**UNITEDSTATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**Form 10-KSB**

 

**(MarkOne)**

 

**x****    Annual Report under Section 13 or15(d) of the Securities Exchange Act of 1934**

**For the fiscal year ended December 31, 2007**

** **

**or**

** **

**o****    Transition Report under Section 13 or15(d) of the Securities Exchange Act of 1934**

**For the transition period from           to          **

** **

**Commission file number 001-33065**

 

**TIDELANDS BANCSHARES, INC.**

(Name of small business issuer in its charter)

 

| **South  Carolina**                | ** ** | **02-0570232**       |
|------------------------------------|------------|----------------------|
| (State or other  jurisdiction      |       | (I.R.S. Employer     |
| of incorporation  or organization) |       | Identification  No.) |

 

| **875  Lowcountry Blvd**                  | ** ** | ** ** |
|-------------------------------------------|------------|------------|
| **Mount  Pleasant, SC**                   | ** ** | **29464**  |
| (Address of  principal executive offices) |       | (Zip Code) |

 

Issuer’s telephone number: **(843)388-8433**

 

Securities registered under Section 12(b) ofthe Exchange Act:

 

| **Title of  each class:**                | ** ** | **Name of  each exchange on which registered:** |
|------------------------------------------|------------|-------------------------------------------------|
| Common Stock,  $0.01 par value per share |       | NASDAQ Global  Market                           |

 

Securitiesregistered under Section 12(g) of the Exchange Act:  None

 

Check whether the issueris not required to file reports pursuant to Section 13 or 15(d) ofthe Exchange Act.  o

 

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

 

Check if there is nodisclosure of delinquent filers in response to Item 405 of Regulation S-B inthis form, and no disclosure will be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.o

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).  Yes o   No x

 

The issuer’s revenue forthe year ended December 31, 2007 was $32,780,706.

 

The aggregate marketvalue of the voting stock held by non-affiliates (shareholders holding lessthan 5% of an outstanding class of stock, excluding directors and executiveofficers), as of March 17, 2008, was approximately $24,957,440.  This calculation was based on the closingprice of our common stock on March 17, 2008 of $10.00 on the NASDAQ GlobalMarket.

 

The number of sharesoutstanding of the issuer’s common stock was 4,277,176 at March 17, 2008.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

Proxy Statement for theAnnual Meeting of Shareholders to be held on May 19, 2008           Part III (Items 9-12, 14)

 

Transitional Small Business Disclosure Format.  (Check one): Yes o  Nox

 

 

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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.  Forward-looking statements may relate to our financial condition, results of operation, plans, objectives, or future performance.  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 andfinancial services industries;

·                  changes in the interest rate environment which could reduce anticipatedor actual margins;

·                  changes in political conditions or the legislative or regulatoryenvironment;

·                  general economic conditions, either nationally or regionally andespecially in our primary service area, becoming less favorable than expectedresulting in, among other things, a deterioration in credit quality;

·                  changes occurring in business conditions and inflation;

·                  changes in technology;

·                  changes in monetary and tax policies;

·                  the level of allowance for loan loss;

·                  the rate of delinquencies and amounts of charge-offs;

·                  the rates of loan growth;

·                  adverse changes in asset quality and resulting credit risk-relatedlosses and expenses;

·                  loss of consumer confidence and economic disruptions resulting fromterrorist activities;

·                  changes in the securities markets; and

·                  other risks and uncertainties detailed from time to time in our filingswith the Securities and Exchange Commission.

 

**General Overview**

 

We area South Carolina corporation organized in 2002 as the holding company forTidelands Bank, a state chartered bank headquartered in Mount Pleasant, SouthCarolina.  We opened Tidelands Bank in October 2003,and we have grown rapidly since our inception. As of December 31, 2007, our assets totaled $512.3 million and ourshareholders equity was $41.0 million. We are primarily engaged in the business of accepting demand depositsand savings deposits insured by the FDIC and providing commercial, consumer,and mortgage loans to the general public.

 

**Marketing Focus**

 

                We have created a strategic planthat focuses on professionals, entrepreneurs, small business owners, and theirfamily members in our core market of the Charleston metropolitan area and otherfast-growing areas along the South Carolina coast.  The cornerstone of relationship banking is tohire and retain professional banking officers that know their customers andfocus on their individual needs.  This“relationship” service model ensures that we are able to generate both repeatbusiness from existing customers as well as new business from customerreferrals.  We have recruited severalbanking officers with significant banking relationships in their respectivecommunities, and we have grown our operations in these markets from these corecustomer bases.

 

 

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**Location and Service Area**

 

Our main office islocated at 875 Lowcountry Boulevard, Mount Pleasant, South Carolina on a majorartery and provides excellent visibility for the bank.  In August 2004, we opened a loan productionoffice in Summerville, South Carolina. Because of the success of this loan production office, we converted itto a temporary full service branch on April 4, 2005.  On April 23, 2007, we opened thepermanent full service banking facility in our Summerville location. InJanuary 2005, we opened a loan production office in Myrtle Beach, SouthCarolina.  We converted this office intoa full service branch on October 11, 2005 and opened the permanentfacility for our full service branch in Myrtle Beach on June 20, 2007. Inaddition, we opened a new full service branch office in the Park West area ofMount Pleasant on May 14, 2007 and converted the loan production office inthe West Ashley area of Charleston to a full service branch on July 2,2007. We also opened a loan production office in Bluffton, the Hilton Head areaof South Carolina, in October 2006. The Bluffton loan production officewas converted into a temporary full service banking facility inSeptember 2007 and we plan to operate out of this temporary facility untilconstruction on the permanent facility is complete.

 

Our primary market areais the Charleston metropolitan area (which includes Charleston, Dorchester, andBerkeley counties), Myrtle Beach, the Hilton Head area, and additional marketsalong the South Carolina coast.  Thisarea is one of the most attractive markets in the Southeast and includes over90 miles of Atlantic coastline, reaches some 50 miles inland towards theintersection of Interstate highways 26 and 95, and offers a wide diversity ofrecreational, arts, and cultural experiences to its residents andvisitors.  According to FDIC data, totaldeposits in the Charleston metropolitan area increased 106% from approximately$4.3 billion in 2000 to approximately $8.8 billion in 2007.  According to U.S. Census Bureau estimates, thepopulation of the Charleston metropolitan area was almost 600,000 in 2006, anincrease of 8% from 2000.  MountPleasant, which is where we are headquartered, now ranks as the sixth largestcity in South Carolina with the third highest per capita income in the state.

 

The economy of Charlestonis diverse and vibrant having recently experienced significant growth intourism, healthcare, manufacturing and at the Port of Charleston.  Notably, in 2004, approximately 4.7 millionpeople visited the Charleston region (a 47% increase from 1997) and spentapproximately $5.7 billion (a 138% increase from 1997).  The Port of Charleston is the top rankedcontainer cargo port on the South Atlantic and Gulf coasts, is second only toNew York and New Jersey on the East Coast, and is the fourth largest containerport in the United States.  Continuedgrowth of the port’s business is expected with plans to deepen its channel andcreate a new three-berth 280-acre container terminal on the site of the formerCharleston Naval complex.  Recenteconomic expansion in the manufacturing sector includes the construction of twonew plants designed for the production and assembly of the fuselage sectionsfor Boeing’s new 787 Dreamliner.  Thesetwo plants are expected to create approximately 750 jobs.  In total, these plants represent a $560million investment, the largest in South Carolina since BMW entered the statein the early 1990s.

 

Our additional market areas along the South Carolinacoast are also experiencing significant growth. The Myrtle Beach area, also known as South Carolina’s Grand Strand, is a 60-mile stretch of coastlineextending from the South Carolina state line at Little River (Horry County)south to Pawleys Island (Georgetown County). According to FDIC data, total deposits in the Myrtle Beach metropolitanstatistical area increased 96% from approximately $2.8 billion in 2000 toapproximately $5.5 billion in 2007. According to U.S. Census Bureau estimates, the population of the MyrtleBeach metropolitan statistical area was approximately 227,000 in 2006, anincrease of approximately 15% from 2000. A significant portion of this growth is attributable to retirees.  In recent years, both *The WallStreet Journal* and *Money* magazinerated the Grand Strand as one of the nation’s top retirement locations.  Today, approximately 25% of South Carolina’sresidents are over 55 years of age and Horry County is No. 1 among the topfive regions in the state where retirees are relocating.  The growth in Myrtle Beach’s retirementpopulation is projected to fuel total population growth of 48% from 2005 to2030.  Similar to Charleston, tourismplays a vital role in the economy of Myrtle Beach.  The American Automobile Association recentlyranked the area as the nation’s second most popular tourist destination with anestimated ****13.7 million visitors annually****.

 

Hilton Head, located inBeaufort County, approximately 45 miles north of Savannah, Georgia and 90 milessouth of Charleston, is also an internationally recognized vacation destinationfamous for its championship golf courses, beaches, and resorts.  The Hilton Head Chamber of Commerce estimatesthat the year-round tourism industry accounts for more than 60% of local jobsand contributes in excess of $1.5 billion annually to the Hilton Headeconomy.  According to FDIC data as ofJune 30, 2007, total deposits in Beaufort County increased 84% from 

 

 

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approximately $1.8billion in 2000 to approximately $3.4 billion in 2007.  According to U.S. Census Bureau estimates,the population of Beaufort County increased 14% from 120,937 in 2000 to 137,849in 2005, and is projected to grow an additional 10% by 2010.  The median family income of Hilton Head residentsin 2005 was approximately $72,000, compared with $43,000 for South Carolina and$50,000 nationally.

 

**Lending Activities**

 

*General.* We emphasize a range of lending services, including commercial andresidential real estate mortgage loans, real estate construction and landdevelopment loans, commercial business loans, consumer loans and equity-lineloans to individuals and small- to medium-sized businesses and professionalfirms that are located in or conduct a substantial portion of their business inour market area.  At December 31,2007, we had total loans of $391.3 million, representing 80.9% of our totalearning assets.  When we opened our bank,we introduced a strong credit culture based on traditional credit measures andour intimate knowledge of our markets through veteran bankers.  We currently engage an outside firm toevaluate our loan portfolio on a semi-annual basis for credit quality and asecond outside firm for compliance issues. As of December 31, 2007, we had three nonperforming assets totalingapproximately $389,000, or 0.10% of gross loans.  In addition, we wrote off one loan totaling$115,760 during the first quarter of 2007, a partial charge off of $106,346during the second quarter of 2007 and wrote off $112,320 in the fourth quarterof 2007.

 

Our underwritingstandards vary for each type of loan, as described below.  While we generally underwrite the loans inour portfolio in accordance with our own internal underwriting guidelines andregulatory supervisory guidelines, in certain circumstances we have made loanswhich exceed either our internal underwriting guidelines, supervisoryguidelines, or both.  We are permitted tohold loans that exceed supervisory guidelines up to 100% of bank capital, or$49.9 million at December 31, 2007. As such, $58.5 million, or 14.9%, of our loans had loan-to-value ratiosthat exceeded regulatory supervisory guidelines, of which eight loans totalingapproximately $4.4 million had loan-to-value ratios of 100% or more.  In addition, supervisory limits on commercialloan to value exceptions are set at 30% of capital.  At December 31, 2007, $38.9 million ofour commercial loans, or 73.0% of the bank’s capital, exceeded the supervisoryloan to value ratio.

 

We have focused our lendingactivities primarily on the professional market, including doctors, dentists,small business owners, and commercial real estate developers.  By focusing on this customer base and byserving each customer with a consistent relationship team of bankers, we havegenerated a loan portfolio with an average outstanding loan balance ofapproximately $259,000 as of December 31, 2007.  At the same time, we have strived to maintaina diversified loan portfolio and limit the amount of our loans to any singlecustomer.  As of December 31, 2007,our 10 largest customer loan relationships represented approximately $48.4 million, or 12.4% of our loan portfolio.

 

*RealEstate Mortgage Loans*.  Loans secured by real estatemortgages are the principal component of our loan portfolio.  We obtain a security interest in real estatewhenever possible, in addition to any other available collateral, in order toincrease the likelihood of the ultimate repayment of the loan.  As of December 31, 2007, loans securedby first or second mortgages on real estate made up approximately $204.1million, or 52.1%, of our loan portfolio.

 

These loans willgenerally fall into one of two categories: commercial real estate loans orresidential real estate loans. Furthermore, each type of real estate loan may be secured by residentialor commercial property.  Real estateloans are subject to the same general risks as other loans and are particularlysensitive to fluctuations in the value of real estate.  Fluctuations in the value of real estate, aswell as other factors arising after a loan has been made, could negativelyaffect a borrower’s cash flow, creditworthiness, and ability to repay the loan.

 

·                  Commercial Real Estate Loans.  AtDecember 31, 2007, the outstanding balances on individual commercial realestate loans ranged from approximately $6,000 to $3.4 million, as we haveparticipated credits in excess of our legal lending limit to correspondentbanks.  The average commercial realestate loan balance was approximately $419,000. These loans generally have terms of five years or less, althoughpayments may be structured on a longer amortization basis.  We evaluate each borrower on an individual basisand attempt to determine the business risks and credit profile of eachborrower.  We attempt to reduce creditrisk in the commercial real estate portfolio by emphasizing 

 

 

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loans onowner-occupied office buildings where the loan-to-value ratio, established byindependent appraisals, does not exceed 85%. We also generally require that a borrower’s cash flow exceeds 125% ofmonthly debt service obligations.  Inorder to ensure secondary sources of payment and liquidity to support a loanrequest, we typically review all of the personal financial statements of theprincipal owners and require their personal guarantees.  At December 31, 2007, commercial realestate loans (other than construction loans) amounted to $160.9 million, orapproximately 41.1% of our loan portfolio.

 

·                  Residential Real Estate Loans and Home Equity Loans.  We do not generally originate traditionallong term residential mortgages for our portfolio, but we do issue traditionalsecond mortgage residential real estate loans and home equity lines ofcredit.  At December 31, 2007, ourindividual residential real estate loans balances ranged from approximately$4,500 to $2.3 million, with an average loan balance of approximately$379,000.  Generally, we limit theloan-to-value ratio on our residential real estate loans to 85%.  We offer fixed and adjustable rateresidential real estate loans with terms of up to 30 years through a thirdparty rather than retaining these loans ourselves.  We also offer home equity lines ofcredit.  At December 31, 2007, ourindividual home equity lines of credit balances ranged up to $953,000, with anaverage balance of approximately $110,000. Our underwriting criteria for, and the risks associated with, home equityloans and lines of credit are generally the same as those for first mortgageloans.  Home equity lines of credittypically have terms of 15 years or less. We generally limit the extension of credit to 90% of the availableequity of each property, although in certain exceptions we may extend up to100% of the available equity.  At December 31,2007, residential real estate loans (other than construction loans) amounted to$43.2 million, or 11.0% of our loan portfolio. Included in the residential real estate loans was $16.3 million, or37.8% of our residential loan portfolio, in first and second mortgages onindividuals’ homes, and $26.9 million, or 62.2% of our residential loanportfolio, in home equity loans.

 

*RealEstate Construction and Land Development Loans. *We offerfixed and adjustable rate residential and commercial construction loans tobuilders and developers and to consumers who wish to build their ownhomes.  At December 31, 2007,outstanding balances on our commercial construction and development real estateloans ranged up to approximately $3.9 million, with an average loan balance ofapproximately $486,000.  At December 31,2007, the outstanding balances on our individual residential construction anddevelopment real estate loans ranged up to approximately $694,000, with anaverage loan balance of approximately $183,000. The term of our construction and development loans generally is limitedto 18 months, although payments may be structured on a longer amortizationbasis.  Construction and developmentloans generally carry a higher degree of risk than long-term financing ofexisting properties because repayment depends on the ultimate completion of theproject and usually on the sale of the property.  Specific risks include:

 

·                  cost overruns;

·                  mismanaged construction;

·                  inferior or improper construction techniques;

·                  economic changes or downturns during construction;

·                  a downturn in the real estate market;

·                  rising interest rates which may prevent sale of the property; and

·                  failure to sell completed projects in a timely manner.

 

We attempt to reduce therisk associated with construction and development loans by obtaining personalguarantees and by keeping the loan-to-value ratio of the completed project ator below 85%.  At December 31, 2007,total construction loans amounted to $159.8 million, or 40.8% of our total loanportfolio.  Included in the $159.8million total was $150.1 million in construction and development loans, or93.9% of our construction loan portfolio, that were made to commercialconstruction developers, and approximately $9.7 million, or 6.1% of ourconstruction loan portfolio, that were made to consumers.

 

*CommercialBusiness Loans*.  We make loans for commercial purposes invarious lines of businesses, including the manufacturing industry, serviceindustry, and professional service areas. At December 31, 2007, outstanding balances on our individualcommercial business loans ranged up to approximately $2.3 million, with anaverage loan balance of approximately $73,000. Commercial loans are generally considered to have greater risk 

 

 

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than first or secondmortgages on real estate because commercial loans may be unsecured, or if theyare secured, the value of the collateral may be difficult to assess and morelikely to decrease than real estate.  At December 31,2007, commercial business loans amounted to $24.3 million, or 6.2% of our totalloan portfolio.

 

We are eligible to offersmall business loans utilizing government enhancements such as the SmallBusiness Administration’s (“SBA”) 7(a) program and SBA’s 504programs.  These loans typically arepartially guaranteed by the government, which helps to reduce their risk.  Government guarantees of SBA loans do notexceed, and are generally less than, 80% of the loan.  As of December 31, 2007, we had notoriginated any small business loans utilizing government enhancements.

 

*ConsumerLoans*.  We make a variety of loans to individuals forpersonal and household purposes, including secured and unsecured installmentloans and revolving lines of credit. Consumer loans are underwritten based on the borrower’s income, currentdebt level, past credit history, and the availability and value ofcollateral.  Consumer rates are bothfixed and variable, with negotiable terms. At December 31, 2007, the outstanding balance on our individualconsumer loans ranged from approximately $69 to $441,000, with an average loanbalance of approximately $18,000.  Ourinstallment loans typically amortize over periods up to 60 months.   Although we typically require monthlypayments of interest and a portion of the principal on our revolving loanproducts, we will offer consumer loans with a single maturity date when aspecific source of repayment is available. Consumer loans are generallyconsidered to have greater risk than first or second mortgages on real estatebecause they may be unsecured, or, if they are secured, the value of thecollateral may be difficult to assess and more likely to decrease in value thanreal estate.  At December 31, 2007,consumer loans amounted to $3.5 million, or 0.9% of our loan portfolio.

 

*LoanApproval.*  Certain credit risks are inherent in makingloans.  These include prepayment risks,risks resulting from uncertainties in the future value of collateral, risksresulting from changes in economic and industry conditions, and risks inherentin dealing with individual borrowers.  Weattempt to mitigate repayment risks by adhering to internal credit policies andprocedures.  These policies andprocedures include officer and customer lending limits, a multi-layeredapproval process for larger loans, documentation examination, and follow-upprocedures for any exceptions to credit policies.  Our loan approval policies provide forvarious levels of officer lending authority. When the amount of aggregate loans to a single borrower exceeds anindividual officer’s lending authority, the loan request will be reviewed by anofficer with a higher lending authority. Between the Chief Executive Officer,Senior Commercial Banker and Chief Credit Officer, any two may combine theirauthority to approve credits up to $1.5 million.  If the loans exceed $1.5 million, then a loancommittee comprised of Mr. Coffee and five outside directors may approvethe loans up to 10% of the Bank’s capital and surplus.  All loans in excess of this lending limitwill be submitted for approval to the entire board of directors.  We do not make any loans to any director orexecutive officer of the bank unless the loan is approved by the disinterestedmembers of the board of directors of the bank and is on terms not morefavorable to such person than would be available to a person not affiliatedwith the bank.

 

*CreditAdministration and Loan Review.*  We maintain acontinuous loan review system.  We alsoapply a credit grading system to each loan, and we use an independentconsultant on a semi-annual basis to review the loan files on a test basis toconfirm the grading of each loan. Each loan officer is responsible for eachloan he or she makes, regardless of whether other individuals or committeesjoined in the approval.  Thisresponsibility continues until the loan is repaid or until the loan isofficially assigned to another officer.

 

*LendingLimits.*  Our lending activities are subject to avariety of lending limits imposed by federal law.  In general, the bank is subject to a legallimit on loans to a single borrower equal to 15% of the bank’s capital andunimpaired surplus.  This limit willincrease or decrease as the bank’s capital increases or decreases.  Based upon the capitalization of the bank at December 31,2007, our legal lending limit was approximately $8.0 million.  Our internal lending limit was $5.2 millionat December 31, 2007. We are able to sell participations in our largerloans to other financial institutions, which allows us to manage the riskinvolved in these loans and to meet the lending needs of our customersrequiring extensions of credit in excess of these limits.

 

**Deposit Products**

 

Weoffer a full range of deposit services that are typically available in mostbanks and savings institutions, 

 

 

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including checkingaccounts, commercial accounts, savings accounts, and other time deposits ofvarious types, ranging from daily money market accounts to longer-termcertificates of deposit.  Transactionaccounts and time deposits are tailored to and offered at rates competitive tothose offered in our primary market area. In addition, we offer certain retirement account services, such asIRAs.  We solicit accounts fromindividuals, businesses, associations, organizations, and governmentalauthorities.

 

**OtherBanking Services**

 

We also offer other bankservices 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 ourcustomers throughout the country.  Webelieve that by being associated with a shared network of ATMs, we are betterable to serve our customers and are able to attract customers who areaccustomed to the convenience of using ATMs, although we do not believe thatmaintaining this association is critical to our success.  We also offer internet banking services, billpayment services, and cash management services, along with remote depositcapture and ACH origination.  We do notexpect to exercise trust powers during our next few years of operation.

 

**Competition**

 

The banking business is highly competitive, and weexperience competition in our market from many other financialinstitutions.  Competition amongfinancial institutions is based upon interest rates offered on depositaccounts, interest rates charged on loans, other credit and service chargesrelating to loans, the quality and scope of the services rendered, theconvenience of banking facilities, and, in the case of loans to commercialborrowers, relative lending limits.  Wecompete with commercial banks, credit unions, savings institutions, mortgagebanking firms, consumer finance companies, securities brokerage firms,insurance companies, money market funds, and other mutual funds, as well asother super-regional, national, and international financial institutions thatoperate offices in the Charleston area and elsewhere.

 

As of June 30, 2007, there were 24 financialinstitutions other than us in Charleston County, and 21 and 22 in Horry andBeaufort County, where our Myrtle Beach and Hilton Head area offices arelocated, respectively.  We compete withthese institutions both in attracting deposits and in making loans.  In addition, we have to attract our customerbase from other existing financial institutions and from new residents.  Many of our competitors are well-established,larger financial institutions with substantially greater resources and lendinglimits, such as BB&T, Bank of America, Wachovia, and Carolina FirstBank.  These institutions offer some services,such as extensive and established branch networks and trust services, which wedo not provide.  In addition, many of ournon-bank competitors are not subject to the same extensive federal regulationsthat govern bank holding companies and federally insured banks.

 

**Employees**

 

As of March 17, 2008,we had 88 full-time employees and two part-time employees.

 

 

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**SUPERVISIONAND REGULATION**

 

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

 

The following discussionis not intended to be a complete list of all the activities regulated by thebanking laws or of the impact of such laws and regulations on ouroperations.  It is intended only tobriefly summarize some material provisions.

 

**Tidelands Bancshares**

 

We own 100% of theoutstanding capital stock of the bank, and therefore we are considered to be abank holding company under the federal Bank Holding Company Act of 1956 (the “BankHolding Company Act”).  As a result, weare primarily subject to the supervision, examination and reportingrequirements of the Board of Governors of the Federal Reserve (the “FederalReserve”) under the Bank Holding Company Act and its regulations promulgatedthereunder.  As a bank holding companylocated in South Carolina, the South Carolina Board of Financial Institutionsalso regulates and monitors all significant aspects of our operations.

 

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

 

·                  banking or managing or controlling banks;

 

·                  furnishing services to or performingservices for our subsidiaries; and

 

·                  any activity that the Federal Reservedetermines to be so closely related to banking as to be a proper incident to the business ofbanking.

 

Activitiesthat the Federal Reserve has found to be so closely related to banking as to bea proper incident to the business of banking include:

 

·                  factoring accounts receivable;

 

·                  making, acquiring, brokering or servicingloans and usual related activities;

 

·                  leasing personal or real property;

 

·                  operating a non-bank depositoryinstitution, such as a savings association;

 

·                  trust company functions;

 

·                  financial and investment advisoryactivities;

 

·                  conducting discount securities brokerageactivities;

 

·                  underwriting and dealing in governmentobligations and money market instruments;

 

·                  providing specified management consultingand counseling activities;

 

·                  performing selected data processingservices and support services;

 

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·                  acting as agent or broker in sellingcredit life insurance and other types of insurance in connection with credittransactions; and

 

·                  performing selected insurance underwritingactivities.

 

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

 

The Federal Reserve hasthe authority to order a bank holding company or its subsidiaries to terminateany of these activities or to terminate its ownership or control of anysubsidiary when it has reasonable cause to believe that the bank holdingcompany’s continued ownership, activity or control constitutes a serious riskto the financial safety, soundness or stability of it or any of its banksubsidiaries.

 

***Change in Control****. *In addition, and subject to certain exceptions, the Bank Holding CompanyAct and the Change in Bank Control Act, together with regulations promulgatedthere under, require Federal Reserve approval prior to any person or companyacquiring “control” of a bank holding company. Moreover, the South Carolina Board of Financial Institutions also mustapprove an acquisition of a South Carolina bank holding company.  Control is conclusively presumed to exist ifan individual or company acquires 25% or more of any class of voting securitiesof a bank holding company.  Control isrebuttably presumed to exist if a person acquires 10% or more, but less than25%, of any class of voting securities and either:

 

·                  the company has registered securities under Section 12of the Securities Exchange Act of 1934; or

 

·                  no other person owns a greater percentage of thatclass of voting securities immediately after the transaction.

 

Our common stock isregistered under Section 12 of the Securities Exchange Act of 1934.  Any shareholder of 10% or more, but less than25% of any class of our voting securities would be required to either file as acontrolling shareholder of the company or rebut the presumption of control inaccordance with Federal Reserve regulations. The regulations provide a procedure for rebutting control when ownershipof any class of voting securities is below 25%.

 

***Sourceof Strength****.*  In accordance with Federal Reserve Boardpolicy, we are expected to act as a source of financial strength to the bankand to commit resources to support the bank in circumstances in which we mightnot otherwise do so.  If the bank were tobecome “undercapitalized” (see below “Tidelands Bank -  Prompt Corrective Action”), we would berequired to provide a guarantee of the bank’s plan to return to capitaladequacy.  Additionally, under the BankHolding Company Act, the Federal Reserve Board may require a bank holding companyto terminate any activity or relinquish control of a nonbank subsidiary, otherthan a nonbank subsidiary of a bank, upon the Federal Reserve Board’sdetermination that such activity or control constitutes a serious risk to thefinancial soundness or stability of any depository institution subsidiary ofthe bank holding company.  Further,federal bank regulatory authorities have additional discretion to require abank holding company to divest itself of any bank or nonbank subsidiaries ifthe agency determines that divestiture may aid the depository institution’sfinancial condition.  Further, any loansby a bank holding company to a subsidiary bank are subordinate in right ofpayment to deposits and certain other indebtedness of the subsidiary bank.  In the event of a bank holding company’sbankruptcy, any commitment by the bank holding company to a federal bank regulatoryagency to maintain the capital of a subsidiary bank at a certain level would beassumed by the bankruptcy trustee and entitled to priority payment.

 

***CapitalRequirements.***  The Federal Reserve Board imposes certaincapital requirements on the bank 

 

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holding company under theBank Holding Company Act, including a minimum leverage ratio and a minimumratio of “qualifying” capital to risk-weighted assets.  These requirements are essentially the sameas those that apply to the bank and are described below under “Tidelands Bank -Capital Regulations.”  Subject to ourcapital requirements and certain other restrictions, we are able to borrowmoney to make a capital contribution to the bank, and these loans may be repaidfrom dividends paid from the bank to the company.  Our ability to pay dividends depends on thebank’s ability to pay dividends to us, which is subject to regulatoryrestrictions as described below in “Tidelands bank — Dividends.”  We are also able to raise capital forcontribution to the bank by issuing securities without having to receiveregulatory approval, subject to compliance with federal and state securitieslaws.

 

***SouthCarolina State Regulation.***  As a SouthCarolina bank holding company under the South Carolina Banking and BranchingEfficiency Act, we are subject to limitations on sale or merger and toregulation by the South Carolina Board of Financial Institutions.  We are not required to obtain the approval ofthe S.C. Board prior to acquiring the capital stock of a national bank, but wemust notify them at least 15 days prior to doing so.  We must receive the Board’s approval prior toengaging in the acquisition of a South Carolina state chartered bank or anotherSouth Carolina bank holding company.

 

**Tidelands Bank**

 

The bank operates as astate bank incorporated under the laws of the State of South Carolina and issubject to examination by the South Carolina Board of Financial Institutions.

 

The South Carolina Boardof Financial Institutions and the FDIC regulate or monitor virtually all areasof the bank’s operations, including:

 

·                  security devices and procedures;

 

·                  adequacy of capitalization and loss reserves;

 

·                  loans;

 

·                  investments;

 

·                  borrowings;

 

·                  deposits;

 

·                  mergers;

 

·                  issuances of securities;

 

·                  payment of dividends;

 

·                  interest rates payable on deposits;

 

·                  interest rates or fees chargeable on loans;

 

·                  establishment of branches;

 

·                  corporate reorganizations;

 

·                  maintenance of books and records; and

 

·                  adequacy of staff training to carry on safe lendingand deposit gathering practices.

 

The South Carolina Boardof Financial Institutions requires the bank to maintain specified capitalratios and imposes limitations on the bank’s aggregate investment in realestate, bank premises, and furniture and fixtures.  The 

 

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South Carolina Board ofFinancial Institutions also requires the bank to prepare quarterly reports onthe bank’s financial condition in compliance with its minimum standards andprocedures.

 

All insured institutionsmust undergo regular on site examinations by their appropriate bankingagency.  The cost of examinations ofinsured depository institutions and any affiliates may be assessed by theappropriate agency against each institution or affiliate as it deems necessaryor appropriate.  Insured institutions arerequired to submit annual reports to the FDIC, their federal regulatory agency,and their state supervisor when applicable. The FDIC has developed a method for insured depository institutions toprovide supplemental disclosure of the estimated fair market value of assetsand liabilities, to the extent feasible and practicable, in any balance sheet,financial statement, report of condition or any other report of any insureddepository institution.  The FDICImprovement Act also requires the federal banking regulatory agencies toprescribe, by regulation, standards for all insured depository institutions anddepository institution holding companies relating, among other things, to thefollowing:

 

·                  internal controls;

 

·                  information systems and audit systems;

 

·                  loan documentation;

 

·                  credit underwriting;

 

·                  interest rate risk exposure; and

 

·                  asset quality.

 

***Prompt Corrective Action. ***As an insured depository institution, the bank isrequired to comply with the capital requirements promulgated under the FederalDeposit Insurance Act and the regulations thereunder, which set forth****five capital categories, each with specific regulatoryconsequences.  Under these regulations,the categories are:

 

·                  Well Capitalized — The institutionexceeds the required minimum level for each relevant capital measure.  A well capitalized institution is one (i) havinga total capital ratio of 10% or greater, (ii) having a tier 1 capitalratio of 6% or greater, (iii) having a leverage capital ratio of 5% orgreater and (iv) that is not subject to any order or written directive tomeet and maintain a specific capital level for any capital measure.

 

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

 

·                  Undercapitalized — The institution failsto meet the required minimum level for any relevant capital measure.  An undercapitalized institution is one (i) havinga total capital ratio of less than 8% or (ii) having a tier 1 capitalratio of less than 4% or (iii) having a leverage capital ratio of lessthan 4%, or if the institution is rated a composite 1 under the CAMELS ratingsystem, a leverage capital ratio of less than 3%.

 

·                  Significantly Undercapitalized — Theinstitution is significantly below the required minimum level for any relevantcapital measure.  A significantlyundercapitalized institution is one (i) having a total capital ratio ofless than 6% or (ii) having a tier 1 capital ratio of less than 3% or (iii) havinga leverage capital ratio of less than 3%.

 

·                  Critically Undercapitalized — Theinstitution fails to meet a critical capital level set by the appropriate 

 

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                        federal banking agency.  A critically undercapitalized institution isone having a ratio of tangible equity to total assets that is equal to or lessthan 2%.

 

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

 

If the bank is not well capitalized, it cannot accept brokered depositswithout prior FDIC approval and, if approval is granted, cannot offer aneffective yield in excess of 75 basis points on interests paid on deposits ofcomparable size and maturity in such institution’s normal market area fordeposits accepted from within its normal market area, or national rate paid ondeposits of comparable size and maturity for deposits accepted outside the bank’snormal market area.  Moreover, if thebank becomes less than adequately capitalized, it must adopt a capitalrestoration plan acceptable to the FDIC. The bank also would become subject to increased regulatory oversight, andis increasingly restricted in the scope of its permissible activities.  Each company having control over anundercapitalized institution also must provide a limited guarantee that theinstitution will comply with its capital restoration plan.  Except under limited circumstances consistentwith an accepted capital restoration plan, an undercapitalized institution maynot grow.  An undercapitalizedinstitution may not acquire another institution, establish additional branchoffices or engage in any new line of business unless determined by theappropriate federal banking agency to be consistent with an accepted capitalrestoration plan, or unless the FDIC determines that the proposed action willfurther the purpose of prompt corrective action.  The appropriate federal banking agency maytake any action authorized for a significantly undercapitalized institution ifan undercapitalized institution fails to submit an acceptable capitalrestoration plan or fails in any material respect to implement a plan acceptedby the agency.  A criticallyundercapitalized institution is subject to having a receiver or conservatorappointed to manage its affairs and for loss of its charter to conduct bankingactivities.

 

An insured depository institution may not pay a management fee to abank holding company controlling that institution or any other person havingcontrol of the institution if, after making the payment, the institution, wouldbe undercapitalized.  In addition, aninstitution cannot make a capital distribution, such as a dividend or otherdistribution that is in substance a distribution of capital to the owners ofthe institution if following such a distribution the institution would beundercapitalized.  Thus, if payment ofsuch a management fee or the making of such would cause the bank to becomeundercapitalized, it could not pay a management fee or dividend to us.

 

As of December 31,2007, the bank was deemed to be “well capitalized.”

 

***Standardsfor Safety and Soundness.***  The FederalDeposit Insurance Act (“FDIA”) also requires the federal banking regulatoryagencies to prescribe, by regulation or guideline, operational and managerialstandards for all insured depository institutions relating to: (i) internalcontrols, information systems and internal audit systems; (ii) loandocumentation; (iii) credit underwriting; (iv) interest rate riskexposure; and (v) asset growth.  Theagencies also must prescribe standards for asset quality, earnings, and stockvaluation, as well as standards for compensation, fees and benefits.  The federal banking agencies have adoptedregulations and Interagency Guidelines Prescribing Standards for Safety andSoundness to implement these required standards.  These guidelines set forth the safety andsoundness standards that federal banking agencies use to identify and addressproblems at insured depository institutions before capital becomesimpaired.  Under the regulations, if theFDIC determines that the bank fails to meet any standards prescribed by theguidelines, the agency may require the bank to submit to the agency anacceptable plan to achieve compliance with the standard, as required by theFDIC.  The final regulations establishdeadlines for the submission and review of such safety and soundness complianceplans.

 

***DepositInsurance and Assessments.***  Deposits atthe bank are insured by the Deposit Insurance Fund (the “DIF”) as administeredby the FDIC, up to the applicable limits established by law — generally$100,000 per accountholder and $250,000 for certain retirement accountholders.  In November 2006, the FDIC adopted finalregulations that set the deposit insurance assessment rates that took effect in2007.  The FDIC uses a risk-basedassessment system that assigns insured depository institutions to one of fourrisk categories based on three primary sources of information — supervisoryrisk ratings for all institutions, financial ratios for most institutions,including the company, and long-term debt issuer ratings for large institutionsthat have such ratings.  The new premiumrate structure imposes a minimum assessment of from five to seven cents forevery $100 of domestic deposits at institutions that are assigned to the lowestrisk category.  This category is expectedto encompass substantially all 

 

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insured institutions,including the bank.  A one-timeassessment credit is available to offset up to 100% of the 2007assessment.  Any remaining credit can beused to offset up to 90% of subsequent annual assessments through 2010.  For institutions assigned to higher riskcategories, the premium that took effect in 2007 ranges from 10 cents to 43cents per $100 of deposits.

 

The FDIC also collects adeposit-based assessment from insured financial institutions on behalf of The FinancingCorporation (“FICO”).  The funds fromthese assessments are used to service debt issued by FICO in its capacity as afinancial vehicle for the Federal Savings and Loan Insurance Corporation.  The FICO assessment rate is set quarterly andin 2006 ranged from 1.32 cents to 1.24 cents per $100 of assessabledeposits.  For the first quarter of 2007,the FICO assessment rate was 1.22 cents per $100 of assessable deposits.

 

***Transactionswith Affiliates and Insiders.***  The company isa legal entity separate and distinct from the bank and its othersubsidiaries.  Various legal limitationsrestrict the bank from lending or otherwise supplying funds to the company orits non-bank subsidiaries.  The companyand the bank are subject to Sections 23A and 23B of the Federal Reserve Act andFederal Reserve Regulation W.  Section 23Aof the Federal Reserve Act places limits on the amount of loans or extensionsof credit to, or investments in, or certain other transactions with, affiliatesand on the amount of advances to third parties collateralized by the securitiesor obligations of affiliates.  Theaggregate of all covered transactions is limited in amount, as to any oneaffiliate, to 10% of the bank’s capital and surplus and, as to all affiliatescombined, to 20% of the bank’s capital and surplus.  Furthermore, within the foregoing limitationsas to amount, each covered transaction must meet specified collateralrequirements.  The bank is forbidden topurchase low quality assets from an affiliate.

 

Section 23B of theFederal Reserve Act, among other things, prohibits an institution from engagingin certain transactions with certain affiliates unless the transactions are onterms substantially the same, or at least as favorable to such institution orits subsidiaries, as those prevailing at the time for comparable transactionswith nonaffiliated companies.

 

Regulation W generallyexcludes all non-bank and non-savings association subsidiaries of banks fromtreatment as affiliates, except to the extent that the Federal Reserve Boarddecides to treat these subsidiaries as affiliates.  The regulation also limits the amount ofloans that can be purchased by a bank from an affiliate to not more than 100%of the bank’s capital and surplus.

 

The bank is also subjectto certain restrictions on extensions of credit to executive officers,directors, certain principal shareholders, and their related interests.  Such extensions of credit (i) must bemade on substantially the same terms, including interest rates and collateral,as those prevailing at the time for comparable transactions with third partiesand (ii) must not involve more than the normal risk of repayment orpresent other unfavorable features.

 

***Branching****.*  Under currentSouth Carolina law, we may open branch offices throughout South Carolina withthe 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 SouthCarolina.  Furthermore, federal legislationhas been passed that permits interstate branching by banks if allowed by statelaw, and interstate merging by banks. However, South Carolina law, with limited exceptions, currently permitsbranching across state lines only through interstate mergers.

 

***Anti-TyingRestrictions***.  Under amendments to the Bank Holding CompanyAct and Federal Reserve regulations, a bank is prohibited from engaging incertain tying or reciprocity arrangements with its customers.  In general, a bank may not extend credit, lease,sell property, or furnish any services or fix or vary the consideration forthese on the condition that (i) the customer obtain or provide someadditional credit, property, or services from or to the bank, the bank holdingcompany or subsidiaries thereof or (ii) the customer may not obtain someother credit, property, or services from a competitor, except to the extentreasonable conditions are imposed to assure the soundness of the creditextended.  Certain arrangements arepermissible: a bank may offer combined-balance products and may otherwise offermore favorable terms if a customer obtains two or more traditional bankproducts; and certain foreign transactions are exempt from the generalrule.  A bank holding company or any bankaffiliate also is subject to anti-tying requirements in connection withelectronic benefit transfer services.

 

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***CommunityReinvestment Act****.*  The Community Reinvestment Act (“CRA”)requires that, in connection with examinations of financial institutions withintheir respective jurisdictions, a financial institution’s primary regulator,which is the FDIC for the bank, shall evaluate the record of each financialinstitution in meeting the credit needs of its local community, including lowand moderate income neighborhoods.  Thesefactors are also considered in evaluating mergers, acquisitions, andapplications to open a branch or facility. Failure to adequately meet these criteria could impose additionalrequirements and limitations on our bank. Additionally, we must publicly disclose the terms of various CRA-relatedagreements.

 

***FinanceSubsidiaries.***  Under the Gramm-Leach-Bliley Act (the “GLBA”),subject to certain conditions imposed by their respective banking regulators,national and state-chartered banks are permitted to form “financialsubsidiaries” that may conduct financial or incidental activities, therebypermitting bank subsidiaries to engage in certain activities that previouslywere impermissible.  The GLBA imposes severalsafeguards and restrictions on financial subsidiaries, including that theparent bank’s equity investment in the financial subsidiary be deducted fromthe bank’s assets and tangible equity for purposes of calculating the bank’scapital adequacy.  In addition, the GLBAimposes new restrictions on transactions between a bank and its financialsubsidiaries similar to restrictions applicable to transactions between banksand non-bank affiliates.

 

***ConsumerProtection Regulations.***  Activities ofthe bank are subject to a variety of statutes and regulations designed toprotect consumers.  Interest and othercharges collected or contracted for by the bank are subject to state usury lawsand federal laws concerning interest rates. The bank’s loan operations are also subject to federal laws applicableto credit transactions, such as the:

 

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

 

·                  The Home Mortgage Disclosure Act of 1975,requiring financial institutions to provide information to enable the publicand public officials to determine whether a financial institution is fulfillingits 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 prohibitedfactors in extending credit;

 

·                  The Fair Credit Reporting Act of 1978, asamended by the Fair and Accurate Credit Transactions Act, governing the use andprovision of information to credit reporting agencies, certain identity theftprotections and certain credit and other disclosures;

 

·                  The Fair Debt Collection Act, governingthe manner in which consumer debts may be collected by collection agencies; and

 

·                  The Rules and regulations of thevarious federal agencies charged with the responsibility of implementing thesefederal laws.

 

The deposit operations ofthe bank also are subject to:

 

·                  the Right to Financial Privacy Act, whichimposes a duty to maintain confidentiality of consumer financial records andprescribes procedures for complying with administrative subpoenas of financialrecords; and

 

·                  the Electronic Funds Transfer Act andRegulation E issued by the Federal Reserve Board to implement that Act, whichgoverns automatic deposits to and withdrawals from deposit accounts andcustomers’ rights and liabilities arising from the use of automated tellermachines and other electronic banking services.

 

***EnforcementPowers.***  The bank and its “institution-affiliatedparties,” including its management, employees, agents, independent contractors,and consultants such as attorneys and accountants and others who participate inthe conduct of the financial institution’s affairs, are subject to potentialcivil and criminal penalties for violations of law, regulations or writtenorders of a government agency. These practices can include the failure of an 

 

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institution to timelyfile required reports or the filing of false or misleading information or thesubmission of inaccurate reports.  Civilpenalties may be as high as $1,000,000 a day for such violations.  Criminal penalties for some financialinstitution crimes have been increased to 20 years.  In addition, regulators are provided withgreater flexibility to commence enforcement actions against institutions andinstitution-affiliated parties.  Possibleenforcement actions include the termination of deposit insurance.  Furthermore, banking agencies’ power to issuecease-and-desist orders were expanded. Such orders may, among other things, require affirmative action tocorrect any harm resulting from a violation or practice, including restitution,reimbursement, indemnifications or guarantees against loss.  A financial institution may also be orderedto restrict its growth, dispose of certain assets, rescind agreements orcontracts, or take other actions as determined by the ordering agency to beappropriate.

 

***Anti-MoneyLaundering.***  Financial institutions must maintainanti-money laundering programs that include established internal policies,procedures, and controls; a designated compliance officer; an ongoing employeetraining program; and testing of the program by an independent audit function.The company and the bank are also prohibited from entering into specifiedfinancial transactions and account relationships and must meet enhancedstandards for due diligence and “knowing your customer” in their dealings withforeign financial institutions and foreign customers.  Financial institutions must take reasonablesteps to conduct enhanced scrutiny of account relationships to guard againstmoney laundering and to report any suspicious transactions, and recent lawsprovide law enforcement authorities with increased access to financialinformation maintained by banks. Anti-money laundering obligations have been substantially strengthenedas a result of the USA Patriot Act, enacted in 2001 and renewed in 2006.  Bank regulators routinely examineinstitutions for compliance with these obligations and are required to considercompliance in connection with the regulatory review of applications.  The regulatory authorities have been activein imposing “cease and desist” orders and money penalty sanctions againstinstitutions found to be violating these obligations.

 

## ***USA PATRIOT Act.***** The USA PATRIOT Act became effective on October 26, 2001, amended,in part, the Bank Secrecy Act, and provides, in part, for the facilitation ofinformation sharing among governmental entities and financial institutions forthe purpose of combating terrorism and money laundering by enhancing anti-moneylaundering and financial transparency laws, as well as enhanced informationcollection tools and enforcement mechanics for the U.S. government, including: (i) requiringstandards for verifying customer identification at account opening; (ii) rules topromote cooperation among financial institutions, regulators, and lawenforcement entities in identifying parties that may be involved in terrorismor money laundering; (iii) reports by nonfinancial trades and businessesfiled with the Treasury Department’s Financial Crimes Enforcement Network fortransactions exceeding $10,000; and (iv) filing suspicious activitiesreports by brokers and dealers if they believe a customer may be violating U.S.laws and regulations and requires enhanced due diligence requirements forfinancial institutions that administer, maintain, or manage private bankaccounts or correspondent accounts for non-U.S. persons.  Bank regulators routinely examineinstitutions for compliance with these obligations and are required to considercompliance in connection with the regulatory review of applications.

## ** **

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

 

The Office of Foreign Assets Control (“OFAC”), which is a division ofthe U.S. Department of the Treasury, is responsible for helping to insure thatUnited States entities do not engage in transactions with “enemies” of theUnited States, as defined by various Executive Orders and Acts ofCongress.  OFAC has sent, and will send,our banking regulatory agencies lists of names of persons and organizationssuspected of aiding, harboring or engaging in terrorist acts.  If the bank finds a name on any transaction,account or wire transfer that is on an OFAC list, it must freeze such account,file a suspicious activity report and notify the FBI.  The bank has appointed an OFAC complianceofficer to oversee the inspection of its accounts and the filing of anynotifications.  The bank actively checkshigh-risk OFAC areas such as new accounts, wire transfers and customerfiles.  The bank performs these checksutilizing software, which is updated each time a modification is made to thelists provided by OFAC and other agencies of Specially Designated Nationals andBlocked Persons.

 

**Privacy and Credit Reporting.** Financial institutions are required to disclose their policies forcollecting and protecting confidential information.  Customers generally may prevent financialinstitutions from sharing 

 

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nonpublic personal financial information with nonaffiliated thirdparties except under narrow circumstances, such as the processing of transactionsrequested by the consumer or when the financial institution is jointlysponsoring a product or service with a nonaffiliated third party. Additionally,financial institutions generally may not disclose consumer account numbers toany nonaffiliated third party for use in telemarketing, direct mail marketingor other marketing to consumers. It is the bank’s policy not to disclose anypersonal information unless required by law.

 

Like other lendinginstitutions, the bank utilizes credit bureau data in its underwritingactivities.  Use of such data isregulated under the Federal Credit Reporting Act on a uniform, nationwidebasis, including credit reporting, prescreening, sharing of information betweenaffiliates, and the use of credit data. The Fair and Accurate Credit Transactions Act of 2003 (the “FACT Act”)authorizes states to enact identity theft laws that are not inconsistent withthe conduct required by the provisions of the FACT Act.

 

**Payment of Dividends.** A South Carolina state bank may not paydividends from its capital.  Alldividends must be paid out of undivided profits then on hand, after deductingexpenses, including reserves for losses and bad debts.  The bank is authorized to pay cash dividendsup to 100% of net income in any calendar year without obtaining the priorapproval of the South Carolina Board of Financial Institutions, provided thatthe bank received a composite rating of one or two at the last federal or stateregulatory examination.  The bank mustobtain approval from the South Carolina Board of Financial Institutions priorto the payment of any other cash dividends. In addition, under the FDIC Improvement Act, the bank may not pay adividend if, after paying the dividend, the bank would be undercapitalized.

 

**Check 21.**  TheCheck Clearing for the 21st Century Act gives “substitute checks,” such as adigital image of a check and copies made from that image, the same legalstanding as the original paper check. Some of the major provisions include:

 

**·**                 allowing check truncation without makingit mandatory;

 

·                  demanding that every financialinstitution communicate to accountholders in writing a description of itssubstitute check processing program and their rights under the law;

 

·                  legalizing substitutions for andreplacements of paper checks without agreement from consumers;

 

·                  retaining in place the previouslymandated electronic collection and return of checks between financialinstitutions only when individual agreements are in place;

 

·                  requiring that when accountholders requestverification, financial institutions produce the original check (or a copy thataccurately represents the original) and demonstrate that the account debit wasaccurate and valid; and

 

·                  requiring the re-crediting of funds to anindividual’s account on the next business day after a consumer proves that thefinancial institution has erred.

 

***Effectof Governmental Monetary Policies*****.**  Our earnings are affected by domesticeconomic conditions and the monetary and fiscal policies of the United Statesgovernment and its agencies.  The FederalReserve Board’s monetary policies have had, and are likely to continue to have,an important impact on the operating results of commercial banks through itspower to implement national monetary policy in order, among other things, tocurb inflation or combat a recession. The monetary policies of the Federal Reserve Board have major effectsupon the levels of bank loans, investments and deposits through its open marketoperations in United States government securities and through its regulation ofthe discount rate on borrowings of member banks and the reserve requirementsagainst member bank deposits.  It is notpossible to predict the nature or impact of future changes in monetary andfiscal policies.

 

***ProposedLegislation and Regulatory Action*****.**  New regulations and statutes are regularlyproposed that contain wide-ranging proposals for altering the structures,regulations, and competitive relationships of the nation’s financialinstitutions.  We cannot predict whetheror in what form any proposed regulation or statute will be adopted or theextent to which our business may be affected by any new regulation or statute.

 

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### **RISK FACTORS**

### ** **

***Wehave grown rapidly and may not be able to sustain this rate of growth forfuture periods.***

 

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

 

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

 

RobertE. Coffee, Jr., our president and chief executive officer, has extensiveand long-standing ties within our market area and substantial experience withour 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 bematerially and adversely affected.

 

Oursuccess also depends, in part, on our continued ability to attract and retainexperienced management personnel and loan originators.  The loss of the services of several of suchkey personnel could adversely affect our growth strategy and prospects to theextent we are unable to replace such personnel.

 

***The success of our growth strategy dependson our ability to identify and retain individuals with experience andrelationships in the markets in which we intend to expand.***

 

Toexpand our coastal franchise successfully, we must identify and retainexperienced key management members with local expertise and relationships inthese markets.  We expect thatcompetition for qualified management in the markets in which we may expand willbe intense and that there will be a limited number of qualified persons withknowledge of and experience in the community banking industry in these markets.  Even if we identify individuals that webelieve could assist us in establishing a presence in a new market, we may beunable to recruit these individuals away from more established financialinstitutions.  In addition, the processof identifying and recruiting individuals with the combination of skills andattributes required to carry out our strategy requires both management andfinancial resources and is often lengthy. Our inability to identify, recruit, and retain talented personnel tomanage new offices effectively would limit our growth and could materiallyadversely affect our business, financial condition, and results of operations.

 

***Aneconomic downturn, especially one affecting the Charleston, Myrtle Beach andHilton Head metropolitan areas, could reduce our customer base, our level ofdeposits, and demand for financial products such as loans.***

 

Weare in uncertain economic times, including uncertainty with respect tofinancial markets that have been volatile as a result of sub-prime mortgagerelated and other matters.  Our successsignificantly depends upon the growth in population, income levels, depositsand housing starts in our markets, primarily the Charleston, Myrtle Beach andHilton Head metropolitan areas.  If thecommunities in which we operate do not grow or if prevailing economicconditions locally or nationally are unfavorable, our business may notsucceed.  An economic downturn wouldlikely contribute to the deterioration of the credit quality of our loanportfolio and reduce our level of customer deposits, which in turn would hurtour business.  Interest received on loansrepresented approximately 88.5% of our interest income for the year ended December 31,2007.  If an economic downturn occurs inthe economy as a whole, or in the Charleston, Myrtle Beach or Hilton Headmetropolitan markets, borrowers may be less likely to repay their loans asscheduled or at all.  Moreover, the valueof real estate or other collateral that may secure our loans could be adverselyaffected.  Unlike many larger institutions, we are not able to spread the risks ofunfavorable local economic conditions across a large number of diversifiedeconomies and geographic locations.  An economicdownturn could, therefore, result in losses that could materially and adverselyaffect our business.

 

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***Our small- to medium-sized business targetmarkets may have fewer financial resources to weather a downturn in theeconomy.***

 

Wetarget the banking and financial services needs of small- and medium-sizedbusinesses.  These businesses generallyhave fewer financial resources in terms of capital borrowing capacity thanlarger entities.  If general economicconditions negatively impact these businesses in the markets in which weoperate, our business, financial condition, and results of operation may beadversely affected.

 

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

 

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

 

·                  an ongoing review of the quality, mix, and size of our overall loanportfolio;

·                  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, securingthe loans.

 

However,there is no precise method of predicting credit losses, since any estimate ofloan losses is necessarily subjective and the accuracy depends on the outcomeof future events.  In addition, due toour rapid growth over the past several years and our limited operating history,a large portion of the loans in our loan portfolio was originatedrecently.  In general, loans do not beginto show signs of credit deterioration or default until they have beenoutstanding for some period of time, a process referred to as “seasoning.”  As a result, a portfolio of older loans willusually perform more predictably than a newer portfolio.  As of December 31, 2007, we had onlythree loans on nonaccrual status totaling approximately $389,000.  In addition, we have charged-off a total of$334,426 in loans since our inception. Because our loan portfolio is relatively new, the current level ofdelinquencies and defaults may not be representative of the level that willprevail when the portfolio becomes more seasoned, which may be higher thancurrent levels.  If charge-offs in futureperiods increase, we may be required to increase our provision for loan losses,which would decrease our net income and possibly our capital.

 

***Ourdecisions regarding credit risk and reserves for loan losses may materially andadversely affect our business.***

 

Making loans and otherextensions of credit is an essential element of our business.  Although we seek to mitigate risks inherentin lending by adhering to specific underwriting practices, our loans and otherextensions 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 fromuncertainties about the future value of the collateral.

 

While we generallyunderwrite the loans in our portfolio in accordance with our own internalunderwriting guidelines and regulatory supervisory guidelines, in certaincircumstances we have made loans which exceed either our internal underwritingguidelines, supervisory guidelines, or both. As of December 31, 2007, approximately $58.5 million, or 14.9%, ofour loans had loan-to-value ratios that exceeded regulatory supervisoryguidelines, of which eight loans totaling approximately $4.4 million hadloan-to-value ratios of 100% or more.  Inaddition, supervisory limits on commercial loan to value exceptions are set at30% of our bank’s capital.  At December 31,2007, $38.9 million of our commercial loans, or 73.0% of our bank’s capital,exceeded the supervisory loan to value ratio. The number of loans in our portfolio with loan-to-value ratios in excessof supervisory guidelines, our internal guidelines, or both could increase therisk of delinquencies and defaults in our portfolio.

 

 

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***We may have higher loan losses than we haveallowed for in our allowance for loan losses.***

 

Ourloan losses could exceed our allowance for loan losses.  Our average loan size continues to increaseand reliance on our historic allowance for loan losses may not beadequate.  Approximately 88.2% of ourloan portfolio is composed of construction, commercial mortgage and commercialloans.  Repayment of such loans isgenerally considered more subject to market risk than residential mortgageloans.  Industry experience shows that aportion of loans will become delinquent and a portion of loans will requirepartial or entire charge-off.

 

Regardlessof the underwriting criteria utilized, losses may be experienced as a result ofvarious factors beyond our control, including among other things, changes inmarket conditions affecting the value of loan collateral and problems affectingthe credit of our borrowers.

 

***A significant portion of our loan portfoliois secured by real estate, and events that negatively impact the real estatemarket could hurt our business.***

 

A significant portion of our loan portfolio is securedby real estate.  As of December 31,2007, approximately 93.0 % of ourloans had real estate as a primary or secondary component of collateral.  The real estate collateral in each caseprovides an alternate source of repayment in the event of default by theborrower and may deteriorate in value during the time the credit isextended.  A weakening of the real estatemarket in our primary market area could result in an increase in the number ofborrowers who default on their loans and a reduction in the value of thecollateral securing their loans, which in turn could have an adverse effect onour profitability and asset quality.  Ifwe are required to liquidate the collateral securing a loan to satisfy the debtduring a period of reduced real estate values, our earnings and capital couldbe adversely affected.  Acts of nature,including hurricanes, tornados, earthquakes, fires and floods, which may causeuninsured damage and other loss of value to real estate that secures theseloans, may also negatively impact our financial condition.

 

***Alarge percentage of the loans in our portfolio currently include exceptions toour loan policies and supervisory guidelines.***

 

All of the loans that wemake are subject to written loan policies adopted by our board of directors andto supervisory guidelines imposed by our regulators.  Our loan policies are designed to reduce therisks associated with the loans that we make by requiring our loan officers totake certain steps that vary depending on the type and amount of the loan,prior to closing a loan.  These stepsinclude, among other things, making sure the proper liens are documented andperfected on property securing a loan, and requiring proof of adequateinsurance coverage on property securing loans. Loans that do not fully comply with our loan policies are known as“exceptions.”  We categorize exceptionsas policy exceptions, financial statement exceptions and collateralexceptions.  As of December 31,2007, approximately 17.7% of the loans in our portfolio included collateralexceptions to our loan policies, which exceeds the 10% suggested by ourregulators.  As a result of theseexceptions, such loans may have a higher risk of loan loss than the other loansin the portfolio that fully comply with our loan policies.  In addition, we may be subject to regulatoryaction by federal or state banking authorities if they believe the number ofexceptions in our loan portfolio represents an unsafe banking practice.  Although we have taken steps to reduce thenumber of exceptions in our loan portfolio, we may not be successful in furtherreducing and managing the number of exceptions in our loan portfolio.

 

***Changesin interest rates may reduce our profitability.***

 

Our profitability dependsin large part on our net interest income, which is the difference betweeninterest income from interest-earning assets, such as loans and investmentsecurities, and interest expense on interest-bearing liabilities, such asdeposits and other borrowings. Approximately 56.6% of our loans were variable rate loans at December 31,2007, and we were liability sensitive at December 31, 2007.  During 2007, we expect to be liabilitysensitive over the one year horizon, which means that our net interest incomewill generally decrease in higher interest rate environments and rise in lowerinterest rate environments.  Our netinterest income will be adversely affected if market interest rates change suchthat the interest we earn on loans and investments decreases faster than theinterest we pay on deposits and borrowings. Many factors cause changes in interest rates, including governmentalmonetary policies and domestic and international economic and political conditions.  While we intend to manage the effects ofchanges in interest rates by adjusting the terms, maturities, and pricing ofour assets and 

 

 

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liabilities, our effortsmay not be effective and our financial condition and results of operationscould suffer.

 

***Weface strong competition for customers, which could prevent us from obtainingcustomers and may cause us to pay higher interest rates to attract customers****.*

 

The banking business is highly competitive, and weexperience competition in our market from many other financialinstitutions.  We compete with commercialbanks, credit unions, savings institutions, mortgage banking firms, consumerfinance companies, securities brokerage firms, insurance companies, moneymarket funds, and other mutual funds, as well as other super-regional,national, and international financial institutions that operate offices in ourprimary market areas and elsewhere.

 

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

 

***Wemay not be able to compete with our larger competitors for larger customersbecause our lending limits are lower than theirs.***

 

We are limited in theamount we can loan a single borrower by the amount of the bank’s capital.  Our legal lending limit is 15% of the bank’scapital and surplus, or $8.0 million at December 31, 2007.  Our internal lending limit was $5.2 millionat December 31, 2007.  Even thoughour legal lending limit increased after we raised net proceeds of $16.4 millionin a public stock offering in October 2006, it is still significantly lessthan the limit for our larger competitors and may affect our ability to seekrelationships with larger businesses in our market area.

 

***We are subject to extensiveregulation that could limit or restrict our activities.  This regulation is for the protection of thebank’s depositors and not for the investors.***

 

We operate in a highly regulated industry and aresubject to examination, supervision, and comprehensive regulation by the SouthCarolina Board of Financial Institutions, the FDIC, and the Federal ReserveBoard. Our compliance with these regulations is costly and restricts certain ofour activities, including payment of dividends, mergers and acquisitions,investments, loans and interest rates charged, interest rates paid on deposits,and locations of offices.  We must alsomeet regulatory capital requirements.  Ifwe fail to meet these capital and other regulatory requirements, our financialcondition, liquidity, and results of operations would be materially andadversely affected.  Our failure toremain “well capitalized” for regulatory purposes could affect customerconfidence, our ability to grow, our cost of funds and FDIC insurance, ourability to pay dividends on common stock, and our ability to make acquisitions.

 

The laws and regulations applicable to the bankingindustry could change at any time, and we cannot predict the effects of thesechanges on our business and profitability. For example, new legislation or regulation could limit the manner inwhich we may conduct our business, including our ability to obtain financing,attract deposits, and make loans.  Manyof these regulations are intended to protect depositors, the public, and theFDIC, not shareholders.  In addition, theburden imposed by these regulations may place us at a competitive disadvantagecompared to competitors who are less regulated. The laws, regulations, interpretations, and enforcement policies thatapply to us have been subject to significant change in recent years, sometimesretroactively applied, and may change significantly in the future. Our cost ofcompliance could adversely affect our ability to operate profitably. See“Supervision and Regulation.”

 

 

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***Our future growth may require usto raise additional capital in the future, but that capital may not beavailable when it is needed.***

 

We are required by regulatory authorities to maintainadequate levels of capital to support our operations.  We anticipate that our capital levels willsatisfy our regulatory requirements for the foreseeable future.  We may at some point, however, need to raiseadditional capital to support our continued growth.  Our ability to raise additional capital willdepend in part on conditions in the capital markets at that time, which areoutside our control, and our financial performance.  Accordingly, we may be unable to raise additionalcapital, if and when needed, on terms acceptable to us, or at all.  If we cannot raise additional capital whenneeded, our ability to further expand our operations through internal growthand acquisitions could be materially impaired. In addition, if we decide to raise additional equity capital, yourinterest could be diluted.

 

***We will facerisks with respect to future expansion and acquisitions or mergers.***

 

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

 

·                  taking additional time and creating expense associated with identifyingand evaluating potential acquisitions and merger partners;

·                  using inaccurate estimates and judgments to evaluate credit,operations, management, and market risks with respect to the target institutionor assets;

·                  diluting our existing shareholders in an acquisition;

·                  taking additional time and creating expense associated with evaluatingnew markets for expansion, hiring experienced local management, and opening newoffices, as there may be a substantial time lag between these activities beforewe generate sufficient assets and deposits to support the costs of theexpansion;

·                  taking a significant amount of time negotiating a transaction orworking on expansion plans, resulting in management’s attention being divertedfrom the operation of our existing business;

·                  taking time and creating expense integrating the operations andpersonnel 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 thatis poorly received.

 

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

 

***Efforts to comply with Sarbanes-Oxley Act will involve significantexpenditures, and non-compliance with the Sarbanes-Oxley Act may adverselyaffect us.***

 

The Sarbanes-Oxley Act of 2002, and the related rules andregulations promulgated by the Securities and Exchange Commission that are nowapplicable to us, have increased the scope, complexity, and cost of corporategovernance, reporting, and disclosure practices.  We have experienced, and we expect tocontinue to experience, greater compliance costs, including costs related tointernal controls, as a result of the Sarbanes-Oxley Act.  For example, for the year ending December 31,2007, we are required to comply with Section 404 of the Sarbanes-Oxley Actand our management has issued a report on our internal controls over financialreporting.  Our independent registeredpublic accounting firm will be required to provide an attestation with respectto management’s report on our internal controls over financial reporting as of December 31,2008.  We expect the applicability ofthese rules and regulations to us will continue to increase ouraccounting, legal, and other costs, and to make some activities more difficult,time consuming and costly.  In the eventthat we are unable to maintain or achieve compliance with the Sarbanes-OxleyAct and related rules, we may be adversely affected.

 

We have evaluated our internal control systems in orderto allow management to report on our internal control over financial reporting,as required by Section 404 of the Sarbanes-Oxley Act.  In the future, if we or our independentauditors were to identify significant deficiencies or material weaknesses inour internal control over financial reporting that we could not remediate in atimely manner, or if we are unable to receive a positive 

 

 

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attestationfrom our independent registered public accounting firm, the trading price ofour common stock could decline, our ability to obtain any necessary equity ordebt financing could suffer, and our common stock could ultimately be delistedfrom the NASDAQ Global Market. In this event, the liquidity of our common stockwould be severely limited and the market price of our common stock would likelydecline significantly.

 

In addition, the rules adoptedas a result of the Sarbanes-Oxley Act could make it more difficult or morecostly for us to obtain certain types of insurance, including directors’ andofficers’ liability insurance, which could make it more difficult for us toattract and retain qualified persons to serve on our board of directors or asexecutive officers.

 

***Weare currently undertaking a number of construction projects which could divertthe time and attention of our senior management***.

 

                We are currently engaged in two simultaneousconstruction projects relating to the improvement of our current facilities andthe addition of new facilities expected to last over the next 9 months.  These projects include the construction oftwo traditional stand-alone branches, one of which will replace a currentstore-front branch and one represents a new banking location.  We rely on our chief administration officer tooversee these construction projects. There is a risk that such projects may take longer or result in greaterexpenses than we intend.  In addition,the time required to oversee such projects could result in management’sattention being materially diverted from the operations of our business.  This could result in an adverse effect on ournear-term results of operations.

 

***Giventhe geographic concentration of our operations, we could be significantlyaffected by any natural disaster that affects coastal South Carolina***.

 

                Our operations are concentrated in and our loanportfolio consists almost entirely of loans to persons and businesses locatedin coastal South Carolina.  Similarly,the collateral for many of our loans consists of real and personal propertylocated in this same geographic area. This area is susceptible to natural disasters which could causeextensive damage to the general region. Specifically, disaster conditions resulting from any hurricane that hitsin this area would adversely affect the local economies and real estatemarkets, which could negatively impact our business.  Adverse economic conditions resulting fromsuch a disaster could also negatively impact the ability of our customers torepay their loans and could affect the value of the collateral securing theseloans. Furthermore, damage resulting from any natural disaster could alsoresult in continued economic uncertainty that could negatively impactbusinesses in those areas.  Consequently,our ability to continue to originate loans may be impaired by adverse changesin local and regional economic conditions in this area following any naturaldisaster.

 

 

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**Item2.  Description of Property.**

 

Ourmain office facility is located at 875 Lowcountry Boulevard in Mount Pleasant,South Carolina.  The building is a fullservice banking facility with two drive-through banking stations and anATM.  The lease has an initial term of 10years from March 24, 2004 with options for two additional five-yearrenewal periods.  We paid approximately$191,000 in rent this year.  Our annualrent payments increased in 2007 and will subsequently increase in accordancewith a formula based on the Consumer Price Index.

 

OnNovember 30, 2005, the bank purchased property for $1.6 million, where weconstructed a building for our permanent Summerville full service bankingfacility. This property is located at 1510 Old Trolley Road in Summerville,South Carolina, which opened on April 23, 2007.

 

OnJuly 8, 2005, the bank purchased property, including a 4,340 square footbuilding, in the Park West section of Mount Pleasant for $1.6 million.  We opened as a full service banking facilityat this location on May 14, 2007.

 

OnJuly 1, 2007, the bank entered into a lease agreement for the permanentbranch location located at 1312 Professional Drive in Myrtle Beach, SouthCarolina. We have a term of 20 years with an option to extend the term for twosuccessive periods for an additional 10 years each. We pay approximately $12,500per month in rent.

 

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

 

On December 22, 2005, thebank entered into a land lease for a West Ashley location with the intent ofbuilding a branch located at 946 Orleans Road in Charleston, South Carolina,which opened on July 2, 2007. The lease has an initial 20-year term andmay be extended at the bank’s option for four additional five-year terms.  The lease requires monthly payments of $5,833for the first five years, which increases 12% every fifth year thereafter.

 

On September 28,2006, the bank entered into a lease for office space for its Bluffton loanproduction office. The lease has an initial one-year term and may be extendedat the bank’s option for an additional 12 month term.  The lease requires monthly payments of $3,000per month.  In addition, the Bank leasedoffice space for the permanent Bluffton branch location. The lease wasoriginated on June 13, 2007 and has a 20-year term with four five-yearrenewal options.

 

On March 20, 2007,the bank also leased office space for its future Murrells Inlet branchlocation. The lease has a 20-year term and does not require monthly paymentsuntil July 1, 2008.

 

On April 24, 2007,the bank entered into a lease for office space located at 830 LowcountryBoulevard, Mount Pleasant, SC for executive offices. The lease has a 20-yearterm with four five-year renewal options. The lease requires monthly paymentsof $9,167 for the first five years, increased 71⁄2% every fifth year thereafter.

 

We believe that all ofour properties are adequately covered by insurance.

 

**Item3.  Legal Proceedings.**

 

Neitherthe company nor the bank is a party to, nor is any of their property thesubject of, any material pending legal proceedings incidental to the businessof the company or the bank.

 

**Item4.  Submission of Matters to a Vote ofSecurity Holders.**

 

No matter was submittedto a vote of security holders during the fourth quarter of the fiscal yearcovered by this report.

 

 

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**PART II**

 

**Item5.  Market for Common Equity and RelatedStockholder Matters and Small Business Issuer Purchases of Equity Securities.**

 

In connection with ourpublic offering in October 2006, our common stock was approved for listingon the NASDAQ Global Market under the symbol “TDBK.”  Prior to October 2006, our common stockwas quoted on the OTC Bulletin Board under the symbol “TDBK.OB.”  As of December 31, 2007, we hadapproximately 531 shareholders of record.

 

The following table showsthe reported high and low closing prices for shares of our common stockpublished by NASDAQ beginning with the fourth quarter of 2005.  For the prior periods indicated, the tableshows the reported high and low bid information on the OTC Bulletin Board.  The OTC Bulletin Board prices are quotations,which reflect inter-dealer prices, without retail mark-up, mark-down orcommission, and may not represent actual transactions.  Prior to our listing on NASDAQ, there waslimited trading, at widely varying prices, and trading had not created anactive market for our common stock. Thus, the prices at which trades occurredmay not be representative of the actual value of our common stock. On a numberof days during this period, there were no trades at all in our common stock.

 

| ** **     | ** ** | **High**   | ** ** | **Low**    | ** ** |
|----------------|------------|------------|------------|------------|------------|
| **2007**       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Fourth Quarter |       | $          | 13.14      |       | $          | 9.50 |   |
| Third Quarter  |       | 13.55      |       | 12.77      |       |
| Second Quarter |       | 14.30      |       | 13.11      |       |
| First Quarter  |       | 15.39      |       | 14.15      |       |
|           |       |       |       |       |       |
| **2006**       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Fourth Quarter |       | $          | 18.00      |       | $          | 14.51 |   |
| Third Quarter  |       | 18.35      |       | 17.50      |       |
| Second Quarter |       | 20.00      |       | 12.50      |       |
| First Quarter  |       | 12.75      |       | 9.75       |       |
| ** **     | ** ** | ** ** | ** ** | ** ** | ** ** |
| **2005**       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Fourth Quarter |       | $          | 9.98       |       | $          | 9.98 |   |

 

Wehave not declared or paid any cash dividends on our common stock since ourinception.  For the foreseeable future wedo not intend to declare cash dividends. We intend to retain earnings to grow our business and strengthen ourcapital base.  Our ability to paydividends depends on the ability of our subsidiary, Tidelands Bank, to paydividends to us.  As a South Carolinastate bank, Tidelands Bank may only pay dividends out of its net profits, afterdeducting expenses, including losses and bad debts.  In addition, the bank is prohibited fromdeclaring a dividend on its shares of common stock until its surplus equals itsstated capital.  At December 31,2007, the bank was no longer prohibited from declaring a dividend.

 

 

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**Item 6.  Management’s Discussion and Analysis or Planof Operation.**

 

*The following discussion reviewsour results of operations and assesses our financial condition.  You should read the following discussion andanalysis in conjunction with our consolidated financial statements and therelated notes included elsewhere in this report.  Our discussion and analysis for the yearsended December 31, 2007, 2006 and 2005 is based on our audited financialstatements for such periods.  Thefollowing discussion describes our results of operations for the year ended December 31,2007 as compared to December 31, 2006 and 2005, and also analyzes ourfinancial condition as of December 31, 2007 as compared to December 31,2006.*

 

**Overview**

 

We were incorporated in March 2002to organize and serve as the holding company for Tidelands Bank.  Since we opened our bank in October 2003,we have grown total assets to $512.3 million, loans to $391.3 million, anddeposits to $388.2 million.

 

Like most community banks, we derive the majority ofour income from interest received on our loans and investments.  Our primary source of funds for making theseloans and investments is our deposits, on most of which we pay interest.  Consequently, one of the key measures of oursuccess is our amount of net interest income, or the difference between theincome on our interest-earning assets, such as loans and investments, and theexpense on our interest-bearing liabilities, such as deposits andborrowings.  Another key measure is thespread between the yield we earn on these interest-earning assets and the ratewe pay on our interest-bearing liabilities, which is called our net interestspread.

 

There are risks inherent in all loans, so we maintainan allowance for loan losses to absorb probable losses on existing loans thatmay become uncollectible.  We maintainthis allowance by charging a provision for loan losses against our operatingearnings for each period.  We haveincluded a detailed discussion of this process, as well as several tables describingour allowance for loan losses.

 

In addition to earning interest on our loans andinvestments, we earn income through fees and other charges to ourcustomers.  We have also included adiscussion of the various components of this noninterest income, as well as ofour noninterest expense.

 

                Thefollowing discussion and analysis also identifies significant factors that haveaffected our financial position and operating results during the periodsincluded in the accompanying financial statements.  We encourage you to read this discussion andanalysis in conjunction with our financial statements and the other statisticalinformation included in this report.

 

#### **Critical AccountingPolicies**

#### ** **

                We have adopted variousaccounting policies that govern the application of accounting principlesgenerally accepted in the United States and with general practices within thebanking industry in the preparation of our financial statements.  Our significant accounting policies are describedin the footnotes to our audited consolidated financial statements as of December 31,2007.

 

                Certain accounting policiesinvolve significant judgments and assumptions by us that have a material impacton the carrying value of certain assets and liabilities.  We consider these accounting policies to becritical accounting policies.  Thejudgment and assumptions we use are based on historical experience and otherfactors, which we believe to be reasonable under the circumstances.  Because of the nature of the judgment andassumptions we make, actual results could differ from these judgments andestimates that could have a material impact on the carrying values of ourassets and liabilities and our results of operations.

 

                We believe the allowance forloan losses is the critical accounting policy that requires the mostsignificant judgment and estimates used in preparation of our consolidatedfinancial statements.  Some of themore critical judgments supporting theamount of our allowance for loan losses include judgments about the credit worthinessof borrowers, the estimated value of the underlying collateral, the assumptionsabout cash flow, determination of loss factors for estimating credit losses,the impact of current events, and conditions and other factors impacting thelevel 

 

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ofprobable inherent losses.  Underdifferent conditions or using different assumptions, the actual amount ofcredit losses incurred by us may be different from management’s estimatesprovided in our consolidated financial statements.  Refer to the portion of this discussion thataddresses our allowance for loan losses for a more complete discussion of ourprocesses and methodology for determining our allowance for loan losses.

 

**Results of Operations**

 

***Income Statement Review***

 

*Summary*

 

                Our net income was approximately$413,000, $1.5 million and $40,000 for the years ended December 31, 2007,2006 and 2005, respectively. Net income before income tax expense was $688,000,$2.4 million and $60,000 for the years ended December 31, 2007, 2006 and2005, respectively. In comparing year-ends December 31, 2007 and 2006, the$1.7 million decrease in net income before tax expense resulted from increasesof $2.5 million in net interest income and $568,000 in other income offset by a$5.0 million increase in noninterest expense. Noninterest expense increased in 2007 as a result of increases insalaries and benefits, occupancy costs, marketing and other expenses that arelargely associated with our growth, as well as increased professional fees,including costs for implementation of Sarbanes-Oxley related requirements.  Noninterest income increased from $787,000for the year ended December 31, 2006 to $1.4 million for the year ended December 31,2007.  For the years ended December 31,2006 and 2005, the $2.3 million increase in net income before tax expenseresulted from increases of $4.7 million in net interest income and $312,000 inother income partially offset by a $3.1 million increase in noninterestexpense. Noninterest income increased from $475,000 for the year ended December 31,2005 to $787,000 for the year ended December 31, 2006.  We recorded provisions for loan losses of$1.0 million, $1.2 million and $1.5 million for the years ended December 31,2007, 2006 and 2005, respectively.

 

*Net Interest Income*

 

Our level of net interestincome is determined by the level of earning assets and the management of ournet interest margin.  The growth in ourloan portfolio is the primary driver of the increase in net interest income.During the years ended December 31, 2007 and 2006, our loan portfolioincreased $118.1 million and $93.5 million, respectively.  We anticipate the growth in loans willcontinue to drive the growth in assets and the growth in net interest income.Since loans typically provide higher interest yields than other types ofinterest-earning assets, we invest a substantial percentage of our earningassets in our loan portfolio.   However,no assurance can be given that we will be able to continue to increase loans atthe same growth rate as we have experienced in the past.

 

Our decision to grow the loan portfolio at the currentpace has created the need for a higher level of capital and the need toincrease deposits and borrowings.  Thisloan growth strategy also resulted in a significant portion of our assets beingin higher earning loans than in lower yielding investments.  At December 31, 2007, loans represented76.4% of total assets, while securities and federal funds sold represented18.0% of total assets.  While we plan tocontinue our focus on increasing the loan portfolio, we also anticipateproportionately increasing the size of the investment portfolio.

 

The current interest rate environment, which isrelatively low by historical measures, has allowed us to obtain short-termborrowings and wholesale certificates of deposit at rates that were typicallylower than certificate of deposit rates being offered in our local market. Thisfunding strategy allowed us to continue to operate in a growing branch environment,which in turn allowed us to focus on growing our loan portfolio.  At December 31, 2007, retail depositsrepresented $131.2 million, or 28.0% of total funding, which includes totaldeposits plus securities sold underagreements to repurchase and other borrowings. Commercial deposits represented $30.2 million, or 6.4% of total funding,borrowings represented $80.7 million, or 17.2% of total funding, and wholesaleout-of-market deposits represented $226.8 million, or 48.4% of total funding.

 

We converted two of our loan production offices into temporary fullservice banking facilities, one in the second quarter of 2005 in Summerville,South Carolina and the other in the fourth quarter of 2005 in Myrtle Beach,South Carolina.   On April 23, 2007,we opened the permanent full service banking facility in our Summervillelocation.  We opened the permanentfacility for our full service branch in Myrtle Beach on June 20, 2007. In 

 

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addition, weopened a new full service branch office in the Park West area of Mount Pleasanton May 14, 2007 and converted the loan production office in the WestAshley area of Charleston to a full service branch office on July 2, 2007.We also opened a loan production office in Bluffton, the Hilton Head area ofSouth Carolina, in October 2006. The Bluffton loan production office wasconverted into a temporary full service banking facility in September 2007and we plan to operate out of this temporary facility until construction on thepermanent facility is complete. We plan to focus our efforts at thesebranch locations on obtaining lower cost deposits that are less affected byrising rates.

 

We plan to continue to offer aggressive rates oninvestment checking and money market accounts. Based on prior experience, we anticipate the majority of these funds tobe retained as core deposits.  Our goalis to maintain a higher percentage of assets being funded by “in market” retaildeposits and to increase the percentage of low-cost transaction accounts tototal deposits.  No assurance can begiven that these objectives will be achieved. Although we anticipate that these additional retail deposit offices willassist us in meeting these objectives, we also anticipate that the currentdeposit strategies and the opening of new offices had a dampening effect onearnings.  However, we believe that overtime these two strategies will provide us with additional customers in our newmarkets and will provide a lower alternative cost of funding.

 

In addition to the growth in both assets andliabilities, and the timing of repricing of our assets and liabilities, netinterest income is also affected by the ratio of interest-earning assets tointerest-bearing liabilities and the changes in interest rates earned on ourassets and interest rates paid on our liabilities.  Our net interest income for the year ended December 31,2007 increased because we had more interest-earning assets thaninterest-bearing liabilities.  For theyears ended December 31, 2007, 2006 and 2005, average interest-earningassets exceeded average interest-bearing liabilities by $27.2 million, $27.6million, and $22.0 million, respectively.

 

The impact of the Federal Reserve’s recent interestrate decreases will result in a decrease in both the yields on our variablerate assets and the rates that we pay for our short-term deposits andborrowings.  The net interest spread andnet interest margin decreased during the year ended December 31, 2007 as aresult of the bank having more interest-earning liabilities thaninterest-bearing assets that repriced as market rates began to increase overthe period.  Our net interest margins forthe years ended December 31, 2007, 2006 and 2005 were 3.05%, 3.63% and3.75%, respectively.  During the year endedDecember 31, 2006, the net interest spread and net interest margindecreased as a result of the bank having more interest-bearing liabilities thaninterest-earning assets that repriced as market rates increased over theperiod. We anticipate that the recent decreases in short-term rates will resultin a decrease in loan yields, while lower rates on our interest deposits andborrowings will also result in lower cost of funds to us.

 

We have included a number of unaudited tables to assistin our description of various measures of our financial performance.  For example, the “Average Balances” tablesshow the average balance of each category of our assets and liabilities as wellas the yield we earned or the rate we paid with respect to each category during2007, 2006 and 2005.  Our loans typicallyprovide higher interest yields than do other types of interest-earning assets,which is why we direct a substantial percentage of our earning assets into ourloan portfolio.  Similarly, the “Rate/VolumeAnalysis” tables help demonstrate the effect of changing interest rates andchanging volume of assets and liabilities on our financial condition during theperiods shown.  We also track thesensitivity of our various categories of assets and liabilities to changes ininterest rates, and we have included tables to illustrate our interest ratesensitivity with respect to interest-earning accounts and interest-bearingaccounts.  Finally, we haveincluded various tables that providedetail about our investment securities, our loans, our deposits and otherborrowings.

 

27

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*Years Ended December 31, 2007, 2006 and 2005*

 

The following table sets forth information related toour average balance sheet, average yields on assets, and average costs ofliabilities.  We derived these yields bydividing income or expense by the average balance of the corresponding assetsor liabilities.  We derived average balancesfrom the daily balances throughout the periods indicated.  During the three years ended December 31,2007, 2006 and 2005, we had no securities purchased with agreements toresell.  All investments were owned at anoriginal maturity of over one year.

** **
| ** **                                       | ** **   | **Average Balances, Income and  Expenses, and Rates** | ** **   |
|--------------------------------------------------|--------------|-------------------------------------------------------|--------------|
| ** **                                       | ** **   | ** **                                            | ** **   | ** ** | ** ** | ** ** | ** ** |
| ** **                                       | ** **   | ** **                                            | ** **   | ** ** | ** ** | ** ** | ** ** |
| ** **                                       | ** **   | **For the  Year Ended  December 31, 2007**       | ** **   | **For the  Year Ended  December 31, 2006** | ** ** | **For the  Year Ended  December 31, 2005** | ** ** |
| ** **                                       | ** **   | **Average  Balance**                                  | ** **   | **Income/  Expense** | ** ** | **Yield/  Rate** | ** ** | **Average  Balance** | ** ** | **Income/  Expense** | ** ** | **Yield/  Rate** | ** ** | **Average  Balance** | ** ** | **Income/  Expense** | ** ** | **Yield/  Rate** | ** ** |
| ** **                                       | *** *** | ***(dollars  in thousands)***                         | *** *** |
| Earning assets:                                  |         |                                                  |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest bearing  balances                       |         | $                                                     | 283          |   | $ | 16 |   | 5.74 | % | $ | 51 |   | $ | 3 |   | 5.15 | % | $ | 28 |   | $ | 1 |   | 3.57 | % |
| Federal funds  sold                              |         | 13,573                                                |         | 702 |   | 5.17 | % | 6,103 |   | 323 |   | 5.29 | % | 6,416 |   | 215 |   | 3.36 | % |
| Taxable  investment securities                   |         | 42,885                                                |         | 2,463 |   | 5.74 | % | 24,483 |   | 1,307 |   | 5.34 | % | 13,333 |   | 632 |   | 4.74 | % |
| Non-taxable  investment securities.              |         | 11,035                                                |         | 440 |   | 3.98 | % | 180 |   | 7 |   | 3.79 | % | — |   | — |   | — | % |
| Loans receivable                                 |         | 339,774                                               |         | 27,805 |   | 8.18 | % | 242,349 |   | 20,130 |   | 8.31 | % | 118,531 |   | 8,383 |   | 7.07 | % |
| Total earning assets                             |         | 407,550                                               |         | 31,426 |   | 7.71 | % | 273,166 |   | 21,770 |   | 7.97 | % | 138,308 |   | 9,231 |   | 6.67 | % |
|                                             |         |                                                  |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Nonearning assets:                               |         |                                                  |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and due from  banks                         |         | 1,577                                                 |         |   |   |   |   | 2,031 |   |   |   |   |   | 1,581 |   |   |   |   |   |
| Mortgage loans  held for sale                    |         | 1,640                                                 |         |   |   |   |   | 1,323 |   |   |   |   |   | 782 |   |   |   |   |   |
| Premises and  equipment, net                     |         | 14,974                                                |         |   |   |   |   | 6,453 |   |   |   |   |   | 2,221 |   |   |   |   |   |
| Other assets                                     |         | 12,256                                                |         |   |   |   |   | 4,353 |   |   |   |   |   | 1,824 |   |   |   |   |   |
| Allowance for  loan losses                       |         | (4,117                                                | )            |   |   |   |   | (3,032 | ) |   |   |   |   | (1,438 | ) |   |   |   |   |
| Total nonearning assets                          |         | 26,330                                                |         |   |   |   |   | 11,128 |   |   |   |   |   | 4,970 |   |   |   |   |   |
| Total assets                                     |         | $                                                     | 433,880      |   |   |   |   |   | $ | 284,294 |   |   |   |   |   | $ | 143,278 |   |   |   |   |   |
|                                             |         |                                                  |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                    |         |                                                  |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest bearing  transaction accounts           |         | $                                                     | 6,718        |   | 240 |   | 3.58 | % | $ | 3,697 |   | 115 |   | 3.11 | % | $ | 3,285 |   | 41 |   | 1.26 | % |
| Savings &  money market                 |         | 186,732                                               |         | 9,081 |   | 4.86 | % | 133,311 |   | 6,228 |   | 4.67 | % | 69,212 |   | 2,504 |   | 3.62 | % |
| Time deposits  less than $100,000                |         | 131,130                                               |         | 6,691 |   | 5.10 | % | 73,897 |   | 3,616 |   | 4.89 | % | 19,430 |   | 652 |   | 3.35 | % |
| Time deposits  greater than $100,000             |         | 10,418                                                |         | 562 |   | 5.39 | % | 10,531 |   | 487 |   | 4.62 | % | 16,867 |   | 560 |   | 3.32 | % |
| Junior  subordinated debentures                  |         | 8,248                                                 |         | 561 |   | 6.80 | % | 7,073 |   | 470 |   | 6.65 | % | — |   | — |   | — | % |
| Advances from  FHLB                              |         | 20,575                                                |         | 1,012 |   | 4.92 | % | 7,847 |   | 423 |   | 5.38 | % | — |   | — |   | — | % |
| Securities sold  under repurchase agreement      |         | 14,828                                                |         | 736 |   | 4.96 | % | 7,804 |   | 424 |   | 5.44 | % | 6,500 |   | 236 |   | 3.62 | % |
| Federal funds  purchased                         |         | 856                                                   |         | 47 |   | 5.50 | % | 540 |   | 28 |   | 5.14 | % | 80 |   | 3 |   | 3.41 | % |
| ESOP borrowings                                  |         | 854                                                   |         | 60 |   | 7.02 | % | — |   | — |   | — | % | — |   | — |   | — | % |
| Other borrowings                                 |         | —                                                |         | — |   | — | % | 834 |   | 57 |   | 6.85 | % | 955 |   | 55 |   | 5.78 | % |
| Total interest-bearing liabilities               |         | 380,359                                               |         | 18,990 |   | 4.99 | % | 245,534 |   | 11,848 |   | 4.83 | % | 116,329 |   | 4,051 |   | 3.48 | % |
|                                             |         |                                                  |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Noninterest-bearing liabilities:                 |         |                                                  |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                  |         | 10,550                                                |         |   |   |   |   | 9,693 |   |   |   |   |   | 6,992 |   |   |   |   |   |
| Other liabilities                                |         | 1,710                                                 |         |   |   |   |   | 1,395 |   |   |   |   |   | 601 |   |   |   |   |   |
| Shareholders’  equity                       |         | 41,261                                                |         |   |   |   |   | 27,672 |   |   |   |   |   | 19,356 |   |   |   |   |   |
|                                             |         |                                                  |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total liabilities  and shareholders’ equity |         | $                                                     | 433,880      |   |   |   |   |   | $ | 284,294 |   |   |   |   |   | $ | 143,278 |   |   |   |   |   |
| Net interest income                              |         |                                                  |         | $ | 12,436 |   |   |   |   |   | $ | 9,922 |   |   |   |   |   | $ | 5,180 |   |   |   |
| Net interest spread                              |         |                                                  |         |   |   | 2.72 | % |   |   |   |   | 3.14 | % |   |   |   |   | 3.19 | % |
| Net interest margin                              |         |                                                  |         |   |   | 3.05 | % |   |   |   |   | 3.63 | % |   |   |   |   | 3.75 | % |

----

(1) Includes nonaccruing loans

28

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Our net interest spread was 2.72%, 3.14% and 3.19% forthe years ended December 31, 2007, 2006 and 2005, respectively.  The net interest spread is the differencebetween the yield we earn on our interest-earning assets and the rate we pay onour interest-bearing liabilities.

 

The net interest margin is calculated as net interestincome divided by average interest-earning assets.  Our net interest margin for the years ended December 31,2007, 2006 and 2005 was 3.05%, 3.63% and 3.75 %, respectively. During 2007,interest-earning assets averaged $407.6 million, compared to $273.2 million in2006 and $138.3 million in 2005. During the same periods, averageinterest-bearing liabilities were $380.4 million, $245.5 million, and $116.3million, respectively.

 

The net interest spread and net interest margindecreased during the year ended December 31, 2007 as a result of the bankhaving more interest-earning liabilities than interest-bearing assets thatrepriced as market rates changed over the period and the bank’s reliance onhigher rate wholesale funding sources. The net interest spread and net interest margin also decreased duringthe year ended December 31, 2006 as a result of the bank having moreinterest-bearing liabilities than interest-earning assets that repriced asmarket rates increased over the period.

 

Net interest income, the largest component of ourincome, was $12.4 million, $9.9 million and $5.2 million for the years ended December 31,2007, 2006 and 2005, respectively.  Thesignificant increase in 2007 and 2006 resulted from higher levels of bothaverage earning assets and interest-bearing liabilities, rather than from anincrease in the net interest spread.

 

The $2.5 million increase in net interest income forthe year ended December 31, 2007 compared to the same period in 2006resulted from a $9.7 million increase in interest income offset by a $7.2million increase in interest expense. The $4.7 million increase in net interest income for the year ended December 31,2006 compared to the same period in 2005 resulted from a $12.5 million increasein interest income offset by a $7.8 million increase in interest expense.

 

Interestincome for the year ended December 31, 2007 was $31.4 million, consistingprimarily of $27.8 million on loans, $2.9 million on investments and interestbearing balances, and $702,000 on federal funds sold.  Interest income for the year ended December 31,2006 was $21.8 million, consisting primarily of $20.1 million on loans, $1.3million on investments and interest bearing balances, and $323,000 on federalfunds sold.  Interest income for the yearended December 31, 2005 was $9.2 million, consisting of $8.4 million onloans, $632,000 on investments and $215,000 on federal funds sold.  Interest and fees on loans represented 88.5%,92.5% and 90.8% of total interest income for the years ended December 31,2007, 2006 and 2005, respectively. Meanwhile, income from investments, federalfunds sold and interest bearing balances represented 11.5%, 7.5% and 9.2% oftotal interest income for the years ended December 31, 2007, 2006 and2005, respectively.  The high percentageof interest income from loans related to our strategy to maintain a significantportion of our assets in higher earning loans compared to lower yielding investments.  Average loans represented 83.4%, 88.7% and85.7% of average interest-earning assets for the years ended December 31,2007, 2006 and 2005, respectively.

 

Interest expense for the year ended December 31,2007 was approximately $19.0 million, consisting primarily of $16.6 millionrelated to deposits, $736,000 related to securities sold under repurchaseagreements, $107,000 federal funds purchased and other borrowings, $561,000related to junior subordinated debentures and $1.0 million related to FHLBadvances. Interest expense for the year ended December 31, 2006 wasapproximately $11.8 million, consisting primarily of $10.4 million related todeposits, $424,000 related to securities sold under repurchase agreements,$85,000 federal funds purchased and other borrowings, $470,000 related tojunior subordinated debentures and $423,000 related to FHLB advances. Interestexpense for the year ended December 31, 2005 was approximately $4.1million, consisting of $3.8 million related to deposits, $236,000 related tosecurities sold under repurchase agreements and $58,000 federal funds purchasedand other borrowings.   Interest expenseon deposits for the years ended December 31, 2007, 2006 and 2005represented87.3%, 88.2% and 92.8%respectively, of total interest expense. Meanwhile, interest expense onborrowings represented 12.7%, 11.8% and 7.2% of total interest expense at December 31,2007, 2006 and 2005, respectively. During the year ended December 31,2007, average interest-bearing liabilities were higher by $134.8 million thanfor the same period in 2006, while other borrowings and federal funds purchasedaveraged $336,000 higher, FHLB advances averaged $12.7 million higher, juniorsubordinated debentures averaged $1.2 million higher and securities sold underrepurchase agreement

 

29

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averaged$7.0 million higher than for the same period ended December 31, 2006.  During the year ended December 31, 2006,average interest-bearing liabilities were higher by $129.2 million than for thesame period in 2005, while other borrowings and federal funds purchasedaveraged $339,000 million higher, FHLB advances averaged $7.8 million higher,junior subordinated debentures averaged $7.1 million higher and securities soldunder repurchase agreement averaged $1.3 million higher than for the sameperiod ended December 31, 2005.

 

*Rate/Volume Analysis*

 

Net interest income can be analyzed in terms of theimpact of changing interest rates and changing volume.  The following tables set forth the effectwhich the varying levels of interest-earning assets and interest-bearingliabilities and the applicable rates have had on changes in net interest incomefor the periods presented.

 
| ** **                                   | ** **   | **Year Ended  December 31, 2007 vs. December 31, 2006** | ** **   | **Year Ended  December 31, 2006 vs. December 31, 2005** | ** ** |
|----------------------------------------------|--------------|-------------------------------------------------------------------|--------------|-------------------------------------------------------------------|------------|
| ** **                                   | ** **   | **Increase (Decrease) Due to**                                    | ** **   | **Increase (Decrease) Due to**                                    | ** ** |
| ** **                                   | ** **   | **Volume**                                                        | ** **   | **Rate**                                                          | ** ** | **Rate/  Volume** | ** ** | **Total** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **Rate/  Volume** | ** ** | **Total** | ** ** |
| *** ***                                 | *** *** | **(in thousands)**                                                | *** *** |
| Interest income                              |         |                                                              |         |                                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans                                        |         | $                                                                 | 8,093        |                                                              | $          | (298 | ) | $ | (120 | ) | $ | 7,675 |   | $ | 8,756 |   | $ | 1,463 |   | $ | 1,528 |   | $ | 11,747 |   |
| Taxable  investment securities               |         | 982                                                               |         | 100                                                               |       | 74 |   | 1,156 |   | 529 |   | 80 |   | 66 |   | 675 |   |
| Non-taxable  investment securities           |         | 412                                                               |         | —                                                            |       | 21 |   | 433 |   | — |   | — |   | 7 |   | 7 |   |
| Federal funds  sold                          |         | 395                                                               |         | (8                                                                | )          | (8 | ) | 379 |   | (10 | ) | 124 |   | (6 | ) | 108 |   |
| Interest bearing  balances                   |         | 12                                                                |         | —                                                            |       | 1 |   | 13 |   | 1 |   | — |   | 1 |   | 2 |   |
| Total interest  income                       |         | 9,894                                                             |         | (206                                                              | )          | (32 | ) | 9,656 |   | 9,276 |   | 1,667 |   | 1,596 |   | 12,539 |   |
|                                         |         |                                                              |         |                                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest expense                             |         |                                                              |         |                                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits                                     |         | 5,357                                                             |         | 510                                                               |       | 261 |   | 6,128 |   | 3,890 |   | 1,375 |   | 1,423 |   | 6,688 |   |
| Junior subordinated  debentures              |         | 78                                                                |         | 11                                                                |       | 2 |   | 91 |   | — |   | — |   | 470 |   | 470 |   |
| Advances from  FHLB                          |         | 685                                                               |         | (36                                                               | )          | (59 | ) | 590 |   | — |   | — |   | 423 |   | 423 |   |
| Securities sold  under repurchase agreements |         | 382                                                               |         | (37                                                               | )          | (33 | ) | 312 |   | 47 |   | 118 |   | 24 |   | 189 |   |
| Federal funds  purchased                     |         | 17                                                                |         | —                                                            |       | 1 |   | 18 |   | 16 |   | 1 |   | 8 |   | 25 |   |
| ESOP borrowings                              |         | —                                                            |         | —                                                            |       | 60 |   | 60 |   | — |   | — |   | — |   | — |   |
| Other borrowings                             |         | (57                                                               | )            | (57                                                               | )          | 57 |   | (57 | ) | (7 | ) | 10 |   | (1 | ) | 2 |   |
| Total interest  expense                      |         | 6,462                                                             |         | 391                                                               |       | 289 |   | 7,142 |   | 3,946 |   | 1,504 |   | 2,347 |   | 7,797 |   |
|                                         |         |                                                              |         |                                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest income                          |         | $                                                                 | 3,432        |                                                              | $          | (597 | ) | $ | (321 | ) | $ | 2,514 |   | $ | 5,330 |   | $ | 163 |   | $ | (751 | ) | $ | 4,742 |   |

 

*Provision for Loan Losses*

 

                Wehave established an allowance for loan losses through a provision for loanlosses charged as an expense on our statement of operations.  We review our loan portfolio periodically toevaluate our outstanding loans and to measure both the performance of theportfolio and the adequacy of the allowance for loan losses.  Please see the discussion below under “BalanceSheet Review - Provision and Allowance for Loan Losses” for a description ofthe factors we consider in determining the amount of the provision we expenseeach period to maintain this allowance.

 

Includedin the statement of operations for the years ended December 31, 2007, 2006and 2005 is a noncash expense related to the provision for loan losses ofapproximately $1.0 million, $1.2 million and $1.5 million, respectively.   The increases in the allowance relates toour decision to increase the allowance in response to the $118.1 million, $93.5million and $124.4 million growth in loans for the years ended December 31,2007, 2006 and 2005, respectively.  Theallowance for loan losses was approximately $4.2 million, $3.5 million and $2.2million as of December 31, 2007, 2006 and 2005, respectively.  The allowance for loan losses as a percentageof gross loans was 1.06% at December 31, 2007, 1.27% at December 31,2006 and 1.25% at December 31, 2005. At December 31, 2007, we had three nonperforming loans totalingapproximately $389,000.  Net charge offsamounted to approximately $334,000 for the year ended December 31,2007.  We had two nonperforming loanstotaling approximately $2.0 million at December 31, 2006.

 

30

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*NoninterestIncome*

 

*               *The following table sets forthinformation related to our noninterest income:

 

| ** **                                   | ** **   | **Years Ended December 31,** | ** **   |
|----------------------------------------------|--------------|-----------------------------------|--------------|
| ** **                                   | ** **   | **2007**                          | ** **   | **2006** | ** ** | **2005** | ** ** |
| *** ***                                 | *** *** | **(in thousands)**                | *** *** |
| Service fees on deposit accounts             |         | $                                 | 35           |   | $ | 24 |   | $ | 13 |   |
| Residential mortgage origination fees        |         | 651                               |         | 573 |   | 337 |   |
| Origination income on mortgage loans sold    |         | 113                               |         | 91 |   | 62 |   |
| Gain (loss) on sale of investment securities |         | 38                                |         | (137 | ) | — |   |
| Gain on sale of property and equipment       |         | 10                                |         | 14 |   | — |   |
| Other service fees and commissions           |         | 193                               |         | 144 |   | 55 |   |
| Bank owned life insurance                    |         | 290                               |         | 59 |   | — |   |
| Other                                        |         | 25                                |         | 19 |   | 8 |   |
| Total  noninterest income                    |         | $                                 | 1,355        |   | $ | 787 |   | $ | 475 |   |

 

Noninterestincome for the year ended December 31, 2007 was approximately $1.4million, an increase of $568,000 compared to noninterest income of $787,000during the same period in 2006. Noninterest income for the year ended December 31,2006 was approximately $787,000, an increase of $312,000 compared tononinterest income of $475,000 during the same period in 2005. The increase wasattributable to an increase in mortgage origination income, other service feesand other income.  Residential mortgageorigination fees increased approximately $78,000 from 2006 and $236,000 from2005.

 

Residentialmortgage origination fees consist primarily of late charge fees and mortgageorigination fees we receive on residential loans funded and closed by a thirdparty.  Residential mortgage originationfees were $651,000, $573,000 and $337,000 for the years ended December 31,2007, 2006 and 2005, respectively.  Theadditional $78,000 in 2007 and $236,000 in 2006 related primarily to increasedvolume in the mortgage department as we expanded this line of business withadditional originators. Origination income on mortgage loans sold includes theinterest income collected on mortgage payments prior to selling these loans toinvestors. Accordingly, we received $113,000 of origination income on mortgageloans sold in 2007 compared to $91,000 in 2006 and $62,000 in 2005. Weanticipate that the level of mortgage origination fees will decrease if themortgage refinancing business declines due to deteriorating economicconditions.

 

Servicefees on deposit accounts consist primarily of service charges on our checking,money market, and savings accounts.  Suchfees were $35,000, $24,000 and $13,000 for the years ended December 31,2007, 2006, and 2005, respectively. The additional $11,000 in income for 2007and 2006 resulted from a larger number of customer accounts.

 

Otherservice fees, commissions, and the fee income received from customernon-sufficient funds transactions increased $49,000 to $193,000 for the yearended December 31, 2007 and increased $89,000 to $144,000 for the yearended December 31, 2006. The increase is attributed to the growing numberof customers to whom we provide financial services.

 

Anadditional $290,000 and $59,000 in noninterest income was primarilyattributable to the income received from bank owned life insurance for the yearended December 31, 2007 and 2006. Other income consists primarily of feesreceived on debit and credit card transactions, income from sales of checks,and the fees received on wire transfers. Other income was $25,000, $19,000 and $8,000 for the year ended December 31,2007, 2006 and 2005, respectively.

 

31

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*NoninterestExpense*

 

***               ***Thefollowing table sets forth information related to our noninterest expense.

** **

| ** **                               | ** **   | **Years Ended December 31,** | ** **   |
|------------------------------------------|--------------|-----------------------------------|--------------|
| ** **                               | ** **   | **2007**                          | ** **   | **2006** | ** ** | **2005** | ** ** |
| *** ***                             | *** *** | **(in thousands)**                | *** *** |
| Salaries and benefits                    |         | $                                 | 6,918        |   | $ | 4,484 |   | $ | 2,309 |   |
| Occupancy                                |         | 1,030                             |         | 486 |   | 335 |   |
| Furniture and equipment expense          |         | 484                               |         | 298 |   | 265 |   |
| Professional fees                        |         | 1,108                             |         | 511 |   | 238 |   |
| Advertising and marketing                |         | 647                               |         | 250 |   | 125 |   |
| Insurance                                |         | 360                               |         | 108 |   | 72 |   |
| Data processing and related costs        |         | 275                               |         | 179 |   | 124 |   |
| Telephone                                |         | 153                               |         | 75 |   | 50 |   |
| Postage                                  |         | 26                                |         | 24 |   | 18 |   |
| Office supplies, stationery and printing |         | 171                               |         | 74 |   | 93 |   |
| Other                                    |         | 905                               |         | 635 |   | 422 |   |
| Total  noninterest expense               |         | $                                 | 12,077       |   | $ | 7,124 |   | $ | 4,051 |   |

 

Weincurred noninterest expense of $12.1 million for the year ended December 31,2007 compared to $7.1 million for the year ended December 31, 2006 and$4.1 million for the year ended December 31, 2005.  For the year ended December 31, 2007,the $2.4 million increase in salaries and benefits and $597,000 increase inprofessional fees including costs for implementation of Sarbanes-Oxleyaccounted for 61.2% of the $4.9 million increase in noninterest expense for theyear ended December 31, 2007 compared to the same period in 2006.  The increase was due to additional personneland facilities to better service our customers. The remaining $1.9 millionincrease resulted primarily from increases of $544,000 in occupancy, $186,000in furniture and equipment expense, $397,000 in marketing costs, $252,000 ininsurance costs, $96,000 in data processing and related costs, and $447,000 inother expense.  For the year ended December 31,2006, the $2.2 million increase in salaries and benefits and $273,000 increasein professional fees accounted for 80.0% of the $3.1 million increase innoninterest expense for the year ended December 31, 2006 compared to thesame period in 2005.  The increase wasdue to additional personnel and facilities to better service our customers. Theremaining $625,000 increase resulted primarily from increases of $151,000 inoccupancy, $33,000 in furniture and equipment expense, $125,000 in marketingcosts, $36,000 in insurance costs, $55,000 in data processing and relatedcosts, and $225,000 in other expense.  Asignificant portion of the increase in professional fees is related toadditional legal, audit and compliance expenses.  The increase in marketing expense relates toexpanding our market awareness in the Charleston, Myrtle Beach and Hilton Headmarkets, while a significant portion of the increase in other expense was dueto increased costs of postage, office supplies, and additional staff educationand training.

 

Salaryand benefit expense was $6.9 million, $4.5 million and $2.3 million for theyears ended December 31, 2007, 2006 and 2005, respectively.  Salaries and benefits represented 57.3%,62.9% and 57.0% of our total noninterest expense for the years ended December 31,2007, 2006 and 2005, respectively.  The$2.4 million increase in salaries and benefits expense in 2007 compared to 2006resulted primarily from increases of $1.9 million in base compensation,$452,000 in stock compensation expense, $326,000 in higher benefits costs and adecrease of $228,000 in additional incentive compensation. The $1.9 millionincrease in base compensation expense related to the cost of employing 27additional employees in 2007, as well as annual salary increases. The $2.2million increase in salaries and benefits expense in 2006 compared to 2005resulted primarily from increases of $1.3 million in base compensation,$389,000 in additional incentive compensation, $248,000 in stock compensationexpense and $283,000 in higher benefits costs. The $1.3 million increase in base compensation expense related to thecost of employing 21 additional employees in 2006, as well as annual salaryincreases.

 

Dataprocessing and related costs were $275,000, $179,000 and $124,000 for the yearsended December 31, 2007, 2006 and 2005, respectively.  During the year ended December 31, 2007,our data processing costs for our core processing system were $218,000 comparedto $113,000 for the year ended December 31, 2006 and $84,000 for the yearended December 31, 2005.  We havecontracted with an outside computer service company to provide our core dataprocessing services.

 

32

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Dataprocessing costs increased $96,000, or 53.6%, for the year ended December 31,2007 compared to the same period in 2006. Data processing costs increased $55,000, or 44.4%, for the year ended December 31,2006 compared to the same period in 2005. A significant portion of the fee charged by our third party processor isdirectly related to the number of loan and deposit accounts and the relatednumber of transactions, all of which have grown commensurate with the overallgrowth of the bank’s assets and liabilities.

 

Incometax expense was $275,000, $874,000 and $20,000 for the year ended December 31,2007, 2006 and 2005, respectively.  Theincome tax expense is based on an effective tax rate of 40.0%, 37.0% and 34.0%for the year ended December 31, 2007, 2006 and 2005, respectively.

 

***Balance Sheet Review***

 

*General*

 

At December 31, 2007, wehad total assets of $512.3 million, consisting principally of $387.2 million innet loans, $1.4 million in loans held for sale, $90.1 million in securities,$1.9 million in federal funds sold, $17.8 million in net premises, furnitureand equipment, and $725,000 in cash and due from banks.  Our liabilities at December 31, 2007totaled $471.3 million, consisting principally of $388.2 million in deposits,$41.0 million in securities sold under agreements to repurchase, $8.2 millionin junior subordinated debentures and $29.0 million in FHLB advances.  At December 31, 2007, our shareholders’equity was $41.0 million.

 

*Federal Funds Sold*

 

At December 31, 2007, our$1.9 million in short-term investments in federal funds sold on an overnightbasis comprised 0.38% of total assets, compared to $2.5 million, or 0.75% oftotal assets, at December 31, 2006.

 

*Investments*

 

At December 31, 2007, the $88.0 million in ouravailable for sale investment securities portfolio represented approximately17.2% of our total assets.  We held U.S.government agency securities, government sponsored enterprises, municipals,mortgage-backed securities and preferred stocks with a fair value of $88.0million and an amortized cost of $87.2 million for a net unrealized gain of$792,000.  As a result of the relativelylow rate environment during the last two years, we have utilized the investmentportfolio to provide additional income and absorb liquidity on occasion. Weanticipate maintaining an investment portfolio to provide both increasedearnings and liquidity.

 

Contractual maturities and yields on our investments atDecember 31, 2007 are shown in the following table.  Expected maturities may differ from contractualmaturities because issuers may have the right to call or prepay obligationswith or without call or prepayment penalties.

 
| ** **                         | ** ** | **One year  or less**       | ** ** | **After  one year  through five years** | ** ** | **After  five years  through ten years** | ** ** | **After  ten years** | ** ** | **Total**  | ** ** |
|------------------------------------|------------|-----------------------------|------------|-----------------------------------------|------------|------------------------------------------|------------|----------------------|------------|------------|------------|
| ** **                         | ** ** | **Amount**                  | ** ** | **Yield**                               | ** ** | **Amount**                               | ** ** | **Yield**            | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** |
| ** **                         | ** ** | **(dollars  in thousands)** | ** ** |
| Available for  Sale:               |       |                        |       |                                    |       |                                     |       |                 |       |       |       |   |   |   |   |   |   |   |   |   |   |
| U.S. agencies                      |       | $                           | —     |                                    | —     | %                                        | $          | —               |       | —     | %          | $ | 1,025 |   | 5.98 | % | $ | 13,238 |   | 5.90 | % | $ | 14,263 |   | 5.91 | % |
| Government-  sponsored enterprises |       | —                      |       | —                                  | %          | 1,011                                    |       | 5.31                 | %          | 14,651     |       | 5.61 | % | 17,992 |   | 5.79 | % | 33,654 |   | 5.70 | % |
| Mortgage-backed  securities        |       | —                      |       | —                                  | %          | —                                   |       | —               | %          | —     |       | — | % | 24,247 |   | 5.55 | % | 24,247 |   | 5.55 | % |
| Municipals                         |       | —                      |       | —                                  | %          | —                                   |       | —               | %          | 279        |       | 4.07 | % | 12,121 |   | 3.96 | % | 12,400 |   | 3.97 | % |
| Preferred stocks                   |       | —                      |       | —                                  | %          | —                                   |       | —               | %          | —     |       | — | % | 3,472 |   | 8.05 | % | 3,472 |   | 8.05 | % |
| Total                              | ** ** | **$**                       | **—** | ** **                              | **—** | **%**                                    | **$**      | **1,011**            | ** ** | **5.31**   | **%**      | **$** | **15,955** | ** ** | **5.61** | **%** | **$** | **71,070** | ** ** | **5.52** | **%** | **$** | **88,036** | ** ** | **5.53** | **%** |

 

33

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At December 31, 2007, our investments includedU.S. government agency bonds issued by the Federal Farm Credit Bank with anamortized cost of approximately $14.0 million. Government sponsored enterprisesconsist of securities issued by the Federal Home Loan Bank, Federal Home LoanMortgage Corporation and Federal National Mortgage Association with amortizedcosts of approximately $9.6 million, $10.0 million, and $13.7 million,respectively. Mortgage-backed securities consist of securities issued by theFederal National Mortgage Association and Federal Home Loan MortgageCorporation with amortized costs of approximately $16.6 million and $7.4million, respectively. Municipals consist of securities issued by variousdifferent municipalities with an amortized cost of $12.4 million. The preferredstocks consist of securities issued by the Federal Home Loan MortgageCorporation and Federal National Mortgage Association with amortized costs ofapproximately $1.6 million and $2.0 million.

 

Other nonmarketable equity securities at December 31,2007 consisted of Federal Home Loan Bank stock with a cost of $1,909,300 andother investments of $151,640.

 

The amortized costs and the fair value of ourinvestments at December 31, 2007, 2006 and 2005 are shown in the followingtable.

# ** **

| ** **                        | ** ** | **December 31, 2007** | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|-----------------------------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                        | ** ** | **Amortized  Cost**        | ** ** | **Fair  Value**            | ** ** | **Amortized  Cost**        | ** ** | **Fair  Value** | ** ** | **Amortized  Cost** | ** ** | **Fair  Value** | ** ** |
| ** **                        | ** ** | **(in thousands)**         | ** ** |
| Available for  Sale:              |       |                       |       |                       |       |                       |       |   |   |   |   |   |   |
| U.S. Government  agencies         |       | $                          | 14,034     |                       | $          | 14,263                     |       | $ | 3,016 |   | $ | 2,981 |   | $ | — |   | $ | — |   |
| Government-sponsored  enterprises |       | 33,238                     |       | 33,654                     |       | 24,604                     |       | 24,693 |   | 1,496 |   | 1,482 |   |
| Mortgage-backed  securities       |       | 23,979                     |       | 24,247                     |       | 6,108                      |       | 6,204 |   | 10,561 |   | 10,300 |   |
| Municipals                        |       | 12,440                     |       | 12,400                     |       | 3,626                      |       | 3,626 |   | — |   | — |   |
| Preferred stock                   |       | 3,553                      |       | 3,472                      |       | —                     |       | — |   | — |   | — |   |
| Total                             |       | $                          | 87,244     |                       | $          | 88,036                     |       | $ | 37,354 |   | $ | 37,504 |   | $ | 12,057 |   | $ | 11,782 |   |

# ** **

# **Loans**

# ** **

**               **Since loans typicallyprovide higher interest yields than other types of interest-earning assets, asubstantial percentage of our earning assets are invested in our loanportfolio.  Average loans for the yearsended December 31, 2007 and 2006 were $339.8 million and $242.3 million,respectively.  Gross loans outstanding atDecember 31, 2007 and 2006 were $391.3 million and $273.2 million,respectively.

 

                Loans secured by real estatemortgages are the principal component of our loan portfolio.  Most of our real estate loans are secured byresidential or commercial property.  Wedo not generally originate traditional long term residential mortgages for theportfolio, but we do issue traditional second mortgage residential real estateloans and home equity lines of credit. We obtain a security interest in real estate whenever possible, inaddition to any other available collateral. This collateral is taken to increase the likelihood of the ultimaterepayment of the loan.  Generally, welimit the loan-to-value ratio on loans we make to 85%.  Due to the short time our portfolio hasexisted, the current mix may not be indicative of the ongoing portfoliomix.  We attempt to maintain a relativelydiversified loan portfolio to help reduce the risk inherent in concentration incertain types of collateral.

 

34

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The followingtable summarizes the composition of our loan portfolio at December 31,2007, 2006, 2005, 2004 and 2003:

 
| ** **                               | ** **   | **2007**                   | ** **   | **2006**        | ** ** | **2005**   | ** ** | **2004**        | ** ** | **2003**   | ** ** |
|------------------------------------------|--------------|----------------------------|--------------|-----------------|------------|------------|------------|-----------------|------------|------------|------------|
| *** ***                             | *** *** | **(dollars in thousands)** | *** *** |
| ** **                               | ** **   | **Amount**                 | ** **   | **% of  Total** | ** ** | **Amount** | ** ** | **% of  Total** | ** ** | **Amount** | ** ** | **% of  Total** | ** ** | **Amount** | ** ** | **% of  Total** | ** ** | **Amount** | ** ** | **% of  Total** | ** ** |
| *Commercial*                             | * *     | * *                   | * *     | * *        | * *   | * *   | * *   | * *        | * *   | * *   | * *   | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * |
| Commercial and  industrial               |         | $                          | 24,350       |            | 6.2        | %          | $          | 24,631          |       | 9.0        | %          | $ | 11,360 |   | 6.3 | % | $ | 7,173 |   | 13.0 | % | $ | 1,863 |   | 18.8 | % |
|                                     |         |                       |         |            |       |       |       |            |       |       |       |   |   |   |   |   |   |   |   |   |   |
| *Real  Estate*                           |         |                       |         |            |       |       |       |            |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Mortgage                                 |         | 204,068                    |         | 52.2            | %          | 124,715    |       | 45.7            | %          | 85,025     |       | 47.3 | % | 29,837 |   | 54.0 | % | 4,057 |   | 40.9 | % |
| Construction                             |         | 159,815                    |         | 40.8            | %          | 122,210    |       | 44.7            | %          | 81,878     |       | 45.6 | % | 16,918 |   | 30.6 | % | 3,170 |   | 31.9 | % |
| Total real estate                        |         | 363,883                    |         | 93.0            | %          | 246,925    |       | 90.4            | %          | 166,903    |       | 92.9 | % | 46,755 |   | 84.6 | % | 7,227 |   | 72.8 | % |
|                                     |         |                       |         |            |       |       |       |            |       |       |       |   |   |   |   |   |   |   |   |   |   |
| *Consumer*                               | * *     | * *                   | * *     | * *        | * *   | * *   | * *   | * *        | * *   | * *   | * *   | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * |
| Consumer                                 |         | 3,467                      |         | 0.9             | %          | 1,901      |       | 0.7             | %          | 1,708      |       | 1.0 | % | 1,509 |   | 2.7 | % | 857 |   | 8.6 | % |
| Deferred  origination fees, net          |         | (350                       | )            | (0.1            | )%         | (247       | )          | (0.1            | )%         | (311       | )          | (0.2 | )% | (146 | ) | (0.3 | )% | (20 | ) | (0.2 | )% |
|                                     |         |                       |         |            |       |       |       |            |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Total gross  loans, net of deferred fees |         | 391,350                    |         | 100.0           | %          | 273,210    |       | 100.0           | %          | 179,660    |       | 100.0 | % | 55,291 |   | 100.0 | % | 9,927 |   | 100.0 | % |
| Less — allowance  for loan losses   |         | (4,158                     | )            |            |       | (3,467     | )          |            |       | (2,245     | )          |   |   | (700 | ) |   |   | (135 | ) |   |   |
| Total loans, net                         |         | $                          | 387,192      |            |       |       | $          | 269,743         |       |       |       | $ | 177,415 |   |   |   | $ | 54,591 |   |   |   | $ | 9,792 |   |   |   |

 

*Maturities and Sensitivity of Loansto Changes in Interest Rates*

 

The information in the following table is based on thecontractual maturities of individual loans, including loans that may be subjectto renewal at their contractual maturity. Renewal of such loans is subject to review and credit approval, as wellas modification of terms upon maturity. Actual repayments of loans may differ from the maturities reflectedbelow because borrowers have the right to prepay obligations with or withoutprepayment penalties.

 

The following table summarizes the loan maturitydistribution by type and related interest rate characteristics at December 31,2007.

 

| ** **                               | ** **   | **One year  or less** | ** **   | **After one  but within  five years** | ** ** | **After five  years** | ** ** | **Total** | ** ** |
|------------------------------------------|--------------|-----------------------|--------------|---------------------------------------|------------|-----------------------|------------|-----------|------------|
| *** ***                             | *** *** | **(in thousands)**    | *** *** |
| Commercial                               |         | $                     | 12,108       |                                  | $          | 10,274                |       | $         | 1,968      |   | $ | 24,350 |   |
| Real estate                              |         | 126,328               |         | 186,030                               |       | 51,525                |       | 363,883   |       |
| Consumer                                 |         | 806                   |         | 2,183                                 |       | 478                   |       | 3,467     |       |
| Deferred  origination fees, net          |         | (85                   | )            | (231                                  | )          | (34                   | )          | (350      | )          |
| Total gross  loans, net of deferred fees |         | $                     | 139,157      |                                  | $          | 198,256               |       | $         | 53,937     |   | $ | 391,350 |   |
|                                     |         |                  |         |                                  |       |                  |       |      |       |
| Loans maturing  after one year with:     |         |                  |         |                                  |       |                  |       |      |       |
| Fixed interest  rates                    |         |                  |         |                                  |       |                  |       | $         | 132,598    |   |
| Floating interest  rates                 |         |                  |         |                                  |       |                  |       | 119,860   |       |
| Total                                    |         |                  |         |                                  |       |                  |       | $         | 252,458    |   |

 

35

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*Provision and Allowance for Loan Losses*

 

We have established an allowance for loan lossesthrough a provision for loan losses charged to expense on our statement ofoperations.  The allowance for loanlosses represents an amount which we believe will be adequate to absorbprobable losses on existing loans that may become uncollectible.  Our judgment as to the adequacy of theallowance for loan losses is based on a number of assumptions about futureevents, which we believe to be reasonable, but which may or may not prove to beaccurate.  Our determination of theallowance for loan losses is based on evaluations of the collectibility ofloans, including consideration of factors such as the balance of impairedloans, the quality, mix, and size of our overall loan portfolio, economicconditions that may affect the borrower’s ability to repay, the amount andquality 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 lendingpolicies and procedures, changes in the local/national economy, changes involume or type of credits, changes in volume/severity of problem loans, qualityof loan review and board of director oversight, concentrations of credit, andpeer group comparisons.  Due to ourlimited operating history, the provision for loan losses has been madeprimarily as a result of our assessment of general loan loss risk compared tobanks of similar size and maturity. Periodically, we adjust the amount of the allowance based on changingcircumstances.  We recognize loan lossesto the allowance and add subsequent recoveries back to the allowance for loanlosses.  There can be no assurance thatcharge-offs of loans in future periods will not exceed the allowance for loanlosses as estimated at any point in time or that provisions for loan losseswill not be significant to a particular accounting period.

 

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

 
| ** **                               | ** **   | **December 31,**        | ** **   |
|------------------------------------------|--------------|------------------------------|--------------|
| ** **                               | ** **   | **2007**                     | ** **   | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| *** ***                             | *** *** | ***(dollars in thousands)*** | *** *** |
| Balance, beginning of year               |         | $                            | 3,467        |   | $ | 2,245 |   | $ | 700 |   | $ | 135 | ** ** | **$** | **—** | ** ** |
| Charge offs, Commercial and Industrial   |         | 116                          |         | — |   | — |   | — |   | — |   |
| Charge offs, Real Estate Mortgage        |         | —                       |         | — |   | — |   | — |   | — |   |
| Charge offs, Real Estate Contstruction   |         | 218                          |         | — |   | — |   | — |   | — |   |
| Charge offs, Consumer                    |         | 1                            |         | — |   | — |   | — |   | — |   |
| Recoveries                               |         | 1                            |         | — |   | — |   | — |   | — |   |
| Provision for loan losses                |         | 1,025                        |         | 1,222 |   | 1,545 |   | 565 |   | 135 |   |
| Balance, end of year                     |         | $                            | 4,158        |   | $ | 3,467 |   | $ | 2,245 |   | $ | 700 |   | $ | 135 |   |
|                                     |         |                         |         |   |   |   |   |   |   |   |   |
| Total loans outstanding at end of period |         | $                            | 391,350      |   | $ | 273,210 |   | $ | 179,660 |   | $ | 55,291 |   | $ | 9,927 |   |
| Allowance for loan losses to gross loans |         | 1.06                         | %            | 1.27 | % | 1.25 | % | 1.27 | % | 1.36 | % |
| Net charge-offs to average loans         |         | 0.10                         | %            | 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % |

 

We do not allocate the allowance for loan losses tospecific categories of loans.  Instead,we evaluate the adequacy of the allowance for loan losses on an overallportfolio basis utilizing our credit grading system that we apply to eachloan.  We have retained an independentconsultant to review the loan files on a test basis to confirm the grading ofeach loan.

 

 

36

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*Nonperforming Assets*

 

The following table setsforth our nonperforming assets.

 
| ** **                                                | ** **   | **December 31,**        | ** ** |
|-----------------------------------------------------------|--------------|------------------------------|------------|
| ** **                                                | ** **   | **2007**                     | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| *** ***                                              | *** *** | ***(dollars in thousands)*** | ** ** |
| Nonaccrual loans                                          |         | $                            | 389        |   | $ | 1,965 | ** ** | **$** | **—** | ** ** | **$** | **—** | ** ** | **$** | **—** | ** ** |
| Loans 90 days or more past dueand still accruing interest |         | —                       |       | — |   | — |   | — |   | — |   |
| Loans restructured or  otherwise impaired                 |         | —                       |       | — |   | — |   | — |   | — |   |
| Total impaired loans                                      |         | 389                          |       | 1,965 |   | — |   | — |   | — |   |
| Other real estate owned                                   |         | —                       |       | — |   | — |   | — |   | — |   |
| Total nonperforming assets                                |         | $                            | 389        |   | $ | 1,965 |   | $ | — |   | $ | — |   | $ | — |   |
|                                                      |         |                         |       |   |   |   |   |   |   |   |   |
| Nonperforming assets to gross  loans                      |         | 0.10                         | %          | 0.72 | % | 0.00 | % | 0.00 | % | 0.00 | % |

 

The bank had three nonperforming assets at December 31,2007 totaling $389,000 and two nonperforming assets totaling $2.0 million at December 31,2006.  As of December 31, 2005, wedid not have any nonperforming assets and no loans past due 30 days or more. At December 31, 2007, 2006, and2005, the allowance for loan losses was $4,158,000, $3,467,000, and $2,245,000,respectively, or 1.06%, 1.27% and 1.25%, respectively, of outstandingloans.  As of December 31, 2007, wehad 30 loans with a current principal balance of $10.1 million on the watchlist. At December 31, 2007, we did not have any loans past due greaterthan 90 days that were not already placed on nonaccrual.  Generally, a loan is placed on nonaccrualstatus when it becomes 90 days past due as to principal or interest, or when webelieve, after considering economic and business conditions and collectionefforts, that the borrower’s financial condition is such that collection of theloan is doubtful.  A payment of intereston a loan that is classified as nonaccrual is applied against the principalbalance.  During the year ended December 31,2007, we received approximately $4,400 in interest income in relation to loanson nonaccrual status and approximately $48,000 in foregone interest income thatwas related to loans on nonaccrual status.

 

*Deposits and Other Interest-Bearing Liabilities*

 

Our primary source of funds for loans and investmentsis our deposits.  National and localmarket trends over the past several years suggest that consumers have moved anincreasing percentage of discretionary savings funds into investments such asannuities, stocks, and mutual funds. Accordingly, it has become more difficult to attract localdeposits.  We have chosen to obtain aportion of our certificates of deposits from areas outside of our market,through various arrangements including brokered deposits.  The deposits obtained outside of our marketarea generally have lower rates than rates being offered for certificates ofdeposits in our local market.  We alsoutilize out-of-market deposits in certain instances to obtain longer-termdeposits than are readily available in our local market.  We anticipate that the ratio of out-of-marketdeposits will decline after we open additional retail deposit offices.  The amount of out-of-market deposits was$226.8 million, or 58.4% of total deposits, at December 31, 2007 comparedto $110.7 million, or 42.7% of total deposits, at December 31, 2006.

 

We anticipate being able to either renew or replacethese out-of-market deposits when they mature, although we may not be able toreplace them with deposits with the same terms or rates.  Our loan-to-deposit ratio was 100.8% and105.4% at December 31, 2007 and 2006, respectively.

 

 

37

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The following table shows the average balance amountsand the average rates paid on deposits held by us for the years ended December 31,2007, 2006 and 2005.

 
| ** **                          | ** **   | **December 31, 2007**   | ** **   | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|-------------------------------------|--------------|------------------------------|--------------|----------------------------|------------|----------------------------|------------|
| ** **                          | ** **   | **Amount**                   | ** **   | **Rate**                   | ** ** | **Amount**                 | ** ** | **Rate** | ** ** | **Amount** | ** ** | **Rate** | ** ** |
| *** ***                        | *** *** | ***(dollars in thousands)*** | *** *** |
| Noninterest bearing demand deposits |         | $                            | 10,550       |                       | —     | %                          | $          | 9,693 |   | — | % | $ | 6,992 |   | — | % |
| Interest bearing demand deposits    |         | 6,718                        |         | 3.58                       | %          | 3,697                      |       | 3.11 | % | 3,285 |   | 1.26 | % |
| Savings and money market accounts   |         | 186,732                      |         | 4.86                       | %          | 133,311                    |       | 4.67 | % | 69,212 |   | 3.62 | % |
| Time deposits less than $100,000    |         | 131,130                      |         | 5.10                       | %          | 73,897                     |       | 4.89 | % | 19,430 |   | 3.35 | % |
| Time deposits greater than $100,000 |         | 10,418                       |         | 5.39                       | %          | 10,531                     |       | 4.62 | % | 16,867 |   | 3.32 | % |
| Total deposits                      |         | $                            | 345,548      |                       | 4.80       | %                          | $          | 231,129 |   | 4.52 | % | $ | 115,786 |   | 3.25 | % |

 

All of our time deposits are certificates of deposits.  The maturity distribution of our timedeposits of $100,000 or more at December 31, 2007, 2006 and 2005 is asfollows:

 

| ** **                    | ** **   | **2007**             | ** **   | **2006** | ** ** | **2005** | ** ** |
|-------------------------------|--------------|----------------------|--------------|----------|------------|----------|------------|
| *** ***                  | *** *** | ***(in thousands)*** | *** *** |
| Three months or less          |         | $                    | 7,344        |     | $          | 2,812    |       | $ | 2,951 |   |
| Over three through six months |         | 20,111               |         | 3,084    |       | 4,617    |       |
| Over six though twelve months |         | 1,183                |         | 1,207    |       | 3,334    |       |
| Over twelve months            |         | 1,238                |         | 711      |       | 200      |       |
| Total                         |         | $                    | 29,876       |     | $          | 7,814    |       | $ | 11,102 |   |

 

The increase in time deposits of $100,000 or more forthe year ended December 31, 2007 compared to the same period in 2006resulted from our funding the growth of the bank with a variety of depositsproducts and the utilization of deposits that were obtained outside of ourprimary market.

 

 

38

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**Borrowings**

 

The following table outlines our various sources ofborrowed funds during the years ended December 31, 2007, 2006, and 2005,and the amounts outstanding at the end of each period, at the maximum point foreach component during the periods and on average for each period, and theaverage interest rate that we paid for each borrowing source.  The maximum month-end balance represents thehigh indebtedness for each component of borrowed funds at any time during eachof the periods shown.

 
| ** **                                           | ** **   | **Ending**                 | ** **   | **Period  End** | ** **   | **Maximum  Month  End** | ** **   | **Average  for the Period** | ** **   |
|------------------------------------------------------|--------------|----------------------------|--------------|-----------------|--------------|-------------------------|--------------|-----------------------------|--------------|
| ** **                                           | *** *** | **Balance**                | *** *** | **Rate**        | *** *** | **Balance**             | *** *** | **Balance**                 | *** *** | **Rate** | *** *** |
| ** **                                           | ** **   | **(dollars in thousands)** | ** **   |
| **At or for the year ended December 31, 2007:** | ** **   | ** **                 | ** **   |
| Securities sold under agreement to repurchase        |         | $                          | 41,040       |            | 4.54         | %                       | $            | 41,040                      |         | $ | 14,828 |   | 4.96 | % |
| Junior subordinated debentures                       |         | 8,248                      |         | 6.61            | %            | 8,248                   |         | 8,248                       |         | 6.80 | % |
| Advances from FHLB                                   |         | 29,000                     |         | 4.20            | %            | 30,000                  |         | 20,575                      |         | 4.92 | % |
| Federal funds purchased                              |         | —                     |         | —          | %            | 10,870                  |         | 856                         |         | 5.50 | % |
| ESOP borrowings                                      |         | 2,428                      |         | 6.50            | %            | 2,428                   |         | 854                         |         | 7.02 | % |
| ** **                                           | ** **   | ** **                 | ** **   | ** **      | ** **   | ** **              | ** **   | ** **                  | ** **   | ** ** | ** ** |
| **At or for the year ended December 31, 2006:** | ** **   | ** **                 | ** **   | ** **      | ** **   | ** **              | ** **   | ** **                  | ** **   | ** ** | ** ** |
| Note payable                                         |         | $                          | —       |            | —       | %                       | $            | 1,593                       |         | $ | 825 |   | 6.88 | % |
| Securities sold under agreement to repurchase        |         | 10,000                     |         | 5.57            | %            | 10,000                  |         | 7,804                       |         | 5.44 | % |
| Junior subordinated debentures                       |         | 8,248                      |         | 6.75            | %            | 8,248                   |         | 7,073                       |         | 6.65 | % |
| Advances from FHLB                                   |         | 16,000                     |         | 5.27            | %            | 16,000                  |         | 7,847                       |         | 5.38 | % |
| Other borrowings                                     |         | —                     |         | —          | %            | 29                      |         | 9                           |         | 3.75 | % |
| Federal funds purchased                              |         | —                     |         | —          | %            | 6,346                   |         | 540                         |         | 5.14 | % |
| ** **                                           | ** **   | ** **                 | ** **   | ** **      | ** **   | ** **              | ** **   | ** **                  | ** **   | ** ** | ** ** |
| **At or for the year ended December 31, 2005:** | ** **   | ** **                 | ** **   | ** **      | ** **   | ** **              | ** **   | ** **                  | ** **   | ** ** | ** ** |
| Note payable                                         |         | $                          | 1,541        |            | 6.25         | %                       | $            | 1,541                       |         | $ | 651 |   | 5.72 | % |
| Securities sold under agreement to repurchase        |         | 6,500                      |         | 4.66            | %            | 6,500                   |         | 6,500                       |         | 3.62 | % |
| Junior subordinated debentures                       |         | —                     |         | —          | %            | —                  |         | —                      |         | — | % |
| Advance from FHLB                                    |         | —                     |         | —          | %            | —                  |         | —                      |         | — | % |
| Other borrowings                                     |         | 30                         |         | 3.30            | %            | 2,050                   |         | 304                         |         | 4.47 | % |
| Federal funds purchased                              |         | —                     |         | —          | %            | 937                     |         | 80                          |         | 3.41 | % |

 

**Capital Resources**

 

Totalshareholders’ equity was $41.0 million at December 31, 2007 and $41.8million at December 31, 2006.  Thedecrease is attributable to proceeds from the exercise of stock options of$43,199, a decrease of $2,427,500 in the guarantee of ESOP borrowings, net ofcurrent year reductions, plus an increase of $405,749 in the fair value ofavailable for sale securities, stock-based compensation expense of $699,964 andnet income of $413,304 for the year ended December 31, 2007. Since ourinception, we have not paid any cash dividends.

 

Thefollowing table shows the return on average assets (net income divided byaverage total assets), return on average equity (net income divided by averageequity), and equity to assets ratio (average equity divided by average totalassets) for the years ended December 31, 2007, 2006 and 2005:

 

39

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| ** **               | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|----------|------------|
| Return on average assets |       | 0.10     | %          | 0.52     | %          | 0.03     | %          |
|                     |       |     |       |     |       |     |       |
| Return on average equity |       | 1.00     | %          | 5.38     | %          | 0.20     | %          |
|                     |       |     |       |     |       |     |       |
| Equity to assets ratio   |       | 9.51     | %          | 9.73     | %          | 13.51    | %          |

 

The Federal Reserve and bank regulatory agencies requirebank holding companies and financial institutions to maintain capital atadequate levels based on a percentage of assets and off-balance sheetexposures, adjusted for risk weights ranging from 0% to 100%.  Under the capital adequacy guidelines,regulatory capital is classified into two tiers.  These guidelines require an institution tomaintain a certain level of Tier 1 and Tier 2 capital to risk-weightedassets.  Tier 1 capital consists ofcommon shareholders’ equity, excluding the unrealized gain or loss onsecurities available for sale, minus certain intangible assets.  In determining the amount of risk-weightedassets, all assets, including certain off-balance sheet assets, are multipliedby a risk-weight factor of 0% to 100% based on the risks believed to beinherent in the type of asset.  Tier 2capital consists of Tier 1 capital plus the general reserve for loan losses,subject to certain limitations.  Our bankis required to maintain capital at a minimum level based on total averageassets, which is known as the Tier 1 leverage ratio.

 

                To be considered “well-capitalized,”we must maintain total risk-based capital of at least 10%, Tier 1 capital of atleast 6%, and a leverage ratio of at least 5%. To be considered “adequatelycapitalized” under capital guidelines, we must maintain a minimum totalrisk-based capital of 8%, with at least 4% being Tier 1 capital.  In addition, we must maintain a minimum Tier1 leverage ratio of at least 4%.

 

The followingtable sets forth the company’s various capital ratios at December 31, 2007and 2006. For all periods, the company was considered “well capitalized.”

** **

| ** **                      | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
| Leverage ratio                  |       | 9.58     | %          | 14.03    | %          |
| Tier 1 risk-based capital ratio |       | 11.39    | %          | 16.86    | %          |
| Total risk-based capital ratio  |       | 12.39    | %          | 18.06    | %          |

 

The following table sets forth the bank’s variouscapital ratios at December 31, 2007 and 2006.  For all periods, the bank was considered “wellcapitalized.”

 

| ** **                      | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
| Leverage ratio                  |       | 9.93     | %          | 14.02    | %          |
| Tier 1 risk-based capital ratio |       | 11.80    | %          | 16.52    | %          |
| Total risk-based capital ratio  |       | 12.80    | %          | 17.72    | %          |

 

We intend to maintain acapital level for the bank that exceeds the FDIC requirements to be classifiedas a “well capitalized” bank.  To providethe additional capital needed to support our bank’s growth in assets, duringthe first quarter of 2005 we borrowed $2.1 million under a short-term holdingcompany line of credit. On March 31, 2005, we completed a privateplacement of 1,712,000 shares at $9.35 to increase the capital of thebank.  Net proceeds from the offeringwere approximately $14.9 million.  Uponclosing the transaction, the holding company line of credit was repaid in full.On February 22, 2006, Tidelands Statutory Trust, a non-consolidatedsubsidiary of the company, issued and sold floating rate capital securities ofthe trust, generating net proceeds of $8.0 million.  The trust loaned these proceeds to thecompany to use for general corporate purposes, primarily to provide capital tothe bank. The junior subordinated debentures qualify as Tier 1 capital underFederal Reserve Board guidelines. On October 10, 2006, we closed a publicoffering in which 1,200,000 shares of our common stock were issued at apurchase price of $15.00 per share.  Netproceeds after deducting the underwriter’s discount and expenses were $16.4million.  We are using the proceeds fromthe offering to support the growth of the company and the bank.

 

40

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**Effect of Inflation and Changing Prices**

 

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

 

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

 

**Off-Balance Sheet Risk**

 

                Commitments to extend credit areagreements to lend to a customer as long as the customer has not violated anymaterial condition established in the contract. Commitments generally have fixed expiration dates or other terminationclauses and may require the payment of a fee. At December 31, 2007, unfunded commitments to extend credit were$60.4 million.  A significant portion ofthe unfunded commitments related to consumer equity lines of credit.  Based on historical experience, we anticipatethat a significant portion of these lines of credit will not be funded.  We evaluate each customer’s credit worthinesson a case-by-case basis.  The amount ofcollateral obtained, if deemed necessary by us upon extension of credit, isbased 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 realestate.

 

                At December 31, 2007, therewere commitments totaling approximately $1.4 million under letters of credit.The credit risk and collateral involved in issuing letters of credit isessentially the same as that involved in extending loan facilities tocustomers.  Since most of the letters ofcredit are expected to expire without being drawn upon, they do not necessarilyrepresent future cash requirements.

 

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

 

**Market Risk**

 

Market risk is the risk of loss from adverse changes inmarket prices and rates, which principally arises from interest rate riskinherent in our lending, investing, deposit gathering, and borrowingactivities.  Other types of market risk,such as foreign currency exchange rate risk and commodity price risk, do notgenerally arise in the normal course of our business.

 

We actively monitor and manage our interest rate riskexposure principally by measuring our interest sensitivity “gap,” and netinterest income simulations. Interest sensitivity gap is the positive ornegative dollar difference between assets and liabilities that are subject tointerest rate repricing within a given period of time.  Interest rate sensitivity can be managed byrepricing assets or liabilities, selling securities available for sale,replacing an asset or liability at maturity, or adjusting the interest rateduring the life of an asset or liability. Managing the amount of assets and liabilities repricing in this sametime interval helps to hedge the risk and minimize the impact on net interestincome of rising or falling interest rates. We generally would benefit from increasing market rates of interest whenwe have an asset-sensitive gap position and generally would benefit fromdecreasing market rates of interest when we are liability-sensitive.

 

Approximately 56.6% of our loans were variable rateloans at December 31, 2007 and 88.7% of interest-bearing liabilitiesreprice within one year. However, interest rate movements typically result inchangesin interest rates onassets that are different in magnitude from the corresponding changes in ratespaid on liabilities.   While, asubstantial portion of our loans reprice within the first three months of theyear, a larger majority of our deposits will 

 

41

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repricewithin a 12-month period.   However, ourgap analysis is not a precise indicator of our interest sensitivityposition.  The analysis presents only astatic view of the timing of maturities and repricing opportunities, withouttaking into consideration that changes in interest rates do not affect allassets and liabilities equally.  Forexample, rates paid on a substantial portion of core deposits may changecontractually within a relatively short time frame, but those rates are viewedby us as significantly less interest-sensitive than market-based rates such asthose paid on noncore deposits.  Netinterest income may be affected by other significant factors in a giveninterest rate environment, including changes in the volume and mix ofinterest-earning assets and interest-bearing liabilities.

 

**Liquidity and Interest Rate Sensitivity**

 

                Liquidity represents the abilityof a company to convert assets into cash or cash equivalents withoutsignificant loss, and the ability to raise additional funds by increasingliabilities.  Liquidity management involvesmonitoring our sources and uses of funds in order to meet our day-to-day cashflow requirements while maximizing profits. Liquidity management is made more complicated because different balancesheet components are subject to varying degrees of management control.  For example, the timing of maturities of ourinvestment portfolio is fairly predictable and subject to a high degree ofcontrol at the time investment decisions are made.  However, net deposit inflows and outflows arefar less predictable and are not subject to the same degree of control.

 

                At December 31, 2007 and2006, our liquid assets, which consist of cash and due from banks and federalfunds sold, amounted to $2.7 million and $5.4 million, or 0.5% and 1.6% oftotal assets, respectively.  Our availablefor sale securities at December 31, 2007 and 2006 amounted to $88.0million and $37.5 million, or 17.2% and 11.1% of total assets,respectively.  Investment securitiestraditionally provide a secondary source of liquidity since they can beconverted into cash in a timely manner. However, approximately $52.5 million of these securities are pledgedagainst outstanding debt or borrowing lines of credit.  Therefore, the related debt would need to berepaid prior to the securities being sold in order for these securities to beconverted to cash.

 

Our ability to maintainand expand our deposit base and borrowing capabilities serves as our primarysource of liquidity.  We plan to meet ourfuture cash needs through the generation of deposits.  In addition, we will receive cash upon thematurity and sale of loans and the maturity of investment securities.  During most of 2006 and 2007, as a result ofhistorically low rates that were being earned on short-term investments, we choseto maintain a lower than normal level of short-term securities.  In addition, we maintain three federal fundspurchased lines of credit with correspondent banks totaling $24.5 million.  We are also a member of the Federal Home LoanBank of Atlanta, from which applications for borrowings can be made forleverage or liquidity purposes.  The FHLBrequires that securities, qualifying mortgage loans, and stock of the FHLBowned by the bank be pledged to secure any advances.  At December 31, 2007, we had $29.0million in total advances and letters of credit from the FHLB with an excesslendable collateral value of approximately $18.2 million.

 

Asset/liability management is the process by which wemonitor and control the mix and maturities of our assets and liabilities. Theessential purposes of asset/liability management are to ensure adequateliquidity and to maintain an appropriate balance between interest sensitiveassets and liabilities in order to minimize potentially adverse impacts onearnings from changes in market interest rates. Our asset/liability management committee monitors and considers methodsof managing exposure to interest rate risk. The asset/liability management committee is responsible for maintainingthe level of interest rate sensitivity of our interest sensitive assets andliabilities within board-approved limits.

 

42

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The following table sets forth information regardingour rate sensitivity, as of December 31, 2007, at each of the timeintervals.  The information in the tablemay not be indicative of our rate sensitivity position at other points intime.  In addition, the maturitydistribution indicated in the table may differ from the contractual maturitiesof the earning assets and interest-bearing liabilities presented due toconsideration of prepayment speeds under various interest rate change scenariosin the application of the interest rate sensitivity methods describedabove.  The interest sensitivity tableshown below does not reflect the optionality which inherently exists in boththe loan and deposit portfolio.

 
| ** **                                      | ** ** | **Within  three  months**  | ** **   | **After three  but within  twelve months** | ** ** | **After one  but within  five years** | ** ** | **After  five  years** | ** ** | **Total** | ** ** |
|-------------------------------------------------|------------|----------------------------|--------------|--------------------------------------------|------------|---------------------------------------|------------|------------------------|------------|-----------|------------|
| ** **                                      | ** ** | **(dollars in thousands)** | *** *** |
| Interest-earning assets:                        |       |                       |         |                                       |       |                                  |       |                   |       |      |       |
| Federal funds  sold                             |       | $                          | 1,945        |                                       | $          | —                                |       | $                      | —     |      | $          | — |   | $ | 1,945 |   |
| Investment  securities                          |       | 6,918                      |         | 3,471                                      |       | 45,518                                |       | 32,129                 |       | 88,036    |       |
| Loans                                           |       | 232,974                    |         | 27,406                                     |       | 80,248                                |       | 50,722                 |       | 391,350   |       |
| Total  interest-earning assets                  |       | $                          | 241,837      |                                       | $          | 30,877                                |       | $                      | 125,766    |      | $          | 82,851 |   | $ | 481,331 |   |
|                                            |       |                       |         |                                       |       |                                  |       |                   |       |      |       |
| Interest-bearing liabilities:                   |       |                       |         |                                       |       |                                  |       |                   |       |      |       |
| Money market and  NOW                           |       | $                          | 208,166      |                                       | $          | —                                |       | $                      | —     |      | $          | — |   | $ | 208,166 |   |
| Regular savings                                 |       | 128                        |         | —                                     |       | —                                |       | —                 |       | 128       |       |
| Time deposits                                   |       | 40,043                     |         | 77,785                                     |       | 46,400                                |       | 5,457                  |       | 169,685   |       |
| Junior  subordinated debentures                 |       | 8,248                      |         | —                                     |       | —                                |       | —                 |       | 8,248     |       |
| Other borrowings                                |       | 72,468                     |         | —                                     |       | —                                |       | —                 |       | 72,468    |       |
| Total  interest-bearing liabilities             |       | $                          | 329,053      |                                       | $          | 77,785                                |       | $                      | 46,400     |      | $          | 5,457 |   | $ | 458,695 |   |
|                                            |       |                       |         |                                       |       |                                  |       |                   |       |      |       |
| Period gap                                      |       | $                          | (87,216      | )                                          | $          | (46,908                               | )          | $                      | 79,366     |      | $          | 77,394 |   | $ | 22,636 |   |
| Cumulative gap                                  |       | $                          | (87,216      | )                                          | $          | (134,124                              | )          | $                      | (54,758    | )         | $          | 22,636 |   | $ | 22,636 |   |
|                                            |       |                       |         |                                       |       |                                  |       |                   |       |      |       |
| Ratio of cumulative gap to total earning assets |       | (18.12                     | )%           | (27.87                                     | )%         | (11.38                                | )%         | 4.70                   | %          | 4.70      | %          |

** **

**43**

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** **

**Item 7:  Financial Statements.**

** **

**INDEX TOAUDITED FINANCIAL STATEMENTS**

 

 

**TIDELANDS BANCSHARES, INC. ANDSUBSIDIARY**

 
| Report of Independent  Registered Public Accounting Firm                                                                                           | 45     |
|----------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                               |   |
| Consolidated Balance Sheets  as of December 31, 2007 and 2006                                                                                 | 46     |
|                                                                                                                                               |   |
| Consolidated  Statements of Operations for the years ended December 31, 2007, 2006 and  2005                                                  | 47     |
|                                                                                                                                               |   |
| Consolidated  Statements of Changes in Shareholders’ Equity and Comprehensive Incomefor the years ended December 31, 2007, 2006 and 2005 | 48     |
|                                                                                                                                               |   |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2007, 2006 and  2005                                                  | 49     |
|                                                                                                                                               |   |
| Notes to  Consolidated Financial Statements                                                                                                        | 50-74  |

 

 

44

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## ** **

## **REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

## ** **

 

The Board of Directors

Tidelands Bancshares, Inc.

Mount Pleasant, SouthCarolina

 

We have audited theaccompanying consolidated balance sheets of Tidelands Bancshares, Inc. andits subsidiary as of December 31, 2007 and 2006 and the relatedconsolidated statements of operations, changes in shareholders’ equity andcomprehensive income, and cash flows for each of the three years in the periodended December 31, 2007.  These financialstatements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Tidelands Bancshares, Inc.,and its subsidiary, as of December 31, 2007 and 2006 and the results oftheir operations and their cash flows for each of the three years in the periodended December 31, 2007, in conformity with U.S. generally acceptedaccounting principles.

 

We were not engaged toexamine management’s assertion about the effectiveness of Tidelands Bancshares, Inc.’sinternal control over financial reporting as of December 31, 2007 includedin the accompanying Management’s Report on Internal Control over FinancialReporting and, accordingly, we do not express an opinion thereon.

 

 

Elliott Davis, LLC

Columbia, South Carolina

March 18, 2008

 

 

45

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# ** **

# **TidelandsBancshares, Inc. and Subsidiary**

# **ConsolidatedBalance Sheets**

 
| ** **                                                                                                                                                                              | ** ** | **December 31,** | ** **      | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|-----------------|-----------------------|------------|
| **Assets:**                                                                                                                                                                             | ** ** | **2007**              | ** **      | **2006**              | ** ** |
| Cash and cash  equivalents:                                                                                                                                                             |       |                  |            |                  |       |
| Cash and due  from banks                                                                                                                                                                |       | $                     | 724,957         |                  | $          | 2,899,995 |   |
| Federal funds  sold                                                                                                                                                                     |       | 1,945,000             |            | 2,514,000             |       |
| Total cash and  cash equivalents                                                                                                                                                        |       | 2,669,957             |            | 5,413,995             |       |
| Securities  available for sale                                                                                                                                                          |       | 88,036,109            |            | 37,503,989            |       |
| Nonmarketable  equity securities                                                                                                                                                        |       | 2,060,940             |            | 1,182,100             |       |
| Total securities                                                                                                                                                                        |       | 90,097,049            |            | 38,686,089            |       |
| Mortgage loans  held for sale                                                                                                                                                           |       | 1,426,800             |            | 2,557,434             |       |
| Loans receivable                                                                                                                                                                        |       | 391,349,869           |            | 273,210,128           |       |
| Less allowance  for loan losses                                                                                                                                                         |       | 4,158,324             |            | 3,467,000             |       |
| Loans, net                                                                                                                                                                              |       | 387,191,545           |            | 269,743,128           |       |
| Premises,  furniture and equipment, net                                                                                                                                                 |       | 17,759,388            |            | 8,784,902             |       |
| Accrued interest  receivable                                                                                                                                                            |       | 3,164,124             |            | 1,920,279             |       |
| Bank owned life  insurance                                                                                                                                                              |       | 7,849,156             |            | 7,559,124             |       |
| Other assets                                                                                                                                                                            |       | 2,111,572             |            | 1,907,133             |       |
| Total assets                                                                                                                                                                            |       | $                     | 512,269,591     |                  | $          | 336,572,084 |   |
|                                                                                                                                                                                    |       |                  |            |                  |       |
| **Liabilities:**                                                                                                                                                                        | ** ** | ** **            | ** **      | ** **            | ** ** |
| Deposits:                                                                                                                                                                               |       |                  |            |                  |       |
| Noninterest-bearing  transaction accounts                                                                                                                                               |       | $                     | 10,191,152      |                  | $          | 9,461,150 |   |
| Interest-bearing  transaction accounts                                                                                                                                                  |       | 8,460,166             |            | 5,956,213             |       |
| Savings and  money market                                                                                                                                                               |       | 199,833,835           |            | 138,834,651           |       |
| Time deposits  $100,000 and over                                                                                                                                                        |       | 29,876,086            |            | 7,814,307             |       |
| Other time  deposits                                                                                                                                                                    |       | 139,808,202           |            | 97,066,376            |       |
| Total deposits                                                                                                                                                                          |       | 388,169,441           |            | 259,132,697           |       |
|                                                                                                                                                                                    |       |                  |            |                  |       |
| Securities sold  under agreements to repurchase                                                                                                                                         |       | 41,040,000            |            | 10,000,000            |       |
| Junior  subordinated debentures                                                                                                                                                         |       | 8,248,000             |            | 8,248,000             |       |
| Advances from  Federal Home Loan Bank                                                                                                                                                   |       | 29,000,000            |            | 16,000,000            |       |
| ESOP borrowings                                                                                                                                                                         |       | 2,427,500             |            | —                |       |
| Accrued interest  payable                                                                                                                                                               |       | 1,341,161             |            | 971,432               |       |
| Other  liabilities                                                                                                                                                                      |       | 1,088,319             |            | 399,501               |       |
| Total  liabilities                                                                                                                                                                      |       | 471,314,421           |            | 294,751,630           |       |
|                                                                                                                                                                                    |       |                  |            |                  |       |
| Commitments and contingencies                                                                                                                                                           |       | —                |            | —                |       |
| ** **                                                                                                                                                                              | ** ** | ** **            | ** **      | ** **            | ** ** |
| **Shareholders’ equity:**                                                                                                                                                          | ** ** | ** **            | ** **      | ** **            | ** ** |
| Preferred stock,  $.01 par value, 10,000,000 shares authorized, none issued                                                                                                             |       | —                |            | —                |       |
| Common stock,  $.01 par value, 10,000,000 shares authorized; 4,277,176 and 4,272,385 shares  issued and outstanding at December 31, 2007 and December 31, 2006,  respectively |       | 42,772                |            | 42,724                |       |
| Unearned ESOP  shares                                                                                                                                                                   |       | (2,427,500            | )               | —                |       |
| Capital surplus                                                                                                                                                                         |       | 42,788,666            |            | 42,045,551            |       |
| Retained  earnings (deficit)                                                                                                                                                            |       | 49,164                |            | (364,140              | )          |
| Accumulated  other comprehensive income                                                                                                                                                 |       | 502,068               |            | 96,319                |       |
| Total  shareholders’ equity                                                                                                                                                        |       | 40,955,170            |            | 41,820,454            |       |
| Total  liabilities and shareholders’ equity                                                                                                                                        | ** ** | **$**                 | **512,269,591** | ** **            | **$**      | **336,572,084** | ** ** |

 

The accompanying notes are integral tothese financial statements.

 

 

46

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**Tidelands Bancshares, Inc. and Subsidiary**

**ConsolidatedStatements of Operations**

**For theyears ended December 31, 2007, 2006 and 2005**

 
| ** **                                               | ** ** | **2007**      | ** **  | **2006**      | ** ** | **2005**      | ** ** |
|----------------------------------------------------------|------------|---------------|-------------|---------------|------------|---------------|------------|
| **Interest income:**                                     | ** ** | ** **    | ** **  | ** **    | ** ** | ** **    | ** ** |
| Loans, including  fees                                   |       | $             | 27,805,332  |          | $          | 20,130,292    |       | $ | 8,382,809 |   |
| Securities  available for sale, taxable                  |       | 2,462,876     |        | 1,306,995     |       | 632,235       |       |
| Securities  available for sale, non-taxable              |       | 439,719       |        | 6,832         |       | —        |       |
| Federal funds  sold                                      |       | 701,701       |        | 323,084       |       | 215,329       |       |
| Other interest  income                                   |       | 16,211        |        | 2,648         |       | 1,056         |       |
| Total interest  income                                   |       | 31,425,839    |        | 21,769,851    |       | 9,231,429     |       |
| **Interest expense:**                                    | ** ** | ** **    | ** **  | ** **    | ** ** | ** **    | ** ** |
| Time deposits  $100,000 and over                         |       | 562,024       |        | 486,814       |       | 560,032       |       |
| Other deposits                                           |       | 16,012,340    |        | 9,959,450     |       | 3,197,515     |       |
| Other borrowings                                         |       | 2,415,800     |        | 1,401,680     |       | 293,481       |       |
| Total interest expense                                   |       | 18,990,164    |        | 11,847,944    |       | 4,051,028     |       |
| **Net interest income**                                  |       | 12,435,675    |        | 9,921,907     |       | 5,180,401     |       |
| Provision for loan losses                                |       | 1,025,000     |        | 1,222,000     |       | 1,545,000     |       |
| **Net interest income after provision for loan  losses** |       | 11,410,675    |        | 8,699,907     |       | 3,635,401     |       |
|                                                     |       |          |        |          |       |          |       |
| **Noninterest income:**                                  | ** ** | ** **    | ** **  | ** **    | ** ** | ** **    | ** ** |
| Service charges  on deposit accounts                     |       | 35,476        |        | 23,631        |       | 13,454        |       |
| Residential  mortgage origination income                 |       | 764,130       |        | 664,454       |       | 398,577       |       |
| Gain (loss) on  sale of securities available for sale    |       | 37,637        |        | (136,628      | )          | —        |       |
| Gain on sale of  real estate                             |       | 9,488         |        | 13,686        |       | —        |       |
| Other service  fees and commissions                      |       | 192,697       |        | 144,236       |       | 54,785        |       |
| Bank owned life  insurance                               |       | 290,032       |        | 59,124        |       | —        |       |
| Other                                                    |       | 25,407        |        | 18,614        |       | 8,385         |       |
| Total  noninterest income                                |       | 1,354,867     |        | 787,117       |       | 475,201       |       |
| **Noninterest expense:**                                 | ** ** | ** **    | ** **  | ** **    | ** ** | ** **    | ** ** |
| Salaries and  employee benefits                          |       | 6,918,015     |        | 4,483,848     |       | 2,309,422     |       |
| Net occupancy                                            |       | 1,029,784     |        | 486,311       |       | 335,307       |       |
| Furniture and  equipment                                 |       | 484,146       |        | 297,637       |       | 264,918       |       |
| Other operating                                          |       | 3,645,293     |        | 1,856,422     |       | 1,141,024     |       |
| Total  noninterest expense                               |       | 12,077,238    |        | 7,124,218     |       | 4,050,671     |       |
| **Income before income taxes**                           |       | 688,304       |        | 2,362,806     |       | 59,931        |       |
| Income tax expense                                       |       | 275,000       |        | 874,000       |       | 20,411        |       |
| **Net income**                                           | ** ** | **$**         | **413,304** | ** **    | **$**      | **1,488,806** | ** ** | **$** | **39,520** | ** ** |
| **Earnings per common share:**                           | ** ** | ** **    | ** **  | ** **    | ** ** | ** **    | ** ** |
| Basic earnings per share                                 | ** ** | **$**         | **0.10**    | ** **    | **$**      | **0.45**      | ** ** | **$** | **0.02** | ** ** |
| Diluted earnings per share                               | ** ** | **$**         | **0.10**    | ** **    | **$**      | **0.44**      | ** ** | **$** | **0.02** | ** ** |
| **Weighted average common shares outstanding:**          | ** ** | ** **    | ** **  | ** **    | ** ** | ** **    | ** ** |
| Basic                                                    | ** ** | **4,214,910** | ** **  | **3,327,103** | ** ** | **2,620,990** | ** ** |
| Diluted                                                  | ** ** | **4,270,005** | ** **  | **3,327,505** | ** ** | **2,635,446** | ** ** |

 

The accompanyingnotes are integral to these financial statements.

 

47

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**Tidelands Bancshares, Inc. and Subsidiary**

**ConsolidatedStatements of Changes in Shareholders’ Equity and Comprehensive Income**

**For theyears ended December 31, 2007, 2006 and 2005**

 
| ** **                                                    | ** ** | **Common  Stock** | ** ** | **Unearned  ESOP** | ** ** | **Capital** | ** ** | **Retained earnings** | ** ** | **Accumulated  other  comprehensive** | ** **     | ** **         | ** ** |
|---------------------------------------------------------------|------------|-------------------|------------|--------------------|------------|-------------|------------|-----------------------|------------|---------------------------------------|----------------|--------------------|------------|
| ** **                                                    | ** ** | **Shares**        | ** ** | **Amount**         | ** ** | **Shares**  | ** ** | **surplus**           | ** ** | **(deficit)**                         | ** **     | **income  (loss)** | ** ** | **Total** | ** ** |
| ** **                                                    | ** ** | ** **        | ** ** | ** **         | ** ** | ** **  | ** ** | ** **            | ** ** | ** **                            | ** **     | ** **         | ** ** | ** ** | ** ** |
| **Balance, December 31, 2004**                           | ** ** | **1,318,693**     | ** ** | **$**              | **13,187** | ** **  | **$**      | **—**            | ** ** | **$**                                 | **10,113,380** | ** **         | **$**      | **(1,892,466** | **)** | **$** | **75,105** | ** ** | **$** | **8,309,206** | ** ** |
| Proceeds from  exercise of stock options                      |       | 13,361            |       | 134                |       |        |       | 117,445               |       |                                  |           |               |       | 117,579 |   |
| Net proceeds from  issuance of common stock                   |       | 1,712,000         |       | 17,120             |       |        |       | 14,867,753            |       |                                  |           |               |       | 14,884,873 |   |
| Net income                                                    |       |              |       |               |       |        |       |                  |       | 39,520                                |           |               |       | 39,520 |   |
| Other  comprehensive loss, net of taxes of $132,146           |       |              |       |               |       |        |       |                  |       |                                  |           | (256,520           | )          | (256,520 | ) |
| Comprehensive loss                                            |       |              |       |               |       |        |       |                  |       |                                  |           |               |       | (217,000 | ) |
| **Balance, December 31, 2005**                           | ** ** | **3,044,054**     | ** ** | **$**              | **30,441** | ** **  | **$**      | **—**            | ** ** | **$**                                 | **25,098,578** | ** **         | **$**      | **(1,852,946** | **)** | **$** | **(181,415** | **)** | **$** | **23,094,658** | ** ** |
|                                                          |       |              |       |               |       |        |       |                  |       |                                  |           |               |       |   |   |
| Proceeds from  exercise of stock options                      |       | 28,331            |       | 283                |       |        |       | 257,342               |       |                                  |           |               |       | 257,625 |   |
| Net proceeds from  issuance of common stock                   |       | 1,200,000         |       | 12,000             |       |        |       | 16,442,045            |       |                                  |           |               |       | 16,454,045 |   |
| Stock based compensation expense                              |       |              |       |               |       |        |       | 247,586               |       |                                  |           |               |       | 247,586 |   |
| Net income                                                    |       |              |       |               |       |        |       |                  |       | 1,488,806                             |           |               |       | 1,488,806 |   |
| Other  comprehensive income, net of taxes of $146,916         |       |              |       |               |       |        |       |                  |       |                                  |           | 277,734            |       | 277,734 |   |
| Comprehensive income                                          |       |              |       |               |       |        |       |                  |       |                                  |           |               |       | 1,766,540 |   |
| **Balance, December 31, 2006**                           | ** ** | **4,272,385**     | ** ** | **$**              | **42,724** | ** **  | **$**      | **—**            | ** ** | **$**                                 | **42,045,551** | ** **         | **$**      | **(364,140** | **)** | **$** | **96,319** | ** ** | **$** | **41,820,454** | ** ** |
|                                                          |       |              |       |               |       |        |       |                  |       |                                  |           |               |       |   |   |
| Proceeds from  exercise of stock options                      |       | 4,791             |       | 48                 |       |        |       | 43,151                |       |                                  |           |               |       | 43,199 |   |
| Stock based compensation expense                              |       |              |       |               |       |        |       | 699,964               |       |                                  |           |               |       | 699,964 |   |
| Guarantee of ESOP  borrowings, net of current year repayments |       |              |       |               |       | (2,427,500  | )          |                  |       |                                  |           |               |       | (2,427,500 | ) |
| Net income                                                    |       |              |       |               |       |        |       |                  |       | 413,304                               |           |               |       | 413,304 |   |
| Other comprehensive  income, net of taxes of $236,295         |       |              |       |               |       |        |       |                  |       |                                  |           | 405,749            |       | 405,749 |   |
| Comprehensive income                                          |       |              |       |               |       |        |       |                  |       |                                  |           |               |       | 819,053 |   |
| **Balance, December 31, 2007**                           | ** ** | **4,277,176**     | ** ** | **$**              | **42,772** | ** **  | **$**      | **(2,427,500**        | **)**      | **$**                                 | **42,788,666** | ** **         | **$**      | **49,164** | ** ** | **$** | **502,068** | ** ** | **$** | **40,955,170** | ** ** |

 

 

The accompanyingnotes are integral to these financial statements.

 

48

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**Tidelands Bancshares, Inc. and Subsidiary**

**Consolidated Statements of Cash Flows**

**For theyears ended December 31, 2007, 2006 and 2005**

 
| ** **                                                                                   | ** ** | **2007**     | ** **     | **2006**     | ** ** | **2005**       | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------|----------------|--------------|------------|----------------|------------|
| **Cash flows from operating activities:**                                                    |       |         |           |         |       |           |       |
| Net income                                                                                   |       | $            | 413,304        |         | $          | 1,488,806      |       | $ | 39,520 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:           |       |         |           |         |       |           |       |
| Provision for  loan losses                                                                   |       | 1,025,000    |           | 1,222,000    |       | 1,545,000      |       |
| Depreciation and  amortization expense                                                       |       | 575,079      |           | 278,129      |       | 233,413        |       |
| Discount  accretion and premium amortization                                                 |       | (36,236      | )              | (35,739      | )          | (15,291        | )          |
| Stock based  compensation expense                                                            |       | 699,964      |           | 247,586      |       | —         |       |
| (Increase)  decrease in deferred income tax                                                  |       | (211,396     | )              | (135,768     | )          | 71,910         |       |
| Proceeds from  sale of residential mortgages                                                 |       | 52,245,300   |           | 41,466,629   |       | 19,251,352     |       |
| Disbursements  for residential mortgages held-for-sale                                       |       | (51,114,666  | )              | (42,859,214  | )          | (19,752,201    | )          |
| Increase in  accrued interest receivable                                                     |       | (1,243,845   | )              | (1,015,051   | )          | (663,331       | )          |
| Increase in  accrued interest payable                                                        |       | 369,729      |           | 526,433      |       | 305,652        |       |
| Increase in cash  surrender value of life insurance                                          |       | (290,032     | )              | (59,124      | )          | —         |       |
| (Gain) loss from  sale of securities available-for-sale                                      |       | (37,637      | )              | 136,628      |       | —         |       |
| Increase in  other assets                                                                    |       | (229,338     | )              | (668,227     | )          | (48,679        | )          |
| Increase  (decrease) in other liabilities                                                    |       | 688,818      |           | 244,598      |       | (113,501       | )          |
| Net cash  provided by operating activities                                                   |       | 2,854,044    |           | 837,686      |       | 853,844        |       |
| **Cash flows from investing activities:**                                                    | ** ** | ** **   | ** **     | ** **   | ** ** | ** **     | ** ** |
| Purchases of  nonmarketable equity securities                                                |       | (878,840     | )              | (1,031,500   | )          | (93,700        | )          |
| Purchases of  securities available-for-sale                                                  |       | (64,389,788  | )              | (38,719,833  | )          | —         |       |
| Proceeds from  sales of securities available-for-sale                                        |       | 12,514,016   |           | 11,428,559   |       | —         |       |
| Proceeds from  calls and maturities of securities available-for-sale                         |       | 2,059,570    |           | 1,893,347    |       | 2,154,937      |       |
| Net increase in  loans receivable                                                            |       | (118,473,417 | )              | (93,549,961  | )          | (124,368,908   | )          |
| Purchase of bank  owned life insurance                                                       |       | —       |           | (7,500,000   | )          | —         |       |
| Purchase of  premises, furniture and equipment, net                                          |       | (9,549,566   | )              | (3,545,124   | )          | (4,956,623     | )          |
| Net cash used by  investing activities                                                       |       | (178,718,025 | )              | (131,024,512 | )          | (127,264,294   | )          |
| **Cash flows from financing activities:**                                                    | ** ** | ** **   | ** **     | ** **   | ** ** | ** **     | ** ** |
| Net increase in  demand deposits, interest-bearing transaction accounts and savings accounts |       | 64,233,139   |           | 23,023,661   |       | 87,718,411     |       |
| Net increase in  certificates of deposit and other time deposits                             |       | 64,803,605   |           | 61,460,584   |       | 26,630,502     |       |
| Repayments on  notes payable, and other borrowings                                           |       | —       |           | (1,571,151   | )          | (2,020,932     | )          |
| Proceeds from  notes payable                                                                 |       | —       |           | —       |       | 3,551,643      |       |
| Increase in  securities sold under agreements to repurchase                                  |       | 31,040,000   |           | 3,500,000    |       | —         |       |
| Proceeds from  junior subordinated debentures                                                |       | —       |           | 8,248,000    |       | —         |       |
| Increase in FHLB  advances                                                                   |       | 13,000,000   |           | 16,000,000   |       | —         |       |
| Proceeds from  ESOP borrowings                                                               |       | 2,527,500    |           | —       |       | —         |       |
| Repayment of  ESOP borrowings                                                                |       | (100,000     | )              | —       |       | —         |       |
| Increase in  unearned ESOP shares                                                            |       | (2,427,500   | )              | —       |       | —         |       |
| Proceeds from  issuance of common stock, net                                                 |       | —       |           | 16,454,045   |       | 14,884,873     |       |
| Proceeds from  exercise of stock options                                                     |       | 43,199       |           | 257,625      |       | 117,579        |       |
| Net cash  provided by financing activities                                                   |       | 173,119,943  |           | 127,372,764  |       | 130,882,076    |       |
| **Net increase (decrease) in cash and cash  equivalents**                                    |       | (2,744,038   | )              | (2,814,062   | )          | 4,471,626      |       |
| **Cash and cash equivalents, beginning of period**                                           |       | 5,413,995    |           | 8,228,057    |       | 3,756,431      |       |
| **Cash and cash equivalents, end of period**                                                 | ** ** | **$**        | **2,669,957**  | ** **   | **$**      | **5,413,995**  | ** ** | **$** | **8,228,057** | ** ** |
| ** **                                                                                   | ** ** | ** **   | ** **     | ** **   | ** ** | ** **     | ** ** |
| **Cash paid during the period for:**                                                         | ** ** | ** **   | ** **     | ** **   | ** ** | ** **     | ** ** |
| Income taxes                                                                                 | ** ** | **$**        | **160,107**    | ** **   | **$**      | **1,298,152**  | ** ** | **$** | **—** | ** ** |
| Interest                                                                                     | ** ** | **$**        | **18,620,436** | ** **   | **$**      | **11,321,511** | ** ** | **$** | **3,745,377** | ** ** |

### ** **

The accompanying notesare integral to these financial statements.

 

49

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### ** **

### **NOTE1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

### ** **

**Organization** - Tidelands Bancshares, Inc. (the“Company”) was incorporated on January 31, 2002 to serve as a bank holdingcompany for its subsidiary, Tidelands Bank (the “Bank”).  The Company operated as a development stagecompany from January 31, 2002 to October 5, 2003.  Tidelands Bank commenced business on October 6,2003.  The principal business activity ofthe Bank is to provide banking services to domestic markets, principally inCharleston, Dorchester, Berkeley, Horry and Beaufort Counties in SouthCarolina.  The Bank is a state-charteredcommercial bank, and its deposits are insured by the Federal Deposit InsuranceCorporation.  The consolidated financialstatements include the accounts of the parent company and its wholly-ownedsubsidiary after elimination of all significant intercompany balances andtransactions. On February 22, 2006, the Company formed Tidelands StatutoryTrust for the purpose of issuing trust preferred securities. In accordance withcurrent accounting guidance, the Trust is not consolidated in these financialstatements.

 

**Management’s Estimates** - The preparation of consolidatedfinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of income and expenses during the reportingperiod.  Actual results could differ fromthose estimates.

 

Material estimates thatare particularly susceptible to significant change relate to the determinationof the allowance for losses on loans, including valuation allowances forimpaired loans, and the valuation of real estate acquired in connection withforeclosures or in satisfaction of loans. In connection with the determination of the allowances for losses onloans and foreclosed real estate, management obtains independent appraisals forsignificant properties.  Management mustalso make estimates in determining the estimated useful lives and methods fordepreciating premises and equipment.

 

While management usesavailable information to recognize losses on loans and foreclosed real estate,future additions to the allowances may be necessary based on changes in localeconomic conditions.  In addition,regulatory agencies, as an integral part of their examination process,periodically review the Bank’s allowances for losses on loans and foreclosedreal estate. Such agencies may require the Bank to recognize additions to theallowances based on their judgments about information available to them at thetime of their examination.  Because ofthese factors, it is reasonably possible that the allowances for losses onloans and foreclosed real estate may change materially in the near term.

 

**Concentrationsof Credit Risk**- Financial instruments, which potentially subject the Company toconcentrations of credit risk, consist principally of loans receivable,investment securities, federal funds sold and amounts due from banks.

 

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

 

In addition to monitoringpotential concentrations of loans to particular borrowers or groups ofborrowers, industries and geographic regions, management monitors exposure tocredit risk from concentrations of lending products and practices such as loansthat subject borrowers to substantial payment increases (e.g., principaldeferral periods, loans with initial interest-only periods, etc.), and loanswith high loan-to-value ratios.  Additionally, there are industry practices that could subject theCompany to increased credit risk should economic conditions change over thecourse of a loan’s life.  For example,the Company makes variable rate loans and fixed rate principal-amortizing loanswith maturities prior to the loan being fully paid (i.e., balloon paymentloans).  These loans are underwritten andmonitored to manage the associated risks. Therefore, management believes that these particular practices do notsubject the Company to unusual credit risk.

 

 

50

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The Company’s investmentportfolio consists principally of obligations of the United States and itsagencies or its corporations.  In theopinion of management, there is no concentration of credit risk in itsinvestment portfolio.  The Company placesits deposits and correspondent accounts with and sells its federal funds tohigh quality institutions.  Managementbelieves credit risk associated with correspondent accounts is not significant.

 

**Securities Available-for-Sale******- Securities available-for-sale are carried atamortized cost and adjusted to estimated market value by recognizing theaggregate unrealized gains or losses in a valuation account.  Aggregate market valuation adjustments arerecorded in shareholders’ equity net of deferred income taxes.  Reductions in market value considered bymanagement to be other than temporary are reported as a realized loss and areduction in the cost basis of the security. The adjusted cost basis ofinvestments available-for-sale is determined by specific identification and isused in computing the gain or loss upon sale.

 

**Nonmarketable Equity Securities** - Nonmarketable equity securitiesinclude the cost of the Company’s investment in the stock of the Federal HomeLoan Bank and stock in community bank holding companies.  The  FederalHome Loan Bank stock has no quoted market value and no ready marketexists.  Investment in the Federal HomeLoan Bank is a condition of borrowing from the Federal Home Loan Bank, and thestock is pledged to collateralize such borrowings.  Dividends received on this stock are includedas interest income on securities available for sale.

 

**Loans Receivable** - Loans are stated at their unpaidprincipal balance.  Interest income onloans is computed based upon the unpaid principal balance.  Interest income is recorded in the period earned.

 

The accrual of interestincome is generally discontinued when a loan becomes contractually 90 days pastdue as to principal or interest. Management may elect to continue the accrual of interest when theestimated net realizable value of collateral exceeds the principal balance andaccrued interest. A payment of interest on a loan that is classified asnonaccrual is applied against the principal balance.

 

### **Loan origination andcommitment fees are deferred and amortized to income over the contractual lifeof the related loans or commitments, adjusted for prepayments, using thestraight-line method, which approximates the interest method.**

### ** **

UnderStatement of Financial Accounting Standards (“SFAS”) No. 114, *Accounting by Creditors for the Impairment of a Loan,*andSFAS No. 118, *Accounting by Creditorsfor Impairment of a Loan - Income Recognition and Disclosures,* loansare defined as impaired when it is probable that a creditor will be unable tocollect all amounts due according to the contractual terms of the loanagreement.  All loans are subject to thiscriteria except for “smaller balance homogeneous loans that are collectivelyevaluated for impairment” and loans “measured at fair value or at the lower ofcost or fair value.”  The Companyconsiders its consumer installment portfolio, credit card loans, and homeequity lines as such exceptions. Therefore, the real estate and commercial loan portfolios are primarilyaffected by these statements.

 

Impairment of a loan ismeasured based on the present value of expected future cash flows discounted atthe loan’s effective interest rate or the fair value of the collateral if theloan is collateral dependent.  Whenmanagement determines that a loan is impaired, the difference between theCompany’s investment in the related loan and the present value of the expectedfuture cash flows, or the fair value of the collateral, is charged to bad debtexpense with a corresponding entry to the allowance for loan losses.  The accrual of interest is discontinued on animpaired loan when management determines the borrower may be unable to meetpayments as they become due.

 

**Allowancefor Loan Losses -** An allowance for loan losses ismaintained at a level deemed appropriate by management to provide adequatelyfor known and inherent losses in the loan portfolio.  The allowance for loan losses represents anamount which the Company believes will be adequate to absorb probable losses onexisting loans that may become uncollectible in the future.  The Company’s judgment as to the adequacy ofthe allowance for loan losses is based on a number of assumptions about futureevents, which the Company believes to be reasonable, but which may or may notprove to be accurate.  The Company’sdetermination of the allowance for loan losses is based on evaluations of thecollectibility of loans, including consideration of factors such as the balanceof impaired loans, the quality, mix, and size of the Company’s overall loanportfolio, economic conditions that may affect the borrower’s ability to repay,the amount and quality of collateral securing the loans, the

 

 

51

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Company’shistorical loan loss experience, and a review of specific problem loans.  The Company also considers subjective issuessuch as changes in the lending policies and procedures, changes in thelocal/national economy, changes in volume or type of credits, changes involume/severity of problem loans, quality of loan review and board of directoroversight, concentrations of credit, and peer group comparisons.  Loans which are deemed to be uncollectibleare charged off and deducted from the allowance.  The provision for loan losses and recoveriesof loans previously charged off are added to the allowance. An analysis of SFASNo. 5, *Accounting for Contingencies*, and SFASNo. 114, *Accounting by Creditors for Impairment of aLoan* indicates that the level of the allowance for loan losses isappropriate to cover estimated credit losses on individually evaluated loans aswell as estimated credit losses inherent in the remainder of the portfolio.

 

**ResidentialMortgage Loans Held-for-Sale** - The Company’s residential mortgage lendingactivities for sale in the secondary market are comprised of acceptingresidential mortgage loan applications, qualifying borrowers to standardsestablished by investors, funding residential mortgage loans and sellingmortgage loans to investors under pre-existing commitments.  Funded residential mortgages held temporarilyfor sale to investors are recorded at the lower of cost or market value.  Application and origination fees collected bythe Company are recognized as income upon sale to the investor.

 

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

 

**Premises, Furniture and Equipment** - Premises, furniture and equipment arestated 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 five to 10years and buildings of 40 years. Leasehold improvements are amortized over the life of the leases, whichrange from one to 40 years.  The cost ofassets sold or otherwise disposed of and the related allowance for depreciationare eliminated from the accounts and the resulting gains or losses arereflected in the income statement when incurred.  Maintenance and repairs are charged tocurrent expense.  The costs of majorrenewals and improvements are capitalized.

 

**Securities Sold Under Agreementsto Repurchase**- The Bank enters into sales of securities under agreements to repurchase.  Fixed-coupon repurchase agreements aretreated as financing, with the obligation to repurchase securities sold beingreflected as a liability and the securities underlying the agreements remainingas assets.

 

**Income Taxes** - Income taxes are the sum of amountscurrently payable to taxing authorities and the net changes in income taxespayable or refundable in future years. Income taxes deferred to future years are determined utilizing aliability approach.  This method givesconsideration to the future tax consequences associated with differencesbetween financial accounting and tax bases of certain assets and liabilitieswhich are principally the allowance for loan losses, depreciable premises andequipment, and the net operating loss carry forward.

 

**Retirement Plan** - The Company has a 401(k) profitsharing plan, which provides retirement benefits to substantially all officersand employees who meet certain age and service requirements.  The plan includes a “salary reduction” featurepursuant to Section 401(k) of the Internal Revenue Code.  At its discretion, the Bank can make matchingcontributions of $.25 for every dollar contributed up to 6% of theparticipants’ annual compensation.

 

**Stock Option Expense** - On May 10, 2004, the Companyestablished the 2004 Tidelands Bancshares, Inc. Stock Incentive Plan(“Stock Plan”) that provides for the granting of options to purchase 20% of theoutstanding shares of the Company’s common stock to directors, officers, oremployees of the Company.  The per-shareexercise price of incentive stock options granted under the Stock Plan may notbe less than the fair market value of a share on the date of grant and vest basedon continued service with the Company for a specified period, generally two tofive years following the date of grant. The per-share exercise price of stock options granted is determined by acommittee appointed by the Board of Directors. The expiration date of any option may not be greater than 10 years fromthe date of grant.  Options that expire,unexercised or are forfeited become available for reissuance.

 

 

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**EmployeeStock Ownership Plan******— The Company established theTidelands Bancshares, Inc. Employee Stock Ownership Plan (“ESOP”) for theexclusive benefit of all eligible Employees and their beneficiaries subject toauthority to amend, from time to time, or terminate, the ESOP. The ESOP isprimarily designed to invest in common stock of the Company and is permitted topurchase Company common stock with contributions to the ESOP made by theCompany.  Also, the ESOP is permitted toborrow money and use the loan proceeds to purchase Company common stock. Themoney and Company common stock in the ESOP is intended to grow tax free untilretirement, death, permanent disability or other severance of employment withthe Company.  When an employee retires,he/she will receive the value of the accounts that have been set up for thecontributions to the ESOP.  An employeemay also be eligible for benefits in the event of death, permanent disabilityor other severance from employment with the Company.  The employee must pay taxes when the money ispaid following one of these events or any other distributable event describedin the ESOP unless it is transferred to another tax-qualified retirement planor an IRA.

 

**Earnings Per Share** - Basic earnings per share representincome available to shareholders divided by the weighted-average number ofcommon shares outstanding during the period. Dilutive earnings per share reflect additional common shares that wouldhave been outstanding if dilutive potential common shares had been issued.  Potential common shares that may be issued bythe Company relate solely to outstanding stock options and are determined usingthe treasury stock method.  Weightedaverage shares outstanding are reduced for shares encumbered by the ESOPborrowings.

 

### **ComprehensiveIncome**- Accounting principles generally require that recognized income,expenses, gains, and losses be included in net income.  Although certain changes in assets andliabilities, such as unrealized gains and losses on available-for-sale securities,are reported as a separate component of the equity section of the balancesheet, such items, along with net income, are components of comprehensiveincome.

### ** **

**Statements of Cash Flows** - For purposes of reporting cash flowsin the financial statements, the Company considers certain highly liquid debtinstruments purchased with a maturity of three months or less to be cashequivalents.  Cash equivalents includeamounts due from banks and federal funds sold. Generally, federal funds are sold for one-day periods.

 

Changes in the valuationaccount of securities available-for-sale, including the deferred tax effects,are considered noncash transactions for purposes of the statement of cash flowsand are presented in detail in the notes to the consolidated financialstatements.

 

**Off-Balance-Sheet FinancialInstruments** -In the ordinary course of business, the Company enters into off-balance-sheetfinancial instruments consisting of commitments to extend credit and letters ofcredit.  These financial instruments arerecorded in the financial statements when they become payable by the customer.

 

**Recently IssuedAccounting Pronouncements**- The following is asummary of recent authoritative pronouncements that could impact theaccounting, reporting, and / or disclosure of financial information by theCompany.

 

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS157 defines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles, and expands disclosures about fairvalue measurements. This standard eliminates inconsistencies found in variouspriorpronouncementsbut does not require any new fair value measurements. SFAS 157 is effective forthe Company on January 1, 2008 and will not impact the Company’saccounting measurements but it is expected to result in additional disclosures.

 

In September 2006,the FASB ratified the consensuses reached by the FASB’s Emerging Issues TaskForce (“EITF”) relating to EITF 06-4, “Accounting for the Deferred Compensationand Postretirement Benefit Aspects of Endorsement Split-Dollar Life InsuranceArrangements” (“EITF 06-4”).  Entitiespurchase life insurance for various reasons including protection against lossof key employees and to fund postretirement benefits. The two most common typesof life insurance arrangements are endorsement split dollar life and collateralassignment split dollar life. EITF 06-4 covers the former and EITF 06-10(discussed below) covers the latter. EITF 06-4 states that entities withendorsement split-dollar life insurance arrangements that provide a benefit toan employee that extends to 

 

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postretirementperiods should recognize a liability for future benefits in accordance withSFAS No. 106, “Employers’Accounting for Postretirement Benefits Other Than Pensions,” (if, in substance,a postretirement benefit plan exists)**orAccounting Principles Board (“APB”) Opinion No. 12, “Omnibus Opinion—1967” (if the arrangementis, in substance, an individual deferred compensation contract).* *Entitiesshould recognize the effects of applying this issue through either (a) achange in accounting principle through a cumulative-effect adjustment toretained earnings or to other components of equity or net assets in thestatement of financial position as of the beginning of the year of adoption or (b) achange in accounting principle through retrospective application to all priorperiods. EITF 06-4 is effective for the Company on January 1, 2008. TheCompany does not believe the adoption of EITF 06-4 will have a material impacton its financial position, results of operations or cash flows.

 

In September 2006,the FASB ratified the consensus reached on EITF 06-5, “Accounting for Purchasesof Life Insurance—Determining the Amount That Could Be Realized in Accordancewith FASB Technical Bulletin No. 85-4, Accounting for Purchases of LifeInsurance” (“EITF 06-5”).  EITF 06-5 states that a policyholder shouldconsider any additional amounts included in the contractual terms of theinsurance policy other than the cash surrender value in determining the amountthat could be realized under the insurance contract.  EITF 06-5 alsostates that a policyholder should determine the amount that could be realizedunder the life insurance contract assuming the surrender of an individual-lifeby individual-life policy (or certificate by certificate in a group policy).EITF 06-5 is effective for the Company on January 1, 2008.  TheCompany does not believe the adoption of EITF 06-5 will have a material impacton its financial position, results of operations or cash flows.

 

In March 2007,the FASB ratified the consensus reached on EITF 06-10, “Accounting forCollateral Assignment Split-Dollar Life Insurance Arrangements” (“EITF 06-10”).The postretirement aspect of this EITF is substantially similar to EITF 06-4discussed above and requires that an employer recognize a liability for thepostretirement benefit related to a collateral assignment split-dollar lifeinsurance arrangement in accordance with either FASB Statement No. 106 orAPB Opinion No. 12, as appropriate, if the employer has agreed to maintaina life insurance policy during the employee’s retirement or provide theemployee with a death benefit based on the substantive agreement with theemployee.  In addition, a consensus wasreached that an employer should recognize and measure an asset based on thenature and substance of the collateral assignment split-dollar life insurancearrangement. EITF 06-10 is effective for the Company on January 1, 2008.The Company does not believe the adoption of EITF 06-10 will have a materialimpact on its financial position, results of operations or cash flows.

 

In February 2007,the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assetsand Financial Liabilities — Including an amendment of FASB Statement No. 115”(“SFAS 159”). This statement permits, but does not require, entities to measuremany financial instruments at fair value. The objective is to provide entitieswith an opportunity to mitigate volatility in reported earnings caused bymeasuring related assets and liabilities differently without having to applycomplex hedge accounting provisions. Entities electing this option will applyit when the entity first recognizes an eligible instrument and will reportunrealized gains and losses on such instruments in current earnings.   This statement 1) applies to all entities,2) specifies certain election dates, 3) can be applied on an instrument-by-instrumentbasis with some exceptions, 4) is irrevocable and 5) applies only to entireinstruments. One exception is demand deposit liabilities which are explicitlyexcluded as qualifying for fair value. With respect to SFAS 115,available-for-sale and held-to-maturity securities at the effective date areeligible for the fair value option at that date. If the fair value option iselected for those securities at the effective date, cumulative unrealized gainsand losses at that date shall be included in the cumulative-effect adjustmentand thereafter, such securities willbe accounted for as trading securities. SFAS 159 iseffective for the Company on January 1, 2008. The Company is currentlyanalyzing the fair value option that is permitted, but not required, under SFAS159.

 

In November 2007,the Securities and Exchange Commission (“SEC”) issued Staff Accounting BulletinNo. 109, “Written Loan Commitments Recorded at Fair Value Through Earnings”(“SAB 109”). SAB 109 expresses the current view of the SEC staff that theexpected net future cash flows related to the associated servicing of the loanshould be included in the measurement of all written loan commitments that areaccounted for at fair value through earnings.   SEC registrants are expected to apply thisguidance on a prospective basis to derivative loan commitments issued ormodified in the first quarter of 2008 and thereafter. The Company is currentlyanalyzing the impact of this guidance, which relates to the Company’s mortgageloans held for sale.

 

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

 

In December 2007,the FASB issued SFAS No. 160, “Noncontrolling Interests in ConsolidatedFinancial Statements — an amendment of ARB No. 51” (“SFAS 160”). SFAS 160establishes new accounting and reporting standards for the noncontrollinginterest in a subsidiary and for the deconsolidation of a subsidiary. Beforethis statement, limited guidance existed for reporting noncontrolling interests(minority interest). As a result, diversity in practice exists. In some cases minorityinterest is reported as a liability and in others it is reported in themezzanine section between liabilities and equity. Specifically, SFAS 160requires the recognition of a noncontrolling interest (minority interest) asequity in the consolidated financials statements and separate from the parent’sequity. The amount of net income attributable to the noncontrolling interestwill be included in consolidated net income on the face of the incomestatement. SFAS 160 clarifies that changes in a parent’s ownership interest ina subsidiary that do not result in deconsolidation are equity transactions ifthe parent retains its controlling financial interest. In addition, thisstatement requires that a parent recognize gain or loss in net income when asubsidiary is deconsolidated. Such gain or loss will be measured using the fairvalue of the noncontrolling equity investment on the deconsolidation date. SFAS160 also includes expanded disclosure requirements regarding the interests ofthe parent and its noncontrolling interests. SFAS 160 is effective for theCompany on January 1, 2009.  Earlier adoption is prohibited. The Company is currently evaluating theimpact, if any, the adoption of SFAS 160 will have on its consolidatedfinancial statements.

 

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

 

**Risks and Uncertainties** - In the normal course of its business,the Company encounters two significant types of risks: economic andregulatory.  There are three maincomponents of economic risk:  interestrate risk, credit risk and market risk. The Company is subject to interest rate risk to the degree that itsinterest-bearing liabilities mature or reprice at different speeds, or ondifferent basis, than its interest-earning assets.  Credit risk is the risk of default on theloan portfolio that results from borrower’s inability or unwillingness to makecontractually required payments.  Marketrisk reflects changes in the value of collateral underlying loans receivableand the valuation of real estate held by the Company.

 

The Company is subject tothe regulations of various governmental agencies.  These regulations can and do changesignificantly from period to period. Periodic examinations by the regulatory agencies may subject the companyto further changes with respect to asset valuations, amounts of required lossallowances and operating restrictions from the regulators’ judgments based oninformation available to them at the time of their examination.

 

**Reclassifications** - Certain captions and amounts in the2005 and 2006 financial statements were reclassified to conform to the 2007presentation.

 

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** **

**NOTE2 — COMPREHENSIVE INCOME**

** **

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

 
| ** **                                                          | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                          | ** ** | **2007**                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| Unrealized gains (losses) on securities  available-for-sale         |       | $                                | 679,681    |   | $ | 288,022 |   | $ | (388,666 | ) |
| Reclassification  adjustment for gain (loss) realized in net income |       | 37,637                           |       | (136,628 | ) | — |   |
| Net unrealized  gains (losses) on securities                        |       | 642,044                          |       | 424,650 |   | (388,666 | ) |
| Tax effect                                                          |       | (236,295                         | )          | (146,916 | ) | 132,146 |   |
| Net-of-tax  amount                                                  |       | $                                | 405,749    |   | $ | 277,734 |   | $ | (256,520 | ) |

** **

**NOTE3 - CASH AND DUE FROM BANKS**

** **

The Company maintainscash balances with its correspondent banks to meet reserve requirementsdetermined by the Federal Reserve.  At December 31,2007 and 2006, the requirement was met by the cash balance in the vault.

 

**NOTE 4 - INVESTMENT SECURITIES**

 

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

 
| ** **                      | ** ** | **Amortized** | ** **     | **Gross  Unrealized** | ** ** | **Estimated** | ** ** |
|---------------------------------|------------|---------------|----------------|-----------------------|------------|---------------|------------|
| ** **                      | ** ** | **Cost**      | ** **     | **Gains**             | ** ** | **Losses**    | ** ** | **Fair  Value** |   |
| **December 31, 2007**      | ** ** | ** **    | ** **     | ** **            |       |          |       |   |   |
| U.S. agency  securities         |       | $             | 14,033,960     |                  | $          | 229,275       |       | $ | — |   | $ | 14,263,235 |   |
| Government-sponsoredenterprises |       | 33,237,738    |           | 417,287               |       | 1,002         |       | 33,654,023 |   |
| Mortgage-backed  securities     |       | 23,979,241    |           | 269,183               |       | 1,121         |       | 24,247,303 |   |
| Municipals                      |       | 12,440,346    |           | 23,629                |       | 64,341        |       | 12,399,634 |   |
| Preferred stock                 |       | 3,553,000     |           | 71,914                |       | 153,000       |       | 3,471,914 |   |
| Total                           | ** ** | **$**         | **87,244,285** | ** **            | **$**      | **1,011,288** | ** ** | **$** | **219,464** | ** ** | **$** | **88,036,109** | ** ** |
| ** **                      | ** ** | ** **    | ** **     | ** **            | ** ** | ** **    | ** ** | ** ** | ** ** |
| **December 31, 2006**      | ** ** | ** **    | ** **     | ** **            | ** ** | ** **    | ** ** | ** ** | ** ** |
| U.S. agency  securities         |       | $             | 3,015,444      |                  | $          | —        |       | $ | 34,507 |   | $ | 2,980,937 |   |
| Government-sponsoredenterprises |       | 24,604,091    |           | 154,537               |       | 64,987        |       | 24,693,641 |   |
| Mortgage-backed  securities     |       | 6,108,308     |           | 95,312                |       | —        |       | 6,203,620 |   |
| Municipals                      |       | 3,626,366     |           | 33                    |       | 608           |       | 3,625,791 |   |
| Total                           | ** ** | **$**         | **37,354,209** | ** **            | **$**      | **249,882**   | ** ** | **$** | **100,102** | ** ** | **$** | **37,503,989** | ** ** |

 

The amortized cost andestimated fair values of investment securities at December 31, 2007, bycontractual maturity dates, are shown in the following chart.  Actual maturities may differ from contractualmaturities because borrowers may have the right to call or prepay obligationswith or without penalty. Mortgage-backed securities are presented as a separateline item since pay downs are expected before contractual maturity dates.

 

| ** **                             | ** ** | **Amortized Cost** | ** **     | **Fair Value** | ** ** |
|----------------------------------------|------------|--------------------|----------------|----------------|------------|
| Due within one year                    |       | $                  | —         |           | $          | — |   |
| Due after one year through five years  |       | 999,190            |           | 1,011,266      |       |
| Due after five years through ten years |       | 15,748,194         |           | 15,955,436     |       |
| Due after ten years                    |       | 46,517,660         |           | 46,822,104     |       |
| Subtotal                               |       | 63,265,044         |           | 63,788,806     |       |
| Mortgage-backed securities             |       | 23,979,241         |           | 24,247,303     |       |
| Total Securities                       | ** ** | **$**              | **87,244,285** | ** **     | **$**      | **88,036,109** | ** ** |

 

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At December 31, 2007and 2006, investment securities with book values of $52,472,339 and $10,979,693and market values of $53,110,819 and $11,017,268, respectively, were pledged ascollateral for securities sold under agreements to repurchase and Federal HomeLoan Bank advances. Gross proceeds from the sale of investment securitiestotaled $12,514,016 and $11,428,559, resulting in a realized gain of $37,637and loss of $136,628 for the year ended 2007and 2006, respectively. There wereno sales of securities during the year ended December 31, 2005.

 

The following table showsgross unrealized losses and fair value, aggregated by investment category, andlength of time that individual securities have been in a continuous unrealizedloss position, at December 31, 2007 and 2006.

 

Securitiesavailable-for-sale:

 
| ** **                        | ** ** | **Less  than  Twelve months** | ** **    | **Twelve  months or more** | ** ** | **Total**      | ** ** |
|-----------------------------------|------------|-------------------------------|---------------|----------------------------|------------|----------------|------------|
| **December 31, 2007**        | ** ** | **Fair  value**               | ** **    | **Unrealized  losses**     | ** ** | **Fair value** | ** ** | **Unrealized  losses** | ** ** | **Fair  value** | ** ** | **Unrealized  losses** | ** ** |
| U.S. government  agencies         |       | $                             | —        |                       | $          | —         |       | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Government-sponsored  enterprises |       | 959,510                       |          | 214                        |       | 1,472,299      |       | 788 |   | 2,431,809 |   | 1,002 |   |
| Mortgage-backed  securities       |       | 1,537,576                     |          | 1,121                      |       | —         |       | — |   | 1,537,576 |   | 1,121 |   |
| Municipals                        |       | 5,843,156                     |          | 50,535                     |       | 1,346,625      |       | 13,806 |   | 7,189,781 |   | 64,341 |   |
| Preferred stock                   |       | 300,000                       |          | 153,000                    |       | —         |       | — |   | 300,000 |   | 153,000 |   |
|                              | ** ** | **$**                         | **8,640,242** | ** **                 | **$**      | **204,870**    | ** ** | **$** | **2,818,924** | ** ** | **$** | **14,594** | ** ** | **$** | **11,459,166** | ** ** | **$** | **219,464** | ** ** |

 
| ** **                        | ** ** | **Less  than  Twelve months** | ** **     | **Twelve  months or more** | ** ** | **Total**      | ** ** |
|-----------------------------------|------------|-------------------------------|----------------|----------------------------|------------|----------------|------------|
| **December 31, 2006**        | ** ** | **Fair  value**               | ** **     | **Unrealized  losses**     | ** ** | **Fair value** | ** ** | **Unrealized  losses** | ** ** | **Fair  value** | ** ** | **Unrealized  losses** | ** ** |
| U.S. government  agencies         |       | $                             | 2,980,937      |                       | $          | 34,507         |       | $ | — |   | $ | — |   | $ | 2,980,937 |   | $ | 34,507 |   |
| Government-sponsored  enterprises |       | 8,162,453                     |           | 52,619                     |       | 1,484,531      |       | 12,368 |   | 9,646,984 |   | 64,987 |   |
| Mortgage-backed  securities       |       | —                        |           | —                     |       | —         |       | — |   | — |   | — |   |
| Municipals                        |       | 788,839                       |           | 608                        |       | —         |       | — |   | 788,839 |   | 608 |   |
|                              | ** ** | **$**                         | **11,932,229** | ** **                 | **$**      | **87,734**     | ** ** | **$** | **1,484,531** | ** ** | **$** | **12,368** | ** ** | **$** | **13,416,760** | ** ** | **$** | **100,102** | ** ** |

 

Securities classified asavailable-for-sale are recorded at fair market value.  Of the securities in an unrealized loss position,four securities were in a continuous loss position for 12 months or more. TheCompany has the ability and intent to hold these securities until such time asthe value recovers or the securities mature. The Company believes, based on industry analyst reports and creditratings, that the deterioration in value is attributable to changes in marketinterest rates and is not in the credit quality of the issuer and therefore,these losses are not considered other-than-temporary.

 

Nonmarketable equitysecurities include the cost of the Company’s investment in the stock of theFederal Home Loan Bank and $151,640 and $50,000 of stock in community bankholding companies for the periods ending December 31, 2007 and 2006,respectively.  The Federal Home Loan Bankstock has no quoted market value and no ready market exists.  Investment in the Federal Home Loan Bank is acondition of borrowing from the Federal Home Loan Bank, and the stock ispledged to collateralize such borrowings. At December 31, 2007 and 2006, the Company’s investment in FederalHome Loan Bank stock was $1,909,300 and $1,132,100, respectively.

 

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### **NOTE5 - LOANS RECEIVABLE**

 

Major classifications ofloans receivable are summarized as follows:

 
| ** **                     | ** ** | **December 31,** | ** **      |
|--------------------------------|------------|-----------------------|-----------------|
| ** **                     | ** ** | **2007**              | ** **      | **2006** | ** ** |
| Real estate - construction     |       | $                     | 159,814,556     |   | $ | 122,209,433 |   |
| Real estate - mortgage         |       | 204,068,162           |            | 124,715,362 |   |
| Commercial and industrial      |       | 24,349,662            |            | 24,630,818 |   |
| Consumer and other             |       | 3,466,949             |            | 1,901,375 |   |
| Deferred origination fees, net |       | (349,460              | )               | (246,860 | ) |
| Total loans  receivable, gross |       | 391,349,869           |            | 273,210,128 |   |
| Less allowance for loan loss   |       | 4,158,324             |            | 3,467,000 |   |
| Total loans  receivable, net   | ** ** | **$**                 | **387,191,545** | ** ** | **$** | **269,743,128** | ** ** |

 

The composition ofgross loans by rate type is as follows:

 
| ** **          | ** ** | **December 31,** | ** **      |
|---------------------|------------|-----------------------|-----------------|
| ** **          | ** ** | **2007**              | ** **      | **2006** | ** ** |
| Variable rate loans |       | $                     | 221,524,585     |   | $ | 183,302,131 |   |
| Fixed rate loans    |       | 169,825,284           |            | 89,907,997 |   |
| Total gross  loans  | ** ** | **$**                 | **391,349,869** | ** ** | **$** | **273,210,128** | ** ** |

 

Transactions in theallowance for loan losses during 2007, 2006 and 2005 are summarized below:

 
| ** **                             | ** ** | **2007**  | ** **      | **2006**   | ** ** | **2005**        | ** ** |
|----------------------------------------|------------|-----------|-----------------|------------|------------|-----------------|------------|
| Balance, beginning of year             |       | $         | 3,467,000       |       | $          | 2,245,000       |       | $ | 700,000 |   |
| Provision charged to operations        |       | 1,025,000 |            | 1,222,000  |       | 1,545,000       |       |
| Net loan charge offs                   |       | 334,426   |            | —     |       | —          |       |
| Net loan recoveries                    |       | 750       |            | —     |       | —          |       |
| Balance, end of year                   | ** ** | **$**     | **4,158,324**   | ** ** | **$**      | **3,467,000**   | ** ** | **$** | **2,245,000** | ** ** |
| Gross loans outstanding, end of period | ** ** | **$**     | **391,349,869** | ** ** | **$**      | **273,210,128** | ** ** | **$** | **179,660,168** | ** ** |

### ** **

### **The allowance for loanlosses, as a percent of gross loans outstanding, was 1.06%, 1.27% and 1.25% at December 31,2007, 2006 and 2005, respectively.  At December 31,2007, the Bank had three loans totaling $389,095, or 0.10% of gross loans, innonaccrual status. At December 31, 2006, the Bank had two loans totaling$1,964,983, or 0.72% of gross loans, in nonaccrual status.   There were no loans contractually past due90 days or more still accruing interest at December 31, 2007 or 2006. Inaddition, the Bank did not possess any other real estate owned during theperiod ending December 31, 2007, 2006 or 2005. At December 31, 2007,the Bank had three impaired loans totaling $389,095. Our analysis of SFAS No. 5,*Accounting for Contingencies*, and SFAS No. 114,*Accounting by Creditors for Impairment of a Loan*indicates that the level of the allowance for loan losses is appropriate tocover estimated credit losses on individually evaluated loans as well asestimated credit losses inherent in the remainder of the portfolio.**

### ** **

At December 31,2007, loans totaling $41.5 million were pledged as collateral at the FederalHome Loan Bank.

 

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**NOTE 6 - PREMISES, FURNITURE ANDEQUIPMENT**

 

Premises, furniture andequipment consist of the following:

 
| ** **                              | ** ** | **December 31,** | ** **     |
|-----------------------------------------|------------|-----------------------|----------------|
| ** **                              | ** ** | **2007**              | ** **     | **2006** | ** ** |
|                                    |       |                  |           |   |   |
| Land and land improvements              |       | $                     | 3,839,286      |   | $ | 2,918,130 |   |
| Building and leasehold improvements     |       | 10,667,697            |           | 1,838,294 |   |
| Furniture and equipment                 |       | 3,224,925             |           | 1,049,777 |   |
| Software                                |       | 495,633               |           | 254,423 |   |
| Construction in progress                |       | 734,394               |           | 3,366,033 |   |
| Total                                   |       | 18,961,935            |           | 9,426,657 |   |
| Less, accumulated depreciation          |       | 1,202,547             |           | 641,755 |   |
| Premises,  furniture and equipment, net | ** ** | **$**                 | **17,759,388** | ** ** | **$** | **8,784,902** | ** ** |

 

Depreciationexpense for the years ended December 31, 2007, 2006 and 2005 amounted to$575,079, $278,129, and $233,413, respectively. Construction in progress relates to the construction of future branchlocations in Bluffton and Murrells Inlet. For the year ended December 31,2007, the Bank capitalized $165,410 in interest related to the construction ofour new branch locations. There was no capitalized interest incurred during theyear ended December 31, 2006 or 2005.

 

### **NOTE7 - DEPOSITS**

### ** **

At December 31,2007, the scheduled maturities of certificates of deposit were as follows:

 

| **Maturing:** | ** ** | **Amount** | ** **      |
|---------------|------------|------------|-----------------|
| 2008          |       | $          | 117,838,949     |   |
| 2009          |       | 24,300,072 |            |
| 2010          |       | 10,404,616 |            |
| 2011          |       | 11,465,189 |            |
| 2012          |       | 5,567,462  |            |
| Thereafter    |       | 108,000    |            |
| Total         | ** ** | **$**      | **169,684,288** | ** ** |

 

At December 31, 2007and 2006, the Bank had customer relationships with four deposit brokeragefirms, totaling $104.5 million and $13.0 million, respectively.

 

**NOTE 8 - SECURITIES SOLD UNDERREPURCHASE AGREEMENTS**

 

The Bank has entered into sales of securities under agreements torepurchase.  These obligations torepurchase securities sold are reflected as liabilities in the consolidatedbalance sheets and consist of four obligations totaling $41.0 million. OnOctober 23, 2006, the Bank borrowed $10.0 million under a two-yearrepurchase agreement at a variable rate of 5.28% as of December 31, 2007.On September 21, 2007, the Bank borrowed $10.0 million under a five-year repurchaseagreement at a fixed rate of 4.01%.  OnNovember 14, 2007, the Bank borrowed $10.0 million under a nine-yearrepurchase agreement at a fixed rate of 3.50%. On December 27, 2007, theBank borrowed $11.0 million under a short-term repurchase agreement at a fixedrate of 5.27% that was subsequently paid off on January 16, 2008.  All repurchase agreements require quarterlyinterest only payments with principal and interest due on maturity. The dollaramounts of securities underlying the agreements are book entry securities.  U.S. government agency securities with bookvalues of $42,952,339 and $10,979,693 and fair values of $43,461,118 and$11,017,268 at December 31, 2007 and 2006, respectively, are used ascollateral for the agreements.

 

59

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Securities sold underrepurchase agreements are summarized as follows for the years ended December 31,2007 and 2006:

 
| ** **                                 | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|--------------------------------------------|------------|------------|------------|------------|------------|
| Amount outstanding at year end             |       | $          | 41,040,000 |       | $          | 10,000,000 |   |
| Average amount outstanding during year     |       | 14,828,329 |       | 7,804,110  |       |
| Maximum outstanding at any month-end       |       | 41,040,000 |       | 10,000,000 |       |
| Weighted average rate paid at year-end     |       | 4.54       | %          | 5.57       | %          |
| Weighted average rate paid during the year |       | 4.96       | %          | 5.44       | %          |
|                                            |            |            |            |            |            |  |  |

 

**NOTE 9 -JUNIOR SUBORDINATED DEBENTURES**

 

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

 

The Capital Securities in the transaction accrue and pay distributions quarterly at a rate per annum equal to the three-month LIBOR plus 138 basis points, which was 6.61% at December 31, 2007.  The distribution rate payable on the Capital Securities is cumulative and payable quarterly in arrears.  The Company has the right, subject to events of default, to defer payments of interest on the Capital Securities for a period not to exceed 20 consecutive quarterly periods, provided that no extension period may extend beyond the maturity date of March 30, 2036.  The Company has no current intention to exercise its right to defer payments of interest on the Capital Securities.

 

#### **The Capital Securities mature or are mandatorily redeemableupon maturity on March 30, 2036 and or upon earlier optional redemption asprovided in the indenture.  The Companyhas the right to redeem the Capital Securities in whole or in part, on or afterFebruary 22, 2009.  The Company mayalso redeem the capital securities prior to such dates upon occurrence ofspecified conditions and the payment of a redemption premium.**

#### ** **

**NOTE 10 —ADVANCES FROM FEDERAL HOME LOAN BANK**

 

Other borrowings are comprised of three advances totaling $29.0 millionfrom the Federal Home Loan Bank (“FHLB”). On September 17, 2007, the Bank borrowed $16.0 million under afive-year convertible advance at a fixed rate of 4.22%.  On September 21, 2007, the Bank borrowed$9.0 million under a 10-year convertible advance at a fixed rate of 3.96%.  On December 28, 2007, the Bank borrowed$4.0 million under a one-month fixed advance at a rate of 4.69% that wassubsequently paid off on January 28, 2008.  All advances require quarterly interest onlypayments with principal and interest due on maturity.  The advances are collateralized by pledgedFHLB stock and certain investment securities. At December 31, 2007, loans totaling $41.5 million were pledged ascollateral at the Federal Home Loan Bank.

 

FHLBadvances aresummarized as follows for the periods ended December 31, 2007 and 2006:

 
| ** **                                   | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|----------------------------------------------|------------|------------|------------|------------|------------|
| Amount outstanding at period end             |       | $          | 29,000,000 |       | $          | 16,000,000 |   |
| Average amount outstanding during the period |       | 20,575,342 |       | 7,846,575  |       |
| Maximum outstanding at any month-end         |       | 30,000,000 |       | 16,000,000 |       |
| Weighted average rate at period-end          |       | 4.20       | %          | 5.27       | %          |
| Weighted average rate during the period      |       | 4.92       | %          | 5.38       | %          |
|                                              |            |            |            |            |            |  |  |

 

60

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**NOTE 11 -OTHER OPERATING EXPENSES**

 

Otheroperating expenses for the years ended December 31, 2007, 2006 and 2005are summarized below:

 
| ** **                                | ** ** | **2007** | ** **    | **2006**   | ** ** | **2005**      | ** ** |
|-------------------------------------------|------------|----------|---------------|------------|------------|---------------|------------|
| Professional fees                         |       | $        | 1,107,653     |       | $          | 511,230       |       | $ | 238,132 |   |
| Telephone expenses                        |       | 153,174  |          | 74,666     |       | 50,307        |       |
| Office supplies, stationery, and printing |       | 170,697  |          | 74,107     |       | 93,372        |       |
| Insurance                                 |       | 359,654  |          | 108,072    |       | 72,388        |       |
| Postage                                   |       | 26,001   |          | 24,152     |       | 17,732        |       |
| Data processing                           |       | 275,158  |          | 178,649    |       | 124,004       |       |
| Advertising and marketing                 |       | 647,322  |          | 250,135    |       | 125,337       |       |
| FDIC Insurance                            |       | 238,885  |          | 24,366     |       | 10,326        |       |
| Other                                     |       | 666,749  |          | 611,045    |       | 409,426       |       |
| Total                                     | ** ** | **$**    | **3,645,293** | ** ** | **$**      | **1,856,422** | ** ** | **$** | **1,141,024** | ** ** |

 

### **NOTE12 - INCOME TAXES**

### ** **

For the years ended December 31,2007, 2006 and 2005 income tax expense consisted of the following:

 
| ** **            | ** ** | **2007** | ** **  | **2006**   | ** ** | **2005**    | ** ** |
|-----------------------|------------|----------|-------------|------------|------------|-------------|------------|
| Current portion:      |       |     |        |       |       |        |       |
| Federal               |       | $        | 459,977     |       | $          | 650,825     |       | $ | 90,171 |   |
| State                 |       | 26,419   |        | 87,407     |       | 2,150       |       |
| Total current         |       | 486,396  |        | 738,232    |       | 92,321      |       |
| Deferred income taxes |       | (211,396 | )           | 135,768    |       | (71,910     | )          |
| Income tax expense    | ** ** | **$**    | **275,000** | ** ** | **$**      | **874,000** | ** ** | **$** | **20,411** | ** ** |

 

Deferredtax assets represent the future tax benefit of deductible differences and, ifit is more likely than not that a tax asset will not be realized, a valuationallowance is required to reduce the recorded deferred tax assets to netrealizable value.  As of December 31,2007 and 2006, management believes it will fully realize 100% of the Company’sdeferred tax asset.

 

61

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AtDecember 31, 2007, income tax returns from 2006, 2005 and 2004 remainsubject to review by tax authorities.

 

The gross amountsof deferred tax assets and deferred tax liabilities are as follows:

 
| ** **                                       | ** ** | **December 31,** | ** **  |
|--------------------------------------------------|------------|-----------------------|-------------|
| ** **                                       | ** ** | **2007**              | ** **  | **2006** | ** ** | **2005** | ** ** |
| Deferred tax assets:                             |       |                  |        |   |   |   |   |
| Allowance for loan losses                        |       | $                     | 984,449     |   | $ | 701,690 |   | $ | 748,950 |   |
| Net operating loss carry forward                 |       | 39,734                |        | 20,235 |   | — |   |
| Organization and start-up costs                  |       | 86,245                |        | 163,108 |   | 239,970 |   |
| Loan fees and costs                              |       | 118,816               |        | 83,932 |   | 105,745 |   |
| Unrealized loss on securities available for sale |       | —                |        | — |   | 93,454 |   |
| Interest on nonaccrual loans                     |       | 6,104                 |        | 19,541 |   | — |   |
| Tax credit                                       |       | 18,038                |        | — |   | — |   |
| Stock option expense                             |       | 21,879                |        | — |   | — |   |
| Other                                            |       | 28,901                |        | 39,232 |   | 19,891 |   |
| Total deferred  tax assets                       |       | 1,304,166             |        | 1,027,738 |   | 1,208,010 |   |
| Deferred tax liabilities:                        |       |                  |        |   |   |   |   |
| Accumulated depreciation                         |       | 166,891               |        | 129,093 |   | 79,146 |   |
| Prepaid expenses                                 |       | 63,517                |        | 36,284 |   | 37,278 |   |
| Unrealized gain on securities available for sale |       | 289,757               |        | 53,462 |   | — |   |
| Total deferred  tax liabilities                  |       | 520,165               |        | 218,839 |   | 116,424 |   |
| Net deferred tax  asset                          | ** ** | **$**                 | **784,001** | ** ** | **$** | **808,899** | ** ** | **$** | **1,091,586** | ** ** |

 

Areconciliation between the income tax expense and the amount computed byapplying the federal statutory rate of 34% for 2007, 2006 and 2005 to incomebefore income taxes follows:

 
| ** **                                          | ** ** | **2007**   | ** **  | **2006**   | ** ** | **2005**   | ** ** |
|-----------------------------------------------------|------------|------------|-------------|------------|------------|------------|------------|
| ** **                                          | ** ** | **Amount** | ** **  | **Rate**   | ** ** | **Amount** | ** ** | **Rate** | ** ** | **Amount** | ** ** | **Rate** | ** ** |
| Tax expense at  statutory rate                      |       | $          | 234,023     |       | 34.0       | %          | $          | 803,354 |   | 34.0 | % | $ | 20,377 |   | 34.0 | % |
| State income  tax, net of federal income tax effect |       | 17,437     |        | 2.5        | %          | 57,689     |       | 2.5 | % | 1,419 |   | 2.4 | % |
| Stock based  compensation expense                   |       | 210,250    |        | 30.6       | %          | 57,113     |       | 2.4 | % | — |   | — | % |
| Tax exempt interest                                 |       | (149,504   | )           | (21.7      | )%         | —     |       | — | % | — |   | — | % |
| Other                                               |       | (37,206    | )           | (5.4       | )%         | (44,156    | )          | (1.9 | )% | (1,385 | ) | (2.3 | )% |
| Income tax  expense                                 | ** ** | **$**      | **275,000** | ** ** | **40.0**   | **%**      | **$**      | **874,000** | ** ** | **37.0** | **%** | **$** | **20,411** | ** ** | **34.1** | **%** |

 

**NOTE 13 - LEASES**

 

The Bank renegotiated itslease agreement for its main branch location in 2004.  The lease was originated on March 24,2004 and had an initial 10-year term. The lease requires monthly payments of $14,840 for the first threeyears, increased 9% in year four and 3% every year thereafter.  The lease is renewable at the bank’s optionfor two five-year terms.  Rental expenseon this facility was $191,432, $178,076 and $178,076 for the years ended December 31,2007, 2006 and 2005, respectively.

 

The Bank also leased abuilding for its temporary Summerville branch location.  The lease was originated on September 7,2004 and had an initial one-year term. The lease required monthly payments of $3,303 per month.  The lease was terminated in April 2007.Rental expense under this operating lease agreement was $13,113, $54,121, and$42,390 for the years ended December 31, 2007, 2006 and 2005 respectively.

 

The Bank also leased abuilding for its temporary Myrtle Beach branch location. The lease wasoriginated on February 10, 2005 and had an initial two-year term. Thelease was extended up until June 9, 2007 at a monthly expense of $3,000.In addition, the Bank leases a building for the permanent Myrtle Beach branchlocation. The lease commenced on July 1, 2007 and has a 20-year term at amonthly expense of $12,500.   Rentalexpense under these operating lease agreements was $104,000, $23,604 and$22,367 for the years ended December 31, 2007, 2006

 

62

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and 2005. Director JohnGandy is a 50% partner in Office Developers, LLC, which is the owner of anoffice building located at 1312 Professional Drive in Myrtle Beach, SC in whichTidelands Bank is a tenant and is leasing the site for a period of 20 years.

 

The Bank has entered intoa land lease for a West Ashley branch, which opened in July 2007. Thelease was originated on December 22, 2005 and has an initial 20-year term.The lease may be extended at the Bank’s option for four additional five-yearterms.  The lease requires monthlypayments of $5,833 for the first five years, increased 12% every fifth yearthereafter.  In addition, the Bank leasedoffice space for the West Ashley loan production location. The lease wasoriginated on June 30, 2006 and had an initial one-year term. The leasewas terminated at the end of the original term and required monthly payments$1,185 per month. Rental expense under these operating lease agreements was$53,783 and $12,155 for the years ended December 31, 2007 and 2006.

 

The Bank also leasesoffice space for its Bluffton loan production office. The lease was originatedon September 28, 2006 and had an initial one-year term. The lease wasextended at the Bank’s option for an additional 12-month term.  The lease requires minimum monthly paymentsof $3,000 per month. In addition, the Bank leased office space for thepermanent Bluffton branch location. The lease was originated on June 13,2007 and has a 20-year term with four five-year renewal options. Rental expenseunder these operating lease agreements was $79,558 and $10,300 for the yearsended December 31, 2007 and 2006.

 

The Bank has entered intoa lease for office space located at 830 Lowcountry Boulevard, Mount Pleasant,SC for executive offices. The lease was originated on April 24, 2007 andhas a 20-year term with four five-year renewal options. The lease requiresmonthly payments of $9,167 for the first five years, increased 71⁄2% every fifthyear thereafter.  Rental expense underthis operating lease agreement was $67,072 for the year ended December 31,2007.

 

The Bank also leasesoffice space for its Murrells Inlet branch location. The lease was originatedon March 20, 2007 and has a 20-year term. The lease does not requiremonthly payments until July 1, 2008.

 

Future minimum leasepayments under these operating leases are summarized as follows:

 

| 2008       |       | $         | 774,396        |       |
|------------|------------|-----------|----------------|------------|
| 2009       |       | 813,364   |           |
| 2010       |       | 819,512   |           |
| 2011       |       | 825,844   |           |
| 2012       |       | 841,392   |           |
| Thereafter |       | 9,658,977 |           |
|       | ** ** | **$**     | **13,733,485** | ** ** |

** **

 

 

63

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**NOTE 14 -RELATED PARTY TRANSACTIONS**

 

Certainparties (principally certain directors and executive officers of the Company,their immediate families and business interests) were loan customers of and hadother transactions in the normal course of business with the Company.  Related party loans are made on substantiallythe same terms, including interest rates and collateral, as those prevailing atthe time for comparable transactions with unrelated persons and do not involvemore than the normal risk of collectibility.

 

Relatedparty loan transactions for the years ended December 31, 2007 and 2006 aresummarized below:

 
| ** **                 | ** ** | **December 31,** | ** **     |
|----------------------------|------------|-----------------------|----------------|
| ** **                 | ** ** | **2007**              | ** **     | **2006** | ** ** |
| Balance, beginning of year |       | $                     | 5,397,970      |   | $ | 4,684,731 |   |
| New loans                  |       | 1,510,428             |           | 2,832,126 |   |
| Less loan payments         |       | 1,024,064             |           | 2,118,887 |   |
| Other changes              |       | 10,001,700            |           | — |   |
| Balance, end of year       | ** ** | **$**                 | **15,886,034** | ** ** | **$** | **5,397,970** | ** ** |

 

Depositsfrom directors and executive officers and their related interests totaled$801,800 and $424,920, at December 31, 2007 and 2006, respectively. Otherchanges include the addition of three new board members during the year ended December 31,2007. As mentioned in Note 13, Director John Gandy is a 50% partner in OfficeDevelopers, LLC, which is the owner of an office building in Myrtle Beach, SC inwhich Tidelands Bank is a tenant.

 

### **NOTE15 - COMMITMENTS AND CONTINGENCIES**

### ** **

The Company is subject toclaims and lawsuits which arise primarily in the ordinary course ofbusiness.  Management is not aware of anylegal proceedings which would have a material adverse effect on the financialposition or operating results of the Company.

 

**NOTE 16**-**EARNINGS PER SHARE**

 

Basicearnings per share is computed by dividing net income by the weighted-averagenumber of common shares outstanding. Diluted earnings per share is computed by dividing net income by theweighted-average number of common shares outstanding and dilutive common shareequivalents using the treasury stock method. Dilutive common share equivalents include common shares issuable uponthe exercise of outstanding stock options.

 

 

64

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Basic and dilutedearnings per share are computed below:

 
| ** **                                                  | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                  | ** ** | **2007**                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Basic earnings per share computation:**                   |       |                             |       |   |   |   |   |
| Net income available to common shareholders                 |       | $                                | 413,304    |   | $ | 1,488,806 |   | $ | 39,520 |   |
| Average common shares outstanding - basic                   |       | 4,214,910                        |       | 3,327,103 |   | 2,620,990 |   |
| Basic net income per share                                  |       | $                                | 0.10       |   | $ | 0.45 |   | $ | 0.02 |   |
| **Diluted earnings per share computation:**                 |       |                             |       |   |   |   |   |
| Net income available to common shareholders                 |       | $                                | 413,304    |   | $ | 1,488,806 |   | $ | 39,520 |   |
| Average common shares outstanding - basic                   |       | 4,214,910                        |       | 3,327,103 |   | 2,620,990 |   |
| Incremental shares from assumed conversions: Stock  options |       | 55,095                           |       | 45,402 |   | 14,456 |   |
| Average common shares outstanding - diluted                 |       | 4,270,005                        |       | 3,372,505 |   | 2,635,446 |   |
| Diluted earnings per share                                  |       | $                                | 0.10       |   | $ | 0.44 |   | $ | 0.02 |   |

 

For the years ended December 31,2007 and 2006, there were 247,590 and 8,165 options that were anti-dilutivebecause the exercise price exceeded the average market price for the period.There were no anti-dilutive options at December 31, 2005.

 

### **NOTE17 - REGULATORY MATTERS**

### ** **

The Company and Bank aresubject to various regulatory capital requirements administered by the federalbanking agencies.  Failure to meetminimum capital requirements can initiate certain mandatory and possiblyadditional discretionary actions by regulators that, if undertaken, could havea direct adverse material effect on the Company’s or Bank’s financialstatements.  Under capital adequacyguidelines and the regulatory framework for prompt corrective action, theCompany and Bank must meet specific capital guidelines that involvequantitative measures of the Company’s and Bank’s assets, liabilities, andcertain off-balance-sheet items as calculated under regulatory accountingpractices.  The Company’s and Bank’scapital amounts and classification are also subject to qualitative judgments bythe regulators about components, risk weightings, and other factors.

 

Quantitativemeasures established by regulation to ensure capital adequacy require theCompany and Bank to maintain minimum ratios of Tier 1 and total capital as apercentage of assets and off-balance-sheet exposures, adjusted for risk weightsranging from 0% to 100%.  Tier 1 capitalconsists of common shareholders’ equity, excluding the unrealized gain or losson securities available-for-sale, minus certain intangible assets.  Tier 2 capital consists of the allowance forloan losses subject to certain limitations. Total capital for purposes of computing the capital ratios consists ofthe sum of Tier 1 and Tier 2 capital. The regulatory minimum requirements are 4% for Tier 1 and 8% for totalrisk-based capital.

 

### **The Company and Bank are alsorequired to maintain capital at a minimum level based on total assets, which isknown as the leverage ratio.  Only thestrongest institutions are allowed to maintain capital at the minimumrequirement of 3%.  All others aresubject to maintaining ratios 1% to 2% above the minimum.**

### ** **

Asof December 31, 2007 and 2006, management believes it is categorized aswell-capitalized under the regulatory framework for prompt correctiveaction.  There are no conditions orevents that management believes have changed the Company’s and Bank’s category.

 

 

65

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Thefollowing table summarizes the capital amounts and ratios of the Company andthe regulatory minimum requirements at December 31, 2007 and 2006:

 
| ** **                                | ** ** | **Actual** | ** ** | **For  Capital  Adequacy Purposes** | ** ** | **To Be  Well-  Capitalized Under  Prompt Corrective  Action Provisions** | ** ** |
|-------------------------------------------|------------|------------|------------|-------------------------------------|------------|---------------------------------------------------------------------------|------------|
| **Tidelands Bancshares, Inc.**       | ** ** | **Amount** | ** ** | **Ratio**                           | ** ** | **Amount**                                                                | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| ** **                                | ** ** | ** ** | ** ** | ** **                          | ** ** | ** **                                                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **December 31, 2007**                | ** ** | ** ** | ** ** | ** **                          | ** ** | ** **                                                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total capital (to  risk-weighted assets)  |       | $          | 51,493,000 |                                | 12.39      | %                                                                         | $          | 33,262,400 |   | 8.00 | % | N/A |   | N/A |   |
| Tier 1 capital  (to risk-weighted assets) |       | 47,335,000 |       | 11.39                               | %          | 16,631,200                                                                |       | 4.00 | % | N/A |   | N/A |   |
| Tier 1 capital  (to average assets)       |       | 47,335,000 |       | 9.58                                | %          | 19,771,480                                                                |       | 4.00 | % | N/A |   | N/A |   |
| **December 31, 2006**                | ** ** | ** ** | ** ** | ** **                          | ** ** | ** **                                                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total capital (to  risk-weighted assets)  |       | $          | 52,034,000 |                                | 18.06      | %                                                                         | $          | 23,047,760 |   | 8.00 | % | N/A |   | N/A |   |
| Tier 1 capital  (to risk-weighted assets) |       | 48,567,000 |       | 16.86                               | %          | 11,523,880                                                                |       | 4.00 | % | N/A |   | N/A |   |
| Tier 1 capital  (to average assets)       |       | 48,567,000 |       | 14.03                               | %          | 13,850,640                                                                |       | 4.00 | % | N/A |   | N/A |   |

 

Thefollowing table summarizes the capital amounts and ratios of the Bank and theregulatory minimum requirements at December 31, 2007 and 2006:

 
| ** **                                | ** ** | **Actual** | ** ** | **For  Capital  Adequacy Purposes** | ** ** | **To Be  Well-  Capitalized Under  Prompt Corrective  Action Provisions** | ** ** |
|-------------------------------------------|------------|------------|------------|-------------------------------------|------------|---------------------------------------------------------------------------|------------|
| **Tidelands Bank**                        | ** ** | **Amount** | ** ** | **Ratio**                           | ** ** | **Amount**                                                                | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| ** **                                | ** ** | ** ** | ** ** | ** **                          | ** ** | ** **                                                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **December 31, 2007**                | ** ** | ** ** | ** ** | ** **                          | ** ** | ** **                                                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total capital (to  risk-weighted assets)  |       | $          | 53,318,000 |                                | 12.80      | %                                                                         | $          | 33,334,160 |   | 8.00 | % | $ | 41,667,700 |   | 10.00 | % |
| Tier 1 capital  (to risk-weighted assets) |       | 49,160,000 |       | 11.80                               | %          | 16,667,080                                                                |       | 4.00 | % | 25,000,620 |   | 6.00 | % |
| Tier 1 capital  (to average assets)       |       | 49,160,000 |       | 9.93                                | %          | 19,807,360                                                                |       | 4.00 | % | 24,759,200 |   | 5.00 | % |
| **December 31, 2006**                | ** ** | ** ** | ** ** | ** **                          | ** ** | ** **                                                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total capital (to  risk-weighted assets)  |       | $          | 50,907,000 |                                | 17.72      | %                                                                         | $          | 22,977,520 |   | 8.00 | % | $ | 28,721,900 |   | 10.00 | % |
| Tier 1 capital  (to risk-weighted assets) |       | 47,440,000 |       | 16.52                               | %          | 11,488,760                                                                |       | 4.00 | % | 17,233,140 |   | 6.00 | % |
| Tier 1 capital  (to average assets)       |       | 47,440,000 |       | 14.02                               | %          | 13,530,600                                                                |       | 4.00 | % | 16,913,250 |   | 5.00 | % |

### ** **

### **NOTE18 - UNUSED LINES OF CREDIT**

### ** **

As of December 31,2007, the Company had unused lines of credit to purchase federal funds fromunrelated banks totaling $24.5 million. These lines of credit are available on a one to 14 day basis for generalcorporate purposes.  In addition to thesecredit lines, unused credit availability at the Federal Home Loan Bank amountedto $18.2 million at December 31, 2007.

 

**NOTE 19 -SHAREHOLDERS’ EQUITY**

 

**PublicStock Offering**- On October 10, 2006, the Company closed a public offering in which1,200,000 shares of the Company’s common stock were issued at a purchase priceof $15.00 per share.  Net proceeds afterdeducting underwriter discounts and expenses were $16.4 million. Proceeds fromthe offering will be used to support the growth of the Company.

 

**Restrictionson Dividends**- South Carolina banking regulations restrict the amount of dividends that canbe paid to shareholders.  All of theBank’s dividends to Tidelands Bancshares, Inc. are payable only from theundivided profits of the Bank.  The Bankis authorized to pay cash dividends up to 100% of net income in any calendaryear without obtaining the prior approval of the Commissioner of Bankingprovided that the Bank received a composite rating of one or two at the lastFederal or State regulatory examination. Under Federal Reserve Board regulations, the amounts of loans oradvances from the Bank to the parent company are also restricted.

 

 

66

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**NOTE 20 - FINANCIAL INSTRUMENTSWITH OFF-BALANCE-SHEET RISK**

 

The Company is a party tofinancial instruments with off-balance-sheet risk in the normal course ofbusiness to meet the financing needs of its customers.  These financial instruments consist ofcommitments to extend credit and standby letters of credit.  Commitments to extend credit are agreementsto lend to a customer as long as there is no violation of any conditionestablished in the contract.  Commitmentsgenerally have fixed expiration dates or other termination clauses and mayrequire payment of a fee.  A commitmentinvolves, to varying degrees, elements of credit and interest rate risk inexcess of the amount recognized in the balance sheet.  The Company’s exposure to credit loss in theevent of nonperformance by the other party to the instrument is represented bythe contractual notional amount of the instrument.  Since certain commitments are expected toexpire without being drawn upon, the total commitment amounts do notnecessarily represent future cash requirements. The Company uses the same credit policies in making commitments toextend credit as it does for on-balance-sheet instruments.  Standby letters of credit are conditionalcommitments issued to guarantee a customer’s performance to a third party andhave essentially the same credit risk as other lending facilities.

 

Collateral held forcommitments to extend credit and letters of credit varies but may includeaccounts receivable, inventory, property, plant, equipment and income-producingcommercial properties.

 

The followingtable sets forth in thousands the length of time until maturity for unusedcommitments to extend credit and standby letters of credit at December 31,2007.

 
| ** **                   | ** ** | **Amount** | ** **     |
|------------------------------|------------|------------|----------------|
| Commitments to extend credit |       | $          | 59,004,522     |   |
| Standby letters of credit    |       | 1,397,360  |           |
| Total                        | ** ** | **$**      | **60,401,882** | ** ** |

 

**NOTE 21 - STOCK COMPENSATIONPLANS**

 

On May 10, 2004, theCompany established the 2004 Tidelands Bancshares, Inc. Stock IncentivePlan (“Stock Plan”) that provides for the granting of options to purchase 20%of the outstanding shares of the Company’s common stock to directors, officers,or employees of the Company.  The planwas amended during 2005 to provide for the designation of an additional 348,997shares as incentive stock options. The per-share exercise price of incentivestock options granted under the Stock Plan may not be less than the fair marketvalue of a share on the date of grant and vest based on continued service withthe Company for a specified period, generally two to five years following thedate of grant.  The per-share exerciseprice of stock options granted is determined by a committee appointed by theBoard of Directors.  The expiration dateof any option may not be greater than 10 years from the date of grant.  Options that expire, unexercised or areforfeited become available for reissuance.

 

The fair value of optionsgranted is estimated as of the date granted using the Binomial option valuationmodel with the following weighted-average assumptions used for grants:

 
| ** **               | ** ** | **2007**  | ** ** | **2006**  | ** ** | **2005**  | ** ** |
|--------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
| Dividend yield           |       | 0.00      | %          | 0.00      | %          | 0.00      | %          |
| Expected volatility      |       | 19.5-24.6 | %          | 13.7-20.5 | %          | 7.1-8.0   | %          |
| Risk-free interest rate  |       | 4.07      | %          | 4.64      | %          | 4.26      | %          |
| Expected life (in years) |       | 3.0 - 8.0 |       | 3.0 - 8.0 |       | 3.0 - 9.0 |       |

 

The weighted-average fairvalue of options granted during the years 2007, 2006 and 2005 is $3.49, $5.05and $2.36, respectively. The total intrinsic value of options exercised duringthe years ended December 31, 2007, 2006 and 2005 was $24,724, $215,041 and$8,263, respectively.

 

67

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Asummary of the status of the Company’s Stock Plan as of December 31, 2007and 2006 is presented below:

 
| ** **                       | ** ** | **2007**    | ** ** | **2006**                               | ** ** |
|----------------------------------|------------|-------------|------------|----------------------------------------|------------|
| ** **                       | ** ** | **Options** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Aggregate  Intrinsic  Value** | ** ** | **Options** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| Outstanding at beginning of year |       | 456,664     |       | $                                      | 12.17      |   |   |   | 245,619 |   | $ | 9.01 |   |
| Granted                          |       | 273,160     |       | 10.38                                  |       |   |   | 249,159 |   | 14.80 |   |
| Exercised                        |       | (4,791      | )          | 9.02                                   |       |   |   | (28,331 | ) | 9.09 |   |
| Forfeited                        |       | (16,713     | )          | 14.77                                  |       |   |   | (9,783 | ) | 8.97 |   |
| Outstanding at end of year       | ** ** | **708,320** | ** ** | **$**                                  | **11.44**  | ** ** | **$** | **617,840** | ** ** | **456,664** | ** ** | **$** | **12.17** | ** ** |
| Options exercisable at year-end  | ** ** | **253,878** | ** ** | ** **                             | ** ** | **$** | **289,754** |   | **162,327** |   |   |   |
| Shares available for grant (1)   | ** ** | **73,687**  | ** ** | ** **                             |       |   |   | **329,176** |   |   |   |

----

(1) 20% ofoutstanding shares

 

The aggregate intrinsicvalue in the table above represents the total pre-tax intrinsic value (thedifference between the Company’s closing stock price on the last trading day of2007 and the exercise price, multiplied by the number of in-the-money options)that would be received by the option holders had all options holders exercisedtheir options on December 31, 2007. This amount changes based on the fairvalue of the Company’s stock.

 

A summary of the statusof the Company’s nonvested shares as of December 31, 2007 is presentedbelow:

 

| **Nonvested Shares**           | ** ** | **Shares**  | ** ** | **Weighted  Average  Grant-Date  Fair Value** | ** ** |
|--------------------------------|------------|-------------|------------|-----------------------------------------------|------------|
| Nonvested at beginning of year |       | 294,337     |       | $                                             | 4.54       |   |
| Granted                        |       | 273,160     |       | 3.49                                          |       |
| Vested                         |       | (96,947     | )          | 3.73                                          |       |
| Forfeited                      |       | (16,108     | )          | 5.69                                          |       |
| Nonvested at end of year       | ** ** | **454,442** | ** ** | **$**                                         | **4.04**   | ** ** |

 

As of December 31,2007, there was $1.4 million of total unrecognized compensation cost related tononvested share-based compensation arrangements granted under the Stock Plan.That cost is expected to be recognized over a weighted-average period of 2.5years. The total fair value of shares vested during the years ended December 31,2007, 2006 and 2005, was $361,194, $136,506 and $105,093, respectively.

 

The following tablesummarizes information about the stock options outstanding under the Company’sstock compensation plan at December 31, 2007:

 
| ** **                   | ** ** | **Options Outstanding**                        | ** ** | **Options Exercisable**                            | ** ** |
|------------------------------|------------|------------------------------------------------|------------|----------------------------------------------------|------------|
| **Range of Exercise Prices** | ** ** | **Weighted  Number  Outstanding  at 12/31/07** | ** ** | **Weighted  Average  Remaining  Contractual Life** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number  Exercisable  at 12/31/07** | ** ** | **Average  Exercise  Price** | ** ** |
| $ 8.80 to $9.00         |       | 162,871                                        |       | 6.56 years                                         |       | $ | 8.80 |   | 137,709 |   | $ | 8.80 |   |
| $ 9.01 to $10.00        |       | 253,973                                        |       | 9.64 years                                         |       | $ | 9.57 |   | 24,793 |   | $ | 9.89 |   |
| $ 10.01 to $15.00       |       | 286,061                                        |       | 8.99 years                                         |       | $ | 14.50 |   | 87,561 |   | $ | 14.54 |   |
| $ 15.01 to $17.65       |       | 5,415                                          |       | 8.56 years                                         |       | $ | 16.96 |   | 3,815 |   | $ | 17.28 |   |
|                         |       | 708,320                                        |       | 8.66 years                                         |       | $ | 11.44 |   | 253,878 |   | $ | 11.01 |   |

 

68

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**NOTE 22 - EMPLOYEE STOCKOWNERSHIP PLAN**

 

On May 17,2007, the Company announced the formation of the Tidelands Bancshares, Inc.Employee Stock Ownership Plan (“ESOP”), a non-contributory plan, for itsemployees. The ESOP will purchase shares of the Company’s common stock on theopen market from time to time with funds borrowed from a loan from a thirdparty lender.  As of December 31,2007, the ESOP has purchased 198,033 outstanding shares. All employees of theCompany meeting certain tenure requirements are entitled to participate in theESOP. Compensation expense related to the ESOP was $100,000 for the year ended December 31,2007.  At December 31, 2007, theESOP has outstanding loans amounting to $2,427,500. Of the 198,033 shares theESOP has purchased, 8,926 shares have been released for allocation to planparticipants. The aggregate fair value of the 188,838 unallocated shares was$2,030,009 based on the $10.75 closing price of our common stock on December 31,2007.

 

**NOTE 23 - RETIREMENT PLAN**

 

The Company has a 401(k) profitsharing plan, which provides retirement benefits to substantially all officersand 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 matchingcontributions of $.25 for every dollar contributed up to 6% of the participants’annual compensation.  Expenses charged toearnings for the 401(k) profit sharing plan were approximately $48,980,$28,338, and $14,902, in 2007, 2006 and 2005, respectively.

 

**NOTE 24 - FAIR VALUE OF FINANCIALINSTRUMENTS**

 

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

 

***Cashand Due from Banks*** - The carrying amount is a reasonable estimate of fair value.

 

***FederalFunds Sold*** -Federal funds sold are for a term of one day, and the carrying amountapproximates the fair value.

 

***Securities***- The fairvalues of securities available-for-sale equal the carrying amounts, which arethe quoted market prices. If quoted market prices are not available, fairvalues are based on quoted market prices of comparable securities.  The carrying value of nonmarketable equitysecurities approximates the fair value since no ready market exists for thestocks.

 

***MortgageLoans Held for Sale*** - The carrying value for mortgage loans held for sale is a reasonableestimate for fair value considering the short time these loans are carried onthe books.  Management determined thatonly minor fluctuations occurred in fixed rate mortgage loans available forsale; therefore the carrying amount approximates fair value.

 

# ***Loans Receivable***- For certain categories of loans, such as variable rateloans which are repriced frequently and have no significant change in creditrisk, fair values are based on the carrying amounts.  The fair value of other types of loans isestimated by discounting the future cash flows using the current rates at whichsimilar loans would be made to borrowers with similar credit ratings and forthe same remaining maturities.

 

69

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***Deposits*****- The fair value of demand deposits, savings, andmoney market accounts is the amount payable on demand at the reportingdate.  The fair values of certificates ofdeposit are estimated using a discounted cash flow calculation that appliescurrent interest rates to a schedule of aggregated expected maturities.

 

***NotePayable*** - Thecarrying amounts of variable rate notes are reasonable estimates of fair valuebecause they can be repriced frequently.

 

***SecuritiesSold Under Agreements to Repurchase*** - These repurchase agreements have variable ratesthat reprice every 90 days.  Due to theminor change in interest rates, management estimates the carrying value to be areasonable estimate of fair value.

 

***JuniorSubordinated Debentures***-******Thecarrying value of junior subordinated debentures approximates its fair valuesince the debentures were issued at a floating rate.

 

***Advancesfrom Federal Home Loan Bank***-******The fairvalues of fixed rate borrowings are estimated using a discounted cash flowcalculation that applies the Company’s current borrowing rate from the FederalHome Loan Bank.  The carrying amounts ofvariable rate borrowings are reasonable estimates of fair value because theycan be repriced frequently.

 

***AccruedInterest Receivable and Payable*** - The carrying value of these instruments is areasonable estimate of fair value.

 

***EmployeeStock Ownership Plan Borrowings***- The carrying value of the ESOP borrowing is areasonable estimate of fair value.

 

***Off-Balance-SheetFinancial Instruments*** - Fair values for off-balance sheet, credit-related financialinstruments are based on fees currently charged to enter into similaragreements, taking into account the remaining terms of the agreements and thecounterparties’ credit standing.

 

70

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The carryingvalues and estimated fair values of the Company’s financial instruments are asfollows:

 
| ** **                                                          | ** ** | **December 31,** | ** **  |
|---------------------------------------------------------------------|------------|-----------------------|-------------|
| ** **                                                          | ** ** | **2007**              | ** **  | **2006** | ** ** |
| ** **                                                          | ** ** | **Carrying  Amount**  | ** **  | **Estimated  Fair Value** | ** ** | **Carrying  Amount** | ** ** | **Estimated  Fair Value** | ** ** |
|                                                                |       |                  |        |   |   |   |   |   |   |
| **Financial Assets:**                                               |       |                  |        |   |   |   |   |   |   |
| Cash and due  from banks                                            |       | $                     | 724,957     |   | $ | 724,957 |   | $ | 2,899,995 |   | $ | 2,899,995 |   |
| Federal funds  sold                                                 |       | 1,945,000             |        | 1,945,000 |   | 2,514,000 |   | 2,514,000 |   |
| Securities  available-for-sale                                      |       | 88,036,109            |        | 88,036,109 |   | 37,503,989 |   | 37,503,989 |   |
| Mortgage loans  held for sale                                       |       | 1,426,800             |        | 1,426,800 |   | 2,557,434 |   | 2,557,434 |   |
| Nonmarketable  equity securities                                    |       | 2,060,940             |        | 2,060,940 |   | 1,182,100 |   | 1,182,100 |   |
| Loans receivable                                                    |       | 391,349,869           |        | 402,265,869 |   | 273,210,128 |   | 278,543,128 |   |
| Accrued interest  receivable                                        |       | 3,164,124             |        | 3,164,124 |   | 1,920,279 |   | 1,920,279 |   |
| ** **                                                          | ** ** | ** **            | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Financial Liabilities:**                                          |       |                  |        |   |   |   |   |   |   |
| Demand deposit,  interest-bearing transaction, and savings accounts |       | $                     | 218,485,153 |   | $ | 218,485,153 |   | $ | 154,252,014 |   | $ | 154,252,014 |   |
| Certificates of  deposit and other time deposits                    |       | 169,684,288           |        | 173,859,000 |   | 104,880,683 |   | 105,119,000 |   |
| Note payable                                                        |       | —                |        | — |   | — |   | — |   |
| Securities sold  under agreements to repurchase                     |       | 41,040,000            |        | 40,250,000 |   | 10,000,000 |   | 10,000,000 |   |
| Junior  subordinated debentures                                     |       | 8,248,000             |        | 8,248,000 |   | 8,248,000 |   | 8,248,000 |   |
| Advances from  Federal Home Loan Bank                               |       | 29,000,000            |        | 29,046,000 |   | 16,000,000 |   | 16,000,000 |   |
| Accrued interest  payable                                           |       | 1,341,161             |        | 1,341,161 |   | 971,432 |   | 971,432 |   |
| ESOP borrowings                                                     |       | 2,427,500             |        | 2,427,500 |   | — |   | — |   |

 
|                                         | ** ** | **Notional    Amount** | ** ** | **Estimated    Fair Value** | ** ** | **Notional    Amount** | ** ** | **Estimated    Fair Value** | ** ** |
|----------------------------------------------|------------|------------------------|------------|-----------------------------|------------|------------------------|------------|-----------------------------|------------|
| **Off-Balance Sheet Financial Instruments:** |       |                   |       |                        |       |                   |       |                        |       |
| Commitments to  extend credit                |       | $                      | 59,004,522 |                        | $          | —                 |       | $                           | 56,163,050 |   | $ | — |   |
| Letters of  credit                           |       | 1,397,360              |       | —                      |       | 1,210,000              |       | —                      |       |
|                                              |            |                        |            |                             |            |                        |            |                             |            |  |  |  |  |

 

 

71

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**NOTE 25 -TIDELANDS BANCSHARES, INC. (PARENT COMPANY ONLY)**

 

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

 

**CondensedBalance Sheets**

** **
| ** **                                       | ** ** | **December 31,** | ** **     |
|--------------------------------------------------|------------|-----------------------|----------------|
| ** **                                       | ** ** | **2007**              | ** **     | **2006** | ** ** |
| **Assets:**                                      |       |                  |           |   |   |
| Cash                                             |       | $                     | 203,334        |   | $ | 829,719 |   |
| Other equity  securities                         |       | 151,640               |           | 50,000 |   |
| Investment in  banking subsidiary                |       | 49,940,976            |           | 48,361,015 |   |
| Other assets                                     |       | 1,334,720             |           | 827,720 |   |
| Total assets                                     | ** ** | **$**                 | **51,630,670** | ** ** | **$** | **50,068,454** | ** ** |
| ** **                                       | ** ** | ** **            | ** **     | ** ** | ** ** |
| **Liabilities and shareholders’ equity:**   |       |                  |           |   |   |
| Junior  subordinated debentures                  |       | $                     | 8,248,000      |   | $ | 8,248,000 |   |
| ESOP borrowings                                  |       | 2,427,500             |           | — |   |
| Shareholders’  equity                       |       | 40,955,170            |           | 41,820,454 |   |
| Total  liabilities and shareholders’ equity | ** ** | **$**                 | **51,630,670** | ** ** | **$** | **50,068,454** | ** ** |

 

**CondensedStatements of Operations**

 
| ** **                                                                                | ** ** | **For the Years Ended December 31,** | ** **  |
|-------------------------------------------------------------------------------------------|------------|-------------------------------------------|-------------|
| ** **                                                                                | ** ** | **2007**                                  | ** **  | **2006** | ** ** | **2005** | ** ** |
| **Income:**                                                                               |       |                                      |        |   |   |   |   |
| Income on trust  preferred securities                                                     |       | $                                         | 16,862      |   | $ | 14,135 |   | $ | — |   |
| Total income                                                                              |       | 16,862                                    |        | 14,135 |   | — |   |
| ** **                                                                                | ** ** | ** **                                | ** **  | ** ** | ** ** | ** ** | ** ** |
| **Expense:**                                                                              | ** ** | ** **                                | ** **  | ** ** | ** ** | ** ** | ** ** |
| Stock based  compensation                                                                 |       | 699,964                                   |        | 247,586 |   | — |   |
| Other  professional                                                                       |       | 24,000                                    |        | 16,000 |   | — |   |
| Other                                                                                     |       | 560,806                                   |        | 470,118 |   | 12,447 |   |
| Total expense                                                                             |       | 1,284,770                                 |        | 733,704 |   | 12,447 |   |
| **Loss  before income taxes and equity in undistributed earnings of banking  subsidiary** |       | (1,267,908                                | )           | (719,569 | ) | (12,447 | ) |
|                                                                                      |       |                                      |        |   |   |   |   |
| Income tax  benefit                                                                       |       | (507,000                                  | )           | (266,000 | ) | (4,200 | ) |
| Equity in  undistributed earnings of banking subsidiary                                   |       | 1,174,212                                 |        | 1,942,375 |   | 47,767 |   |
| **Net income**                                                                            | ** ** | **$**                                     | **413,304** | ** ** | **$** | **1,488,806** | ** ** | **$** | **39,520** | ** ** |

### ** **

 

72

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**NOTE 26 -TIDELANDS BANCSHARES, INC. (PARENT COMPANY ONLY)*******- continued*

 

**Condensed Statements of Cash Flows**

** **
| ** **                                                                   | ** ** | **For the Years Ended December 31,** | ** **  |
|------------------------------------------------------------------------------|------------|-------------------------------------------|-------------|
| ** **                                                                   | ** ** | **2007**                                  | ** **  | **2006** | ** ** | **2005** | ** ** |
| **Cash flows from operating activities:**                                    |       |                                      |        |   |   |   |   |
| Net income                                                                   |       | $                                         | 413,304     |   | $ | 1,488,806 |   | $ | 39,520 |   |
| Adjustments to  reconcile net loss to net cash used by operating activities: |       |                                      |        |   |   |   |   |
| Increase in  other assets                                                    |       | —                                    |        | (248,000 | ) | (4,200 | ) |
| Equity in  undistributed income of subsidiary                                |       | (1,174,212                                | )           | (1,942,375 | ) | (47,767 | ) |
| Decrease in due  from subsidiary                                             |       | —                                    |        | — |   | 30,000 |   |
| Increase in  deferred income taxes                                           |       | (507,000                                  | )           | (280,987 | ) | — |   |
| Stock based compensation  expense                                            |       | 699,964                                   |        | 247,586 |   | — |   |
|                                                                         |       |                                      |        |   |   |   |   |
| Net cash  provided (used) by operating activities                            |       | (567,944                                  | )           | (734,970 | ) | 17,553 |   |
|                                                                         |       |                                      |        |   |   |   |   |
| **Cash flows from investing activities:**                                    |       |                                      |        |   |   |   |   |
| Purchase of  Tidelands Bank stock                                            |       | —                                    |        | (23,650,000 | ) | (14,958,163 | ) |
| Purchase of  equity securities                                               |       | (101,640                                  | )           | (50,000 | ) | — |   |
|                                                                         |       |                                      |        |   |   |   |   |
| Net cash used by  operating activities                                       |       | (101,640                                  | )           | (23,700,000 | ) | (14,958,163 | ) |
|                                                                         |       |                                      |        |   |   |   |   |
| **Cash flows from financing activities:**                                    |       |                                      |        |   |   |   |   |
| Proceeds from  notes payable                                                 |       | —                                    |        | — |   | 2,010,333 |   |
| Repayments on  notes payable                                                 |       | —                                    |        | — |   | (2,010,333 | ) |
| Increase in  junior subordinated debentures                                  |       | —                                    |        | 8,248,000 |   | — |   |
| Issuance of  common stock                                                    |       | —                                    |        | 18,000,000 |   | 16,007,200 |   |
| Stock issuance  costs                                                        |       | —                                    |        | (1,545,955 | ) | (1,122,327 | ) |
| Proceeds from  ESOP borrowings                                               |       | 2,527,500                                 |        | — |   | — |   |
| Repayment of  ESOP borrowings                                                |       | (100,000                                  | )           | — |   | — |   |
| Increase in  unearned ESOP shares                                            |       | (2,427,500                                | )           | — |   | — |   |
| Proceeds from  exercise of stock options                                     |       | 43,199                                    |        | 257,625 |   | 117,579 |   |
| Net cash  provided by financing activities                                   |       | 43,199                                    |        | 24,959,670 |   | 15,002,452 |   |
|                                                                         |       |                                      |        |   |   |   |   |
| **Net increase in cash and cash equivalents**                                |       | (626,385                                  | )           | 524,700 |   | 61,842 |   |
|                                                                         |       |                                      |        |   |   |   |   |
| **Cash and cash equivalents, beginning of period**                           |       | 829,719                                   |        | 305,019 |   | 243,177 |   |
|                                                                         |       |                                      |        |   |   |   |   |
| **Cash and cash equivalents, end of period**                                 | ** ** | **$**                                     | **203,334** | ** ** | **$** | **829,719** | ** ** | **$** | **305,019** | ** ** |

#### ** **

 

73

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#### **NOTE 27 —QUARTERLY DATA(UNAUDITED)**

 
| ** **                                           | ** **   | **For the Year Ended December 31, 2006** | ** **   | **For the Year Ended December 31, 2007** | ** ** |
|------------------------------------------------------|--------------|-----------------------------------------------|--------------|-----------------------------------------------|------------|
| *** ***                                         | *** *** | **(dollars in thousands)**                    | *** *** |
| ** **                                           | ** **   | **First  Quarter**                            | ** **   | **Second  Quarter**                           | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** | **First  Quarter** | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
| Interest Income                                      |         | $                                             | 4,175        |                                          | $          | 5,122 |   | $ | 6,035 |   | $ | 6,438 |   | $ | 6,838 |   | $ | 7,709 |   | $ | 8,243 |   | $ | 8,636 |   |
| Interest Expense                                     |         | 2,012                                         |         | 2,693                                         |       | 3,448 |   | 3,695 |   | 3,935 |   | 4,649 |   | 5,104 |   | 5,302 |   |
| Net interest  income                                 |         | 2,163                                         |         | 2,429                                         |       | 2,587 |   | 2,743 |   | 2,903 |   | 3,060 |   | 3,139 |   | 3,334 |   |
| Provision for  loan losses                           |         | 484                                           |         | 344                                           |       | 288 |   | 106 |   | 515 |   | 510 |   | — |   | — |   |
| Net interest  income after provision for loan losses |         | 1,679                                         |         | 2,085                                         |       | 2,299 |   | 2,637 |   | 2,388 |   | 2,550 |   | 3,139 |   | 3,334 |   |
| Noninterest  income                                  |         | 214                                           |         | 212                                           |       | 236 |   | 125 |   | 368 |   | 332 |   | 367 |   | 287 |   |
| Noninterest  expense                                 |         | 1,358                                         |         | 1,673                                         |       | 1,924 |   | 2,169 |   | 2,473 |   | 2,958 |   | 3,431 |   | 3,215 |   |
| Income before  taxes                                 |         | 535                                           |         | 624                                           |       | 611 |   | 593 |   | 283 |   | (76 | ) | 75 |   | 406 |   |
| Income tax  expense                                  |         | 182                                           |         | 247                                           |       | 226 |   | 219 |   | 107 |   | (28 | ) | 28 |   | 168 |   |
| **Net  Income (loss)**                               | ** **   | **$**                                         | **353**      | ** **                                    | **$**      | **377** | ** ** | **$** | **385** | ** ** | **$** | **374** | ** ** | **$** | **176** | ** ** | **$** | **(48** | **)** | **$** | **47** | ** ** | **$** | **238** | ** ** |
|                                                 |         |                                          |         |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Earnings per  share:                                 |         |                                          |         |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                |         | $                                             | 0.12         |                                          | $          | 0.12 |   | $ | 0.13 |   | $ | 0.09 |   | $ | 0.04 |   | $ | (0.01 | ) | $ | 0.01 |   | $ | 0.06 |   |
| Diluted                                              |         | $                                             | 0.11         |                                          | $          | 0.12 |   | $ | 0.12 |   | $ | 0.09 |   | $ | 0.04 |   | $ | (0.01 | ) | $ | 0.01 |   | $ | 0.06 |   |

 

74

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**Item 8.  Changes in and Disagreements with Accountantson Accounting and Financial Disclosure.**

 

None

 

**Item8A(T).  Controls and Procedures.**

 

**Evaluationof Disclosure Controls and Procedures**

 

As of the end of the period covered by this report, wecarried out an evaluation, under the supervision and with the participation ofour management, including our Chief Executive Officer and Chief FinancialOfficer, of the effectiveness of our disclosure controls and procedures asdefined in Exchange Act Rule 13a-15(e). Based upon that evaluation, our Chief Executive Officer and ChiefFinancial Officer have concluded that our current disclosure controls andprocedures are effective as of December 31, 2007.  There have been no significant changes in ourinternal controls over financial reporting during the fourth fiscal quarterended December 31, 2007 that have materially affected, or are reasonablylikely to materially affect, our internal controls over financial reporting.

 

The design of any systemof controls and procedures is based in part upon certain assumptions about thelikelihood of future events.  There canbe no assurance that any design will succeed in achieving its stated goalsunder all potential future conditions, regardless of how remote.

 

**Management’sReport on Internal Control Over Financial Reporting**

 

                Management is responsible for establishing andmaintaining adequate internal control over financial reporting, as such term isdefined in the Exchange Act Rules 13a-15(f).  A system of internal control over financialreporting is a process designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accounting principles.

 

                Under the supervision and with the participation ofmanagement, including the principal executive officer and the principalfinancial officer, our management has evaluated the effectiveness of ourinternal control over financial reporting as of December 31, 2007 based onthe criteria established in a report entitled “Internal Control — IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission” and the interpretive guidance issued by the Commission in Release No. 34-55929.  Based on this evaluation, our management hasevaluated and concluded that our internal control over financial reporting waseffective as of December 31, 2007.

 

We are continuouslyseeking to improve the efficiency and effectiveness of our operations and ofour internal controls.  This results inmodifications to our processes throughout the company.  However, there has been no change in ourinternal control over financial reporting that occurred during our most recentfiscal quarter that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

 

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

 

**Item8B.  Other Information**

 

None.

 

75

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**PART III**

 

**Item 9.  Directors, Executive Officers, Promoters,Control Persons and Corporate Governance; Compliance with Section 16(a) ofthe Exchange Act.**

 

Information required by Item 9 is hereby incorporatedby reference from our proxy statement for our 2007 annual meeting ofshareholders to be held on May 19, 2008.

 

**Item10.  Executive Compensation.**

 

Information required byItem 10 is hereby incorporated by reference from our proxy statement for our2007 annual meeting of shareholders to be held on May 19, 2008.

 

**Item 11.  Security Ownership ofCertain Beneficial Owners and Management and Related Stockholder Matters.**

 

Information required byItem 11 is hereby incorporated by reference from our proxy statement for our2007 annual meeting of shareholders to be held on May 19, 2008.

 

**Item12.  Certain Relationships and RelatedTransactions and Director Independence.**

 

Informationrequired by Item 12 is hereby incorporated by reference from our proxystatement for our 2007 annual meeting of shareholders to be held on May 19,2008.

 

**Item13.  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.   |   | Amended and Restated  Bylaws (incorporated by reference as Exhibit 3.1 to the Company’s  Form 8-K filed on September 19, 2007).                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                          |
| 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.                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                          |
| 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  Post-Effective Amendment filed February 28, 2003 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 the Post-Effective Amendment  filed February 28, 2003 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  quarter ended September 30, 2003).*                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                          |
| 10.5   |   | Tidelands  Bancshares, Inc. 2004 Stock Incentive Plan and Form of Stock Option  Agreement (incorporated by reference as Exhibit 10.1 to the Company’s  Form 10-QSB for the quarter ended September 30, 2007).*                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                          |
| 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-QSB for the quarter ended September 30, 2003).                                                                   |

 

76

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| 10.7   |   | Amended and Restated  Trust Agreement among Tidelands Bancshares, Inc., as depositor,  Wilmington Trust Company, as property trustee, Wilmington Trust Company, as  Delaware trustee, and the administrative trustees 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 28, 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 28, 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 for the quarter ended June 30, 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 for the quarter ended  June 30, 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 for the quarter ended  June 30, 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 or compensatory planor arrangement required to be filed as an Exhibit to this Annual Report onForm 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 2007 annual meeting of shareholders to be held on May 19, 2008.

 

77

 

 

**SIGNATURES**

 

                In accordance with Section 13 or 15(d) ofthe Securities Exchange Act of 1934 (the “Exchange Act”), the registrant causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
| ** ** | ** **          | **TIDELANDS BANCSHARES, INC**. |
|------------|---------------------|--------------------------------|
|       |                |                           |
| Date:      | March 17, 2008 |                           | By: | /s/ Robert E.  Coffee, Jr. |
|       |                |                           | Robert E.  Coffee, Jr. |
|       |                |                           | President and Chief  Executive Officer |
|            |                     |                                |  |  |

 

 

                KNOW ALL MEN BY THESE PRESENTS, that each personwhose signature appears below constitutes and appoints Robert E. Coffee, Jr.,his true and lawful attorney-in-fact and agent, with full power of substitutionand resubstitution, for him and in his name, place and stead, in any and allcapacities, to sign any and all amendments to this Form 10-KSB, and tofile the same, with all exhibits thereto, and other documents in connectiontherewith, with the Securities and Exchange Commission, granting untoattorney-in-fact and agent full power and authority to do and perform each andevery act and thing requisite or necessary to be done in and about thepremises, as fully to all intents and purposes as he might or could do inperson, hereby ratifying and confirming all that attorney-in-fact and agent, orhis substitute or substitutes, may lawfully do or cause to be done by virtuehereof.

 

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

 
| **Signature**                     | ** ** | **Title**                                         | ** ** | **Date**            |
|-----------------------------------|------------|---------------------------------------------------|------------|---------------------|
|                              |       |                                              |       |                |
| /s/ Michael W. Burrell            |       | Director                                          |       | March 17, 2008 |
| Michael W. Burrell                |       |                                              |       |                |
|                              |       |                                              |       |                |
| /s/ John N.  Cagle, III, DMD |       | Director                                          |       | March 17, 2008 |
| John N.  Cagle, III, DMD     |       |                                              |       |                |
|                              |       |                                              |       |                |
| /s/ Alan D. Clemmons              |       | Director                                          |       | March 17, 2008 |
| Alan D. Clemmons                  |       |                                              |       |                |
|                              |       |                                              |       |                |
| /s/ Robert E.  Coffee, Jr.   |       | Director, President,  and Chief Executive Officer |       | March 17, 2008 |
| Robert E.  Coffee, Jr.       |       |                                              |       |                |
|                              |       |                                              |       |                |
| /s/ John W. Gandy                 |       | Director                                          |       | March 17, 2008 |
| John W. Gandy                     |       |                                              |       |                |
|                              |       |                                              |       |                |
| /s/ Richard L. Granger            |       | Director                                          |       | March 17, 2008 |
| Richard L. Granger                |       |                                              |       |                |
|                              |       |                                              |       |                |
|                              |       | Director                                          |       |                |
| J. Louis Grant                    |       |                                              |       |                |

 

78

----

 
|                          |   |                                              |   |                |
|-------------------------------|--------|---------------------------------------------------|--------|---------------------|
| /s/ Alan W. Jackson           |   | Principal Accounting  and Chief Financial Officer |   | March 17, 2008 |
| Alan W. Jackson               |   |                                              |   |                |
|                          |   |                                              |   |                |
| /s/ Barry I. Kalinsky         |   | Director, Chairman                                |   | March 17, 2008 |
| Barry I. Kalinsky             |   |                                              |   |                |
|                          |   |                                              |   |                |
| /s/ Morris Kalinsky           |   | Director                                          |   | March 17, 2008 |
| Morris Kalinsky               |   |                                              |   |                |
|                          |   |                                              |   |                |
| /s/ Paul J. Kerwin, DVM       |   | Director                                          |   | March 17, 2008 |
| Paul J. Kerwin, DVM           |   |                                              |   |                |
|                          |   |                                              |   |                |
| /s/ John T.  Parker, Jr. |   | Director                                          |   | March 17, 2008 |
| John T.  Parker, Jr.     |   |                                              |   |                |
|                          |   |                                              |   |                |
| /s/ Mary V. Propes            |   | Director                                          |   | March 17, 2008 |
| Mary V. Propes                |   |                                              |   |                |
|                          |   |                                              |   |                |
| /s/ Tanya D. Robinson         |   | Director                                          |   | March 17, 2008 |
| Tanya D. Robinson             |   |                                              |   |                |
|                          |   |                                              |   |                |
| /s/ Larry W. Tarleton         |   | Director                                          |   | March 17, 2008 |
| Larry W. Tarleton             |   |                                              |   |                |

 

79

----

 

**TIDELANDSBANCSHARES, INC.**

 

**Exhibit List**

 
| 3.1.   |   | Restated Articles of  Incorporation (incorporated by reference as Exhibit 3.1 to the Company’s  Form SB-2 filed with the SEC, File No. 333-97035).                                                                                                                                                                                                                                                                                                                                                        |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 3.2.   |   | Amended and Restated  Bylaws (incorporated by reference as Exhibit 3.1 to the Company’s  Form 8-K filed on September 19, 2007).                                                                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 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.                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 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  Post-Effective Amendment filed February 28, 2003 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 the Post-Effective Amendment  filed February 28, 2003 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  quarter ended September 30, 2003).                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.5   |   | Tidelands  Bancshares, Inc. 2004 Stock Incentive Plan and Form of Stock Option  Agreement (incorporated by reference as Exhibit 10.1 to the Company’s  Form 10-QSB for the quarter ended September 30, 2007).                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 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-QSB for the quarter ended September 30, 2003).                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.7   |   | Amended and Restated  Trust Agreement among Tidelands Bancshares, Inc., as depositor,  Wilmington Trust Company, as property trustee, Wilmington Trust Company, as  Delaware trustee, and the administrative trustees 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 28, 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 28, 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 for the quarter ended June 30, 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 for the quarter ended  June 30, 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 for the quarter ended  June 30, 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.                                      |

 

 

----