  |          
|U.S. agency securities     |           |                  | $        
|Mortgage-backed securities |           |                  |          
|                           |           |                  |          
|Total                      |           |                  | $        
|                           |           |                  |          
|December 31, 2004          |           |                  |          
|U.S. agency securities     |           |                  | $        
|Mortgage-backed securities |           |                  |          
|                           |           |                  |          
|Total                      |           |                  | $        
|                           |           |                  |          

There were no sales of securities in
2005, 2004 or 2003.

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. The scheduled maturity date for all U.S. agency securities is
August 18, 2011. Mortgage-backed securities had no maturity schedule presented as paydowns
are expected before contractual maturity dates.

At December 31, 2005 and 2004,
investment securities with a book value of $6,155,522 and $5,974,406 and a market value of
$5,995,117 and $6,036,239, respectively, were pledged as collateral for the securities
sold under agreements to repurchase.

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, 2005.

Securities available-for-sale:

|                           | Less than | Twelve months |   |          
|-------------------------- | --------- | ------------- | - | ---------
|
|
|
|U.S. government agencies   |           |               | $ | 1,482,187
|Mortgage-backed securities |           |               |   | 4,865,383
|                           |           |               |   |          
|                           |           |               | $ | 6,347,570
|                           |           |               |   |          

Securities classified as
available-for-sale are recorded at fair market value. Approximately 54.27% of the
unrelated losses, or three securities, 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.

52

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# TIDELANDS BANCSHARES,
INC. AND SUBSIDIARY

# 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 loan fees, net       |             
|                              |             
|Total loans receivable, gross |             
|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 2005, 2004 and 2003 are summarized below:

|                                       | 2005 | 2004 | 2003
|-------------------------------------- | ---- | ---- | ----
|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 1.25%, 1.27% and 1.36% at December 31, 2005, 2004
and 2003, respectively. At December 31, 2005 and 2004, the Bank had no loans in nonaccrual
status. Furthermore, there were no loans contractually past due ninety days or more and
still accruing interest at December 31, 2005 or 2004.

53

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# TIDELANDS BANCSHARES,
INC. AND SUBSIDIARY

# NOTE 5  PREMISES,
FURNITURE AND EQUIPMENT

Premises, furniture and equipment
consisted 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, 2005, 2004 and 2003 amounted to $218,624, $159,600 and $31,071,
respectively.

# NOTE 6  DEPOSITS

At December 31, 2005, 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, 2005 and 2004:

|                                           | 2005 | 2004
|------------------------------------------ | ---- | ----
|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 $6,155,522 and $5,974,406 and fair values of $5,995,117 and
$6,036,239 at December 31, 2005 and 2004, respectively, are used as collateral for the
agreements.

# 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 capital to the Bank. The note was paid off on April 4, 2005.

54

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# TIDELANDS BANCSHARES,
INC. AND SUBSIDIARY

On July 12, 2005, the Company
executed a note with Nexity Bank to borrow $1,680,000. The principal balance is due on
July 12, 2006. Interest is based on the prime rate minus 100 basis points (6.25% at
December 31, 2005) and is payable monthly. Proceeds from the note were used to purchase
property for future branch use.

# NOTE 9  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. 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 canceled 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:

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

The weighted-average fair value of
options, calculated using the binomial option valuation model, granted during 2005 is
$2.36 and $2.07 for options granted in 2004.

A summary of the status of the
Companys stock option plan as of December 31, 2005 and 2004 is presented below:

|                                 | 2005 | 2004
|-------------------------------- | ---- | ----
|
|
|
|
|Outstanding at beginning of year |      |     
|Granted                          |      |     
|Exercised                        |      |     
|Cancelled                        |      |     
|                                 |      |     
|Outstanding at end of year       |      |     
|                                 |      |     
|Options exercisable at year-end  |      |     
|                                 |      |     
|Shares available for grant       |      |     
|                                 |      |     

55

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# TIDELANDS BANCSHARES,
INC. AND SUBSIDIARY

The following table summarizes information
about the stock options outstanding under the Companys plans at December 31, 2005:

|                | Options Outstanding | Options Exercisable
|--------------- | ------------------- | -------------------
|
|
|
|
|
|
|$8.80 to $9.00  |                     |                    
|$9.01 to $10.00 |                     |                    
|                |                     |                    
|                |                     |                    
|                |                     |                    

# NOTE 10  OTHER
OPERATING EXPENSES

Other operating expenses for the
years ended December 31, 2005, 2004 and 2003 are summarized below:

|                                          | 2005 | 2004 | 2003
|----------------------------------------- | ---- | ---- | ----
|Professional fees                         |      |      | $   
|Telephone expenses                        |      |      |     
|Office supplies, stationery, and printing |      |      |     
|Insurance                                 |      |      |     
|Postage                                   |      |      |     
|Data processing                           |      |      |     
|Other                                     |      |      |     
|                                          |      |      |     
|Total                                     |      |      | $   
|                                          |      |      |     

# NOTE 11  INCOME
TAXES

For the years ended December 31,
2005, 2004 and 2003 income tax expense consisted of the following:

|                             | 2005 | 2004 | 2003
|---------------------------- | ---- | ---- | ----
|Current portion Federal      |      |      | $   
|State                        |      |      |     
|                             |      |      |     
|Total current                |      |      |     
|                             |      |      |     
|Deferred income taxes        |      |      |     
|                             |      |      |     
|Income tax expense (benefit) |      |      | $   
|                             |      |      |     

56

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# TIDELANDS BANCSHARES,
INC. AND SUBSIDIARY

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 carryforward                  |             
|Organization and start-up costs                  |             
|Loan fees and costs                              |             
|Unrealized loss on securities available for sale |             
|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, 2005 and 2004, 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
2005, 2004 and 2003 to income before income taxes follows:

|                                                   | 2005 | 2004 | 2003
|-------------------------------------------------- | ---- | ---- | ----
|Tax expense (benefit) at statutory rate            |      |      | $   
|State income tax, net of federal income tax effect |      |      |     
|Other                                              |      |      |     
|                                                   |      |      |     
|Income tax benefit                                 |      |      | $   
|                                                   |      |      |     

# NOTE 12  LEASES

The Bank renegotiated its lease
agreement for its main branch location in 2004. The lease was originated on March 29, 2004
and has 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, $157,257 and $91,666 for the years ended
December 31, 2005, 2004, and 2003, respectively.

The Bank also leases a building for
its 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 $3,303 per month. Rental expense under this operating lease agreement was
$42,390 and $13,213 for the year ended December 31, 2005 and 2004, respectively.

57

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# TIDELANDS BANCSHARES,
INC. AND SUBSIDIARY

The Bank also leases a building for
its 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 requires monthly payments $1,967 per month. Rental
expense under this operating lease agreement was $22,367 for the year ended December 31,
2005.

The Bank has entered into a land
lease for a West Ashley location with the intent of building a branch in 2006. 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. There was no
rental expense associated with this lease during 2005.

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

| |  | 
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 

# NOTE 13  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.

Related party loan transactions for
the years ended December 31, 2005 and 2004 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 $501,430 and $389,129, at December 31, 2005
and 2004, respectively.

# NOTE 14 
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.

58

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# TIDELANDS BANCSHARES,
INC. AND SUBSIDIARY

# NOTE 15  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 and 2003, therefore, basic loss per share and diluted earnings per share were the
same.

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                  |                        
|                                                   |                        

# NOTE 16 
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.

59

---

# TIDELANDS BANCSHARES,
INC. AND SUBSIDIARY

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, 2005 and 2004,
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, 2005 and 2004.

|                                         |  |  |   |            | To Be Well-
|---------------------------------------- |  |  | - | ---------- | -----------
|
|
|
|
|
|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 |            
|December 31, 2004                        |  |  |   |            |            
|Total capital (to risk-weighted assets)  |  |  | $ | 8,013,000  |            
|Tier 1 capital (to risk-weighted assets) |  |  |   | 7,313,000  |            
|Tier 1 capital (to average assets)       |  |  |   | 7,313,000  |            

The following table summarizes the
capital amounts and ratios of the Bank and the regulatory minimum requirements at December
31, 2005 and 2004.

|                                         |  |  |   |            | To Be Well-
|---------------------------------------- |  |  | - | ---------- | -----------
|
|
|
|
|
|December 31, 2005                        |  |  |   |            |            
|Total capital (to risk-weighted assets)  |  |  | $ | 24,183,000 |            
|Tier 1 capital (to risk-weighted assets) |  |  |   | 21,938,000 |            
|Tier 1 capital (to average assets)       |  |  |   | 21,938,000 |            
|December 31, 2004                        |  |  |   |            |            
|Total capital (to risk-weighted assets)  |  |  | $ | 7,741,000  |            
|Tier 1 capital (to risk-weighted assets) |  |  |   | 7,041,000  |            
|Tier 1 capital (to average assets)       |  |  |   | 7,041,000  |            

# NOTE 17  UNUSED
LINES OF CREDIT

As of December 31, 2005, the Company
had unused lines of credit to purchase federal funds from unrelated banks totaling
$16,900,000. These lines of credit are available on a one to fourteen day basis for
general corporate purposes.

# NOTE 18 
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 underwriter discounts and expenses were $14.9 million. Proceeds from the offering
will be used to support the growth of the Company.

60

---

# TIDELANDS BANCSHARES,
INC. AND SUBSIDIARY

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 and 2003 were 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. At December 31,
2005, the Bank had negative undivided profits. 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 19  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
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, 2005.

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

61

---

# TIDELANDS BANCSHARES,
INC. AND SUBSIDIARY

# NOTE 20  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 thirty days. Due to the minor change in interest rates,
management estimates the carrying value to be a reasonable estimate of fair value.

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

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.

62

---

# TIDELANDS BANCSHARES,
INC. AND SUBSIDIARY

# NOTE 20  FAIR
VALUE OF FINANCIAL INSTRUMENTS  continued

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                     |             
|Accrued interest payable          |             

|                                         | Notational | Estimated | Notational | Estimated 
|---------------------------------------- | ---------- | --------- | ---------- | ----------
|
|Off-Balance Sheet Financial Instruments: |            |           |            |           
|Commitments to extend credit             |            |           | $          | 50,993,526
|Letters of credit                        |            |           |            | 125,000   

63

---

# TIDELANDS BANCSHARES,
INC. AND SUBSIDIARY

# NOTE 21  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                                       |             
|Due from banking subsidiary                |             
|Investment in banking subsidiary           |             
|Other assets                               |             
|                                           |             
|Total assets                               |             
|                                           |             
|Liabilities and shareholders equity       |             
|Shareholders' equity                       |             
|                                           |             
|Total liabilities and shareholders' equity |             
|                                           |             

Condensed Statements of Operations

|                                                     | For the years ended December 31,
|---------------------------------------------------- | --------------------------------
|
|Income                                               |                                 
|Expenses                                             |                                 
|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)                                    |                                 
|                                                     |                                 

64

---

# TIDELANDS BANCSHARES,
INC. AND SUBSIDIARY

# NOTE 21  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 |                                 
|Pre-opening expenses transferred to the Bank          |                                 
|Decrease (increase) in other liabilities              |                                 
|Decrease in due from subsidiary                       |                                 
|Net cash used by operating activities                 |                                 
|Cash flows from investing activities:                 |                                 
|Purchase of Bank stock                                |                                 
|Transfer of capital to the bank                       |                                 
|                                                      |                                 
|Net cash used by operating activities                 |                                 
|                                                      |                                 
|Cash flows from financing activities:                 |                                 
|Proceeds from notes payable                           |                                 
|Repayments on notes payable                           |                                 
|Issuance of common stock                              |                                 
|Stock issuance costs                                  |                                 
|Retirement of stock                                   |                                 
|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              |                                 
|                                                      |                                 

# NOTE 22 SUBSEQUENT
EVENT

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 annually at a rate per annum equal to the
three-month LIBOR plus 138 basis points, which was 5.92% at December 31, 2005. 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.

65

---

The Capital Securities mature or are
mandatorily redeemable upon maturity on February 22, 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.

# 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, 2005. There have been
no significant changes in our internal controls over financial reporting during the fourth
fiscal quarter ended December 31, 2005 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.

66

---

# 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 15, 2006.

# 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 15, 2006.

# 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 15, 2006.

# 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 15, 2006.

# 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, File
         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).*
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

67

---

|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 15, 2006.

68

---

# 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 20, 2006 |  | 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 20, 2006
|----------------------------------------- | -------- | --------------

|/s/ John N. Cagle, III, DMD
John N. Cagle, III, DMD | Director | March 20, 2006
|--------------------------------------------------- | -------- | --------------

|____________________
Alan D. Clemmons | Director | 
|------------------------------------- | -------- | 

|/s/ Robert E. Coffee, Jr.
Robert E. Coffee, Jr. | Director, President, and Chief Executive Officer | March 20, 2006
|----------------------------------------------- | ------------------------------------------------ | --------------

|/s/ Richard L. Granger
Richard L. Granger | Director | March 20, 2006
|----------------------------------------- | -------- | --------------

|/s/ Alan W. Jackson
Alan W. Jackson | Principal Accounting andChief Financial Officer | March 20, 2006
|----------------------------------- | ----------------------------------------------- | --------------

69

---

|/s/ Barry I. Kalinsky
Barry I. Kalinsky | Director, Chairman | March 20, 2006
|--------------------------------------- | ------------------ | --------------

|/s/ Morris Kalinsky
Morris Kalinsky | Director | March 20, 2006
|----------------------------------- | -------- | --------------

|/s/ Paul J. Kerwin, DVM
Paul J. Kerwin, DVM | Director | March 20, 2006
|------------------------------------------- | -------- | --------------

|/s/ John T. Parker, Jr.
John T. Parker, Jr. | Director | March 20, 2006
|------------------------------------------- | -------- | --------------

|____________________
Tanya D. Robinson | Director | 
|-------------------------------------- | -------- | 

70

---

# Exhibit List

# 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, File
         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.
|-- | ----------------------------------------------

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

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