**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-K**

 

**(Mark One)**

 

| **x**                                                 | **Annual Report under Section 13 or  15(d) of the Securities Exchange Act of 1934**     |
|-------------------------------------------------------|---------------------------------------------------------------------------------------------------|
| ** **                                            | ** **                                                                                        |
| **For the fiscal year ended  December 31, 2008** |
| ** **                                            |
| **or**                                                |
| ** **                                            | ** **                                                                                        |
| **o**                                                 | **Transition Report under Section 13 or  15(d) of the Securities Exchange Act of 1934** |

 

**For thetransition period from           to           **

 

**Commissionfile number 001-33065**

 

**TIDELANDSBANCSHARES, INC.**

(Exact name ofregistrant as specified in its charter)

 

| **South  Carolina**                                             | ** ** | **02-0570232**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction or incorporation of organization) |       | (I.R.S. Employer  Identification No.) |
|                                                            |       |                                  |
| **875  Lowcountry Blvd., Mount Pleasant, South Carolina**       | ** ** | **29464**                             |
| (Address of  principal executive offices)                       |       | (Zip Code)                            |

 

Telephone number: **(843) 388-8433**

 

Securitiesregistered pursuant to Section 12(b) of the Exchange Act:

 

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

 

Securities registeredunder Section 12(g) of the Exchange Act:  **None**

 

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act.
|   | Yes  o | No  x |
|--------|-------------|------------|

 

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Exchange Act.
|   | Yes  o | No  x |
|--------|-------------|------------|

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.
|   | Yes  x | No  o |
|--------|-------------|------------|

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.                                                                                                                o

 

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

 

As of June 30, 2008,the aggregate market value of the registrant’s common stock held bynon-affiliates of the registrant was $21,755,479 based on the closing saleprice of $9.10 per share as reported on the NASDAQ Global Market.

 

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

 

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

 

The number of sharesoutstanding of the issuer’s common stock, as of March 16, 2009 was4,277,176.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

Proxy Statementfor the Annual Meeting of Shareholders to be held on May 18, 2009 Part III(Items 10-13, 14)

 

 

 

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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 competitivepressure in the banking and financial services industries;

·                  changes in the interest rateenvironment which could reduce anticipated or actual margins;

·                  changes in political conditions orthe legislative or regulatory environment;

·                  general economic conditions, eithernationally or regionally and especially in our primary service area, becomingless favorable than expected resulting in, among other things, a deteriorationin credit quality;

·                  changes occurring in businessconditions and inflation;

·                  changes in technology;

·                  changes in monetary and tax policies;

·                  the level of allowance for loan loss;

·                  the rate of delinquencies and amountsof charge-offs;

·                  the rates of loan growth;

·                  adverse changes in asset quality andresulting credit risk-related losses and expenses;

·                  loss of consumer confidence andeconomic disruptions resulting from terrorist activities;

·                  changes in the securities markets;and

·                  other risks and uncertaintiesdetailed from time to time in our filings with the Securities and ExchangeCommission.

 

**General Overview**

 

We area South Carolina corporation organized in 2002 to serve as the holding companyfor Tidelands Bank, a state-chartered banking association under the laws ofSouth Carolina headquartered in Mount Pleasant. We opened Tidelands Bank in October 2003 and have grown to sevenfull service banking offices located along the entire coast of SouthCarolina.  We are primarily engaged inthe business of accepting demand, savings and time deposits insured by the FDICand providing commercial, consumer and mortgage loans to the generalpublic.  Since our inception, we havefocused on serving the banking needs of professionals, entrepreneurs, smallbusiness owners, and their family members in our growing South Carolina coastalmarkets.  As of December 31, 2008,we had total assets of $715.2 million, net loans of $454.3 million, deposits of$561.2 million, and shareholders’ equity of $52.0 million.

 

**OurMarket Area**

 

Our primary market areais the South Carolina coast, including the Charleston (Charleston, Dorchesterand Berkeley counties), Myrtle Beach (Horry and Georgetown County) and HiltonHead (Beaufort and Jasper County) markets areas.  Our main office is located at 875 LowcountryBoulevard, Mount Pleasant, South Carolina.

 

In addition to our mainoffice, we have six full service banking offices.  In August 2004, we opened a loanproduction office in Summerville, South Carolina.  Due to the success of this loan productionoffice, we converted it to a temporary full service branch in April 2005,and in April 2007, we opened the permanent full service banking office inSummerville.  In January 2005, weopened a loan production office in Myrtle Beach, South Carolina, which weconverted into a temporary full service branch in October 2005 and openedour permanent facility in June

 

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2007.  We opened a new full service banking officein the Park West area of Mount Pleasant in May 2007 and converted our loanproduction office in the West Ashley area of Charleston to a full servicebanking office in July 2007.  Wealso opened a loan production office in Bluffton, in the Hilton Head marketarea, in October 2006, which we converted into a temporary full servicebanking office in September 2007 and then opened a permanent full servicebanking office in May 2008.  Finally,we opened a new full service banking office in Murrells Inlet, in the MyrtleBeach market area, in July 2008.

 

According to FDIC data, total deposits in theCharleston market area increased 113% from approximately $4.3 billion in 2000to approximately $9.1 billion in 2008. The population of the Charleston market area was approximately 630,000in 2007, an increase of 13.2% from 2000 and is projected to grow an additional8.4% from 2007 to 2012.  The economy ofCharleston is diverse and vibrant having recently experienced significantgrowth in tourism, healthcare, shipping and manufacturing.  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).  An estimated 105,000 jobs in 2004 weredirectly or indirectly supported by the tourism industry (a 144% increase from1997), which generated approximately $1.3 billion in earnings (a 108% increasefrom 1997).  Charleston is home to theMedical University of South Carolina and the Roper St. Francis HealthcareSystem, two of the top five largest employers in the region.  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 sixth largest containerport in the United States.  TheCharleston Customs district ranks as the sixth largest in dollar value ofinternational shipments, with cargo valued at more than $60 billionannually.  Continued growth of the port’sbusiness is expected with plans to deepen its channel and create a newthree-berth 280-acre container terminal on the site of the former CharlestonNaval complex.  Recent economic expansionin the manufacturing sector includes the construction of two new plantsdesigned for the production and assembly of the fuselage sections for Boeing’snew 787 Dreamliner.  These two plantshave created approximately 750 jobs.  Intotal, these plants represent a $560 million investment, the largest in SouthCarolina since BMW entered the state in the early 1990s.  In October 2008, Google opened a newdata center facility in the Charleston area, which is part of a $600 millioninvestment and which is expected to create 200 technology-related jobs.  In addition, DuPont recently announced aplanned $500 million investment at its facility in Berkeley County and GEAviation and the SKF Group, one of the world’s largest producers of jet enginebearings, have recently announced plans to establish a new facility inCharleston to manufacture and repair jets.

 

Historically, theU.S. military has also played a significant role in the economy of theCharleston area.  Charleston hostsmilitary installations for the U.S. Navy, U.S. Air Force, U.S. Army and U.S.Coast Guard.  Charleston is also home toa number of academic institutions besides the Medical University of SouthCarolina, including The Citadel, The College of Charleston and CharlestonSouthern University.

 

The Myrtle Beach area, also known as ****South Carolina’s GrandStrand****, is a 60-mile stretch of coastline extendingfrom the South Carolina state line at Little River (Horry County) south toPawleys Island (Georgetown County). According to FDIC data, total deposits in the Myrtle Beach market areaincreased 102% from approximately $3.4 billion in 2000 to approximately $6.8billion in 2008.  The population of theMyrtle Beach market area was approximately 307,000 in 2007, an increase ofapproximately 22.37% from 2000 and is projected to grow an additional 17.2% by2012.  A significant portion of thisgrowth is attributable to retirees.  Inrecent years, both *The Wall Street Journal*and *Money* magazine rated the Grand Strand asone of the nation’s top retirement locations. Today, approximately 25% of South Carolina’s residents are over 55 yearsof age and Horry County is No. 1 among the top five regions in the statewhere retirees are relocating.  Similarto Charleston, tourism plays a vital role in the economy of Myrtle Beach.  In recent years, the American AutomobileAssociation has ranked the area as the nation’s second most popular touristdestination.  The Myrtle Beach Chamber ofCommerce estimated that ****14.6 million people visited the area in 2006 and spent over $3.1 billion****.

 

The Hilton Head market area is approximately 45 milesnorth of Savannah, Georgia and 90 miles south of Charleston, and is aninternationally recognized vacation destination famous for its championshipgolf courses, beaches and resorts. According to FDIC data, total deposits in the Hilton Head market areaincreased 83% from approximately $1.9 billion in 2000 to approximately $3.4billion in 2008.  The population for theHilton Head market area was approximately 177,000 in 2007, an increase of 27.27%from 2000, and is projected to grow an additional 16.75% by 2012.  The Hilton Head Chamber of Commerce estimatesthat the year-round tourism industry

 

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accounts for more than 60% of local jobs andcontributes in excess of $1.5 billion annually to the Hilton Head economy.

 

We believe the combination of full-time residents and visitors will continue to support businesses such as real estate development, construction, manufacturing, healthcare and education and favors the expansion of our relationship banking model in our market areas.

 

**Our Strengths**

 

Since commencing operations, we have focused on ourcore operating strength of relationship banking to grow our business.  The cornerstone of our relationship bankingmodel is to hire and retain professional banking officers who know theircustomers and focus on their banking needs. By leveraging our banking officers’ experience and personal contacts, wehave achieved our success to date by focusing on professionals, entrepreneurs,small business owners and their family members in our markets.  This relationship banking model ensures thatwe are able to generate both repeat business from existing customers as well asnew business from customer referrals.

 

We have assembled an experienced senior managementteam, combining extensive market knowledge with an energetic andentrepreneurial culture.  The members ofour management team have close ties to, and are actively involved in, thecommunities in which we operate, which is critical to our relationship bankingfocus.  We believe that our currentorganizational structure and executive officers can support and manage the bank’sgrowth for the foreseeable future without needing to add additional executivepositions.

 

As we move beyond our fifth anniversary, we haveestablished a community banking franchise consisting of seven full servicebanking offices in selected markets along the entire coast of SouthCarolina.  We have been careful to expandby opening new facilities only after we have identified an attractive marketand hired experienced local bankers to manage our operations.  Under our expansion model, we will generallyfirst open a loan production office after retaining these bankers.  Then, once a loan production office generatessufficient assets, we will open a full service branch that will already have anexisting loan and customer base.  Thisapproach has allowed us to “test” our markets and be more efficient uponopening a full service branch.  Six ofour seven full service banking offices have been opened since April 2007and, as of December 31, 2008, these new offices averaged approximately$31.0 million in retail deposits.  Goingforward, we believe retail deposit growth will be a primary component of ourfunding sources.  For example, retaildeposits increased by 39% of loans for the year ending December 31, 2008,with year-to-date retail deposits increasing $115.7 million compared to $70.6million in loans.

 

Through our relationshipbanking service model, we believe we can continue to grow our market sharewithin the Charleston, Myrtle Beach and Hilton Head market areas.  We will continue to consider hiringexperienced lending and deposit gathering employees within our markets to helpdrive organic growth in our full service banking offices.  We will also continue to look at otherstrategic and attractive locations or opportunities to expand our franchisealong the Southeast coast, but we have no such expansion plans at this time.

 

**Lending Activities**

 

*General.*  We emphasize a range of lending services,including commercial and residential real estate mortgage loans, real estateconstruction loans, commercial and industrial loans and consumer loans.  Our customers are generally individuals andsmall to medium-sized businesses and professional firms that are located in orconduct a substantial portion of their business in our market area.  We have focused our lending activitiesprimarily on the professional market, including doctors, dentists, smallbusiness owners and commercial real estate developers.  At December 31, 2008, we had total loansof $462.0 million, representing 68.1% of our total earning assets.  The average loan size was approximately$285,000.  As of December 31, 2008,we had 25 nonperforming loans totaling approximately $11.5 million, or 2.5% oftotal loans.  The average size of ournon-performing loans at December 31, 2008, was approximately $459,000.

 

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At December 31,2008, our loan portfolio was comprised of the following:

 
| ** **                 | ** ** | **Loans**                            | ** ** | **Non-Performing Assets** | ** ** |
|----------------------------|------------|--------------------------------------|------------|--------------------------------|------------|
| ** **                 | ** ** | **Balance  December  31, 2008** | ** ** | **% of  Loans**           | ** ** | **Non-  accrual  Loans** | ** ** | **Other  Real  Estate** | ** ** | **Total Non-  performing  Assets** | ** ** |
| ** **                 | ** ** | **(dollars in thousands)** | ** ** |
| Real estate  mortgage      |       | $                                    | 268,500    |                           | 58.1       | % | $ | 4,309 |   | $ | 1,072 |   | $ | 5,381 |   |
| Real estate  construction  |       | 161,298                              |       | 34.9                           |       | 4,698 |   | 729 |   | 5,427 |   |
| Commercial and  industrial |       | 27,443                               |       | 6.0                            |       | 2,475 |   | — |   | 2,475 |   |
| Consumer                   |       | 4,726                                |       | 1.0                            |       | — |   | — |   | — |   |
|                       |       | $                                    | 461,967    |                           | 100.0      | % | $ | 11,482 |   | $ | 1,801 |   | $ | 13,283 |   |

 

*RealEstate Mortgage Loans*. Loans secured by real estate mortgages are the principal component ofour loan portfolio.  Real estate loansare 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 theloan.  We obtain a security interest inreal estate whenever possible, in addition to any other available collateral,in order to increase the likelihood of the ultimate repayment of the loan.

 

As of December 31,2008, loans secured by first or second mortgages on real estate comprisedapproximately $268.5 million, or 58.1%, of our loan portfolio.** **These loans willgenerally fall into one of two categories: residential real estate loans orcommercial real estate loans.

 

At December 31,2008, our real estate mortgage loan portfolio was comprised of the following:

 

| ** **                                    | ** ** | **Loans**                            | ** ** | **Non-Performing Assets** | ** ** |
|-----------------------------------------------|------------|--------------------------------------|------------|--------------------------------|------------|
| ** **                                    | ** ** | **Balance  December**                | ** ** | **% of  Loan**            | ** ** | **% of  Total** | ** ** | **Non-  accrual** | ** ** | **Other  Real** | ** ** | **Total Non-  performing** | ** ** |
| ** **                                    | ** ** | **31, 2008**                    | ** ** | **Category**                   | ** ** | **Loans** | ** ** | **Loans** | ** ** | **Estate** | ** ** | **Assets** | ** ** |
| ** **                                    | ** ** | **(dollars in thousands)** | ** ** |
| **Real Estate Mortgage Loans** |       |                                 |       |                           |       |   |   |   |   |   |   |   |   |
| Residential                                   |       |                                 |       |                           |       |   |   |   |   |   |   |   |   |
| Owner-occupied                                |       | $                                    | 132,278    |                           | 49.3       | % | 28.6 | % | $ | 2,420 |   | $ | 1,072 |   | $ | 3,492 |   |
| Non  owner-occupied                           |       | 20,110                               |       | 7.5                            |       | 4.4 |   | — |   | — |   | — |   |
|                                          |       |                                 |       |                           |       |   |   |   |   |   |   |   |   |
| Commercial                                    |       |                                 |       |                           |       |   |   |   |   |   |   |   |   |
| Owner-occupied                                |       | 105,286                              |       | 39.2                           |       | 22.8 |   | 1,889 |   | — |   | 1,889 |   |
| Multi-family                                  |       | 10,826                               |       | 4.0                            |       | 2.3 |   | — |   | — |   | — |   |
|                                          |       | $                                    | 268,500    |                           | 100.0      | % | 58.1 | % | $ | 4,309 |   | $ | 1,072 |   | $ | 5,381 |   |

 

·                  ResidentialReal Estate Loans.  We generallyoriginate and hold short-term first mortgages and traditional second mortgageresidential real estate loans and home equity lines of credit.  With respect to fixed and adjustable ratelong-term residential real estate loans with terms of up to 30 years, wetypically only originate these loans for a third-party.  At December 31, 2008, residential realestate mortgage loans amounted to $152.4 million, or 33.0% of our loanportfolio.  Included in these loans was$132.3 million, or 86.8% of our residential real estate loan portfolio, infirst and second mortgages on individuals’ homes, of which $40.7 million, or26.7% of our residential loan portfolio, was in home equity loans.  At December 31, 2008, our residentialreal estate loans balances ranged from approximately $1,000 to $4.3 million,with an average loan balance of approximately $251,000.  The majority of these loans are made onowner-occupied properties.  The nonowner-occupied loans had an average size of approximately $544,000.  Generally, we limit the loan-to-value ratioon our residential

 

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real estate loans to 85%.  At December 31, 2008, our individualhome equity lines of credit balances secured by first and second mortgagesranged up to approximately $989,000, with an average balance of approximately$126,000.  Our underwriting criteria for,and the risks associated with, home equity loans and lines of credit aregenerally the same as those for first mortgage loans.  Home equity lines of credit typically haveterms of 15 years or less and we generally limit the extension of credit toless than 90% of the available equity of each property, although in certainexceptions we may extend up to 100% of the available equity.

 

·                  CommercialReal Estate Loans.  At December 31,2008, commercial real estate mortgage loans amounted to $116.1 million, orapproximately 25.1% of our loan portfolio. At December 31, 2008, the outstanding balances on individualcommercial real estate loans ranged from approximately $2,500 to $3.4million.  We maintain loan relationshipsin excess of this size but have participated credits to correspondent banks toreduce our exposure to single large lending relationships.  The average commercial real estate loanbalance was approximately $575,000. 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 individualbasis and attempt to determine the business risks and credit profile of eachborrower.  We attempt to reduce creditrisk in the commercial real estate portfolio by emphasizing 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.

 

*RealEstate Construction Loans. *Weoffer fixed and adjustable rate residential and commercial construction loansto builders and developers and to consumers who wish to build their ownhomes.  The term of our construction anddevelopment loans generally is limited to 18 months, although payments may bestructured on a longer amortization basis. Construction and development loans generally carry a higher degree ofrisk than long-term financing of existing properties because repayment dependson the ultimate completion of the project and usually on the subsequent sale ofthe property.  Specific risks include:

 

·                  cost overruns;

·                  mismanaged construction;

·                  inferior or improper constructiontechniques;

·                  economic changes or downturns duringconstruction;

·                  a downturn in the real estate market;

·                  rising interest rates which mayprevent sale of the property; and

·                  failure to sell completed projects ina 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%.

 

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At December 31,2008, our real estate construction loans amounted to $161.3 million, or 34.9%of our total loan portfolio, and were comprised of the following:

 

| ** **                                        | ** ** | **Loans**                            | ** ** | **Non-Performing Assets** | ** ** |
|---------------------------------------------------|------------|--------------------------------------|------------|--------------------------------|------------|
| ** **                                        | ** ** | **Balance  December**                | ** ** | **% of  Loan**            | ** ** | **% of  Total** | ** ** | **Non-  accrual** | ** ** | **Other  Real** | ** ** | **Total Non-  performing** | ** ** |
| ** **                                        | ** ** | **31, 2008**                    | ** ** | **Category**                   | ** ** | **Loans** | ** ** | **Loans** | ** ** | **Estate** | ** ** | **Assets** | ** ** |
| ** **                                        | ** ** | **(dollars in thousands)** | ** ** |
| **Real Estate Construction Loans** |       |                                 |       |                           |       |   |   |   |   |   |   |   |   |
| Residential                                       |       |                                 |       |                           |       |   |   |   |   |   |   |   |   |
| Land                                              |       |                                 |       |                           |       |   |   |   |   |   |   |   |   |
| Commercial                                        |       | $                                    | 38,357     |                           | 23.8       | % | 8.3 | % | $ | 2,296 |   | $ | 729 |   | $ | 3,025 |   |
| Consumer                                          |       | 16,461                               |       | 10.2                           |       | 3.6 |   | — |   | — |   | — |   |
| Construction                                      |       |                                 |       |                           |       |   |   |   |   |   |   |   |   |
| Pre-sold  commercial                              |       | 1,255                                |       | 0.8                            |       | 0.3 |   | — |   | — |   | — |   |
| Owner-occupied  consumer                          |       | 10,555                               |       | 6.5                            |       | 2.3 |   | 459 |   | — |   | 459 |   |
| Non owner  occupied commercial                    |       | 18,028                               |       | 11.2                           |       | 3.9 |   | — |   | — |   | — |   |
|                                              |       |                                 |       |                           |       |   |   |   |   |   |   |   |   |
| Commercial                                        |       |                                 |       |                           |       |   |   |   |   |   |   |   |   |
| Land                                              |       | 44,225                               |       | 27.4                           |       | 9.5 |   | 1,943 |   | — |   | 1,943 |   |
| Construction                                      |       |                                 |       |                           |       |   |   |   |   |   |   |   |   |
| Owner-occupied                                    |       | 17,921                               |       | 11.1                           |       | 3.9 |   | — |   | — |   | — |   |
| Non owner  occupied                               |       | 14,496                               |       | 9.0                            |       | 3.1 |   | — |   | — |   | — |   |
|                                              |       | $                                    | 161,298    |                           | 100.0      | % | 34.9 | % | $ | 4,698 |   | $ | 729 |   | $ | 5,427 |   |

 

Residential land loansare made to both commercial entities and consumer borrowers for the purpose offinancing land upon which to build a residential home.  At December 31, 2008, total real estateconstruction loans ranged from approximately $10,000 to $3.3 million, with anaverage balance of approximately $443,000.

 

Residential land loansare reclassified as residential construction loans once construction of theresidential home commences.  These loansare further categorized as (i) pre-sold commercial, which is a loan to acommercial entity with a pre-identified buyer for the finished home, (ii) owner-occupiedconsumer, which is a loan to an individual who intends to occupy the finishedhome and (iii) non owner-occupied commercial, which is a loan to acommercial entity intending to lease or sell the finished home.  At December 31, 2008, residential landloans ranged from approximately $10,000 to $2.5 million, with an averagebalance of approximately $264,000. At December 31, 2008, residentialconstruction loans ranged from approximately $57,000 to $3.3 million, with anaverage balance of approximately $585,000.

 

Commercial land loans aremade to commercial entities for the purpose of financing land upon which tobuild a commercial project.  These loansare for projects that typically involve small and medium sized single andmulti-use commercial buildings.  At December 31,2008, these loans ranged from approximately $29,000 to $3.3 million, with anaverage balance of approximately $553,000.

 

Commercial constructionloans are made to the borrower for the purpose of financing the construction ofa commercial development.  These loansare further categorized depending on whether the borrower intends to occupy thefinished development (owner-occupied) or whether the borrower intends to leaseor sell the finished development (non owner-occupied).  At December 31, 2008, these loans rangedfrom approximately $148,000 to $3.1 million, with an average balance ofapproximately $1.4 million.

 

*Commercialand Industrial Loans*. At December 31, 2008, these loans amounted to $27.4 million, or6.0% of our total loan portfolio.  At December 31,2008, outstanding balances on these loans ranged up to approximately $2.3million, with an average loan balance of approximately $97,000. We make loansfor commercial purposes in various lines of businesses, including themanufacturing industry, service industry and professional service areas.

 

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These loans are generallyconsidered to have greater risk than first or second mortgages on real estatebecause these loans may be unsecured or, if they are secured, the value of thecollateral may be difficult to assess and more likely to decrease than realestate.

 

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, 2008, we had notoriginated any small business loans utilizing government enhancements.

 

*ConsumerLoans*.  At December 31,2008, consumer loans amounted to $4.7 million, or 1.0% of our loanportfolio.  At December 31, 2008,the outstanding balance on our individual consumer loans ranged up to approximately$509,000, with an average loan balance of approximately $27,000.  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. Our installment loans typically amortize over periods up to 60months.  Although we typically requiremonthly payments of interest and a portion of the principal on our loanproducts, we will offer consumer loans with a single maturity date when aspecific source of repayment is available. Consumer loans are generally considered to have greater risk than firstor second mortgages on real estate because they may be unsecured, or, if theyare secured, the value of the collateral may be difficult to assess and morelikely to decrease in value than real estate.

 

*LoanPortfolio Composition*. We believe that the composition of our loan portfolio reduces our lossexposure.  We provide loans for varioususes, including commercial and residential real estate, business purposes,personal use, home improvement, automobiles, as well as letters of credit andhome equity lines of credit.  We striveto maintain a diversified loan portfolio and limit the amount of our loans toany single customer.  At December 31,2008, we had approximately 1,621 loans, with an average loan balance ofapproximately $285,000.  As of December 31,2008, our 10 largest customer loan relationships represented approximately$54.2 million, or 11.7% of our loan portfolio. Further, we believe that operating in three separate and distinct marketareas along the South Carolina coast provides long-term loan portfoliodiversification.  At December 31,2008, our loan portfolio was positioned within our major markets as follows:Charleston — 73.5%; Myrtle Beach — 17.5%; Hilton Head — 9.0%.  We believe that the diversity of economicactivity in our primary markets tends to mitigate economic volatility, which,together with the variety of purposes for which we make loans, reduces ourrisks of loss.

 

*Underwriting. *When we opened our bank, weintroduced a strong credit culture based on traditional credit measures and ourveteran bankers’ intimate knowledge of our markets.  We have a disciplined approach tounderwriting and focus on multiple sources of repayment, including personalguarantees.  Our underwriting standardsvary for each type of loan.  While wegenerally underwrite the loans in our portfolio in accordance with our owninternal underwriting guidelines and regulatory supervisory guidelines, incertain circumstances we have made loans which exceed either our internalunderwriting guidelines, supervisory guidelines, or both.   We are permitted to hold loans that exceedsupervisory guidelines up to 100% of bank capital, or $57.5 million at December 31,2008.  As such, $44.6 million, or 9.7%,of our loans had loan-to-value ratios that exceeded regulatory supervisoryguidelines, of which 33 loans totaling approximately $13.2 million at inceptionhad loan-to-value ratios of 100% or more. In addition, supervisory limits on commercial loan-to-value exceptionsare set at 30% of capital.  At December 31,2008, $26.3 million of our commercial loans, or 45.7% of the bank’s capital,exceeded the supervisory loan-to-value ratio. The exceptions are approved based on a combination of debt serviceability, liquidity and overall balance sheet strength of the borrower. Thefrequency of pre-approved exceptions has decreased due to the erosion inpotential borrower’s balance sheet strength, liquidity and income due to thecurrent economic conditions. The bank expects this trend to continue whileeconomic conditions remain recessionary. The bank, however, has experienced an increase in unintendedloan-to-value exceptions in existing bank loans due to updated appraisals onloans, where the value of the applicable collateral, has decreased.

 

*LoanApproval.*  Certaincredit risks are inherent in making loans. These include prepayment risks, risks resulting from uncertainties inthe future value of collateral, risks resulting from changes in economic andindustry conditions, and risks inherent in dealing with individualborrowers.  We attempt to mitigaterepayment risks by

 

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adhering to internalcredit policies and procedures.  Thesepolicies and procedures include officer and customer lending limits, amulti-layered approval process for larger loans, documentation examination andfollow-up procedures 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, Principal Banking Officer and ChiefCredit Officer, any two may combine their authority to approve credits up to$1.5 million.  If the loans exceed $1.5million, then a loan committee comprised of Mr. Coffee and five outsidedirectors may approve the loans up to 10% of the bank’s capital and surplus.All loans in excess of this lending limit will be submitted for approval to theentire board of directors of the bank. We do not make any loans to any director, executive officer, orprincipal shareholder, and the related interests of each, of the bank unlessthe loan is approved by the disinterested members of the board of directors ofthe bank and is on terms not more favorable to such person than would beavailable to a similarly situated person not affiliated with the bank.

 

*CreditAdministration and Loan Review.*  We maintain a continuous loan reviewprocess.  We apply a credit gradingsystem to each loan, and utilize an independent consultant on a semi-annualbasis to review the loan underwriting on a test basis to confirm the grading ofeach loan.  Each loan officer isresponsible for each loan he or she makes, regardless of whether otherindividuals or committees joined in the approval.  This responsibility continues until the loanis repaid or until the loan is officially assigned to another officer.  We also maintain a separate construction loanmanagement department that operates independently from our lenders and isresponsible for authorizing draws and the continuing oversight during theconstruction process.

 

*LendingLimits.*  Our lendingactivities are subject to a variety of lending limits imposed by federallaw.  In general, the bank is subject toa legal limit on loans to a single borrower equal to 15% of the bank’s capitaland unimpaired surplus.  This limit willincrease or decrease as the bank’s capital increases or decreases.  Based upon the capitalization of the bank at December 31,2008, our legal lending limit was approximately $8.6 million.  Even though our legal lending limit amountsto $8.6 million, we maintain an internal lending limit of $5.2 million, at December 31,2008.  Historically, we have been able tosell participations in our larger loans to other financial institutions, whichhas allowed us to manage the risk involved in these loans and to meet thelending needs of our customers requiring extensions of credit in excess ofthese limits, however, in the current economic environment, it has beendifficult to sell participations to other financial institutions.

 

**Deposit Products**

 

We offer a full range ofdeposit services that are typically available in most banks and savingsinstitutions, including checking accounts, commercial accounts, savingsaccounts and other time deposits of various types, ranging from daily moneymarket accounts to longer-term certificates of deposit.  Transaction accounts and time deposits aretailored to and offered at rates competitive to those offered in our primarymarket areas.  In addition, we offercertain retirement account services, such as IRAs.  We solicit accounts from individuals,businesses, associations, organizations and governmental authorities.  We believe that our branch infrastructurewill assist us in obtaining retail deposits from local customers in thefuture.  Our retail deposits haveincreased to $277.1 million at December 31, 2008 from $50.3 million at December 31,2004.  Our retail deposits at December 31,2008 were 49.4% of our total deposits compared to 41.6% of our total depositsat December 31, 2007.

 

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The following table showsour deposit mix at December 31, 2008 and December 31, 2007:

 
| ** **                           | ** ** | **At December 31, 2008** | ** ** | **At December 31, 2007** | ** ** | **Year-to-Date Growth** | ** ** | **Average Rate at** | ** ** |
|--------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|------------------------------|------------|-------------------------------|------------|
| ** **                           | ** ** | **Amount**                              | ** ** | **Percentage  of Total**           | ** ** | **Amount**                   | ** ** | **Percentage  of Total** | ** ** | **Amount** | ** ** | **Percentage** | ** ** | **December 31,  2008** | ** ** |
| ** **                           | ** ** | **(dollars in thousands)**    | ** ** | ** **                              |
| Retail Deposits                      |       |                                    |       |                                    |       |                         |       |                          |       |   |   |   |   |   |   |
| Noninterest  bearing demand deposits |       | $                                       | 12,133     |                                    | 2.2        | %                            | $          | 10,191                        |       | 2.6 | % | $ | 1,942 |   | 19.1 | % |   |   |
| Interest bearing  demand deposits    |       | 46,987                                  |       | 8.4                                     | %          | 8,460                        |       | 2.2                           | %          | 38,527 |   | 455.4 | % | 2.53 | % |
| Savings and  money market accounts   |       | 34,971                                  |       | 6.2                                     | %          | 94,661                       |       | 24.4                          | %          | (59,690 | ) | (63.1 | )% | 2.77 | % |
| Time deposits  less than $100,000    |       | 92,400                                  |       | 16.5                                    | %          | 19,364                       |       | 5.0                           | %          | 73,036 |   | 377.2 | % | 4.06 | % |
| Time deposits  greater than $100,000 |       | 90,577                                  |       | 16.1                                    | %          | 28,735                       |       | 7.4                           | %          | 61,842 |   | 215.2 | % | 4.15 | % |
| Total Retail  Deposits               |       | 277,068                                 |       | 49.4                                    | %          | 161,411                      |       | 41.6                          | %          | 115,657 |   | 71.7 | % | 3.29 | % |
|                                 |       |                                    |       |                                    |       |                         |       |                          |       |   |   |   |   |   |   |
| Wholesale  Deposits                  |       |                                    |       |                                    |       |                         |       |                          |       |   |   |   |   |   |   |
| Savings and  money market accounts   |       | 147,885                                 |       | 26.3                                    | %          | 105,173                      |       | 27.1                          | %          | 42,712 |   | 40.6 | % | 2.77 | % |
| Time deposits  less than $100,000    |       | 134,024                                 |       | 23.9                                    | %          | 120,444                      |       | 31.0                          | %          | 13,580 |   | 11.3 | % | 4.31 | % |
| Time deposits  greater than $100,000 |       | 2,248                                   |       | 0.4                                     | %          | 1,141                        |       | 0.3                           | %          | 1,107 |   | 97.0 | % | 5.18 | % |
| Total Wholesale  Deposits            |       | 284,157                                 |       | 50.6                                    | %          | 226,758                      |       | 58.4                          | %          | 57,399 |   | 25.3 | % | 3.66 | % |
| Total Deposits                       |       | $                                       | 561,225    |                                    | 100.0      | %                            | $          | 388,169                       |       | 100.0 | % | $ | 173,056 |   | 44.5 | % | 3.49 | % |

 

**Other Banking Services**

 

We also offer other bank services including safedeposit boxes, traveler’s checks, direct deposit, United States Savings Bondsand banking by mail.  We are associatedwith the Cirrus, Master-Money, Pulse and Subswitch ATM networks,****which are available to our customers throughout thecountry.  We believe that by beingassociated with a shared network of ATMs, we are better able to serve ourcustomers and are able to attract customers who are accustomed to theconvenience of using ATMs, although we do not believe that maintaining thisassociation is critical to our success. In addition, we offer courier deposit service for commercial customersand extended banking hours, from 8:00 a.m. to 5:30 p.m. daily.  We also offer internet banking services, billpayment services and cash management services, along with remote depositcapture and ACH origination.  Wecurrently exercise trust powers as trustee for the Tidelands Bancshares, Inc.Employee Stock Ownership Plan, but do not expect to exercise retail trustpowers during our next few years of operation.

 

**Competition**

 

The banking business ishighly competitive, and we experience competition in our market from many otherfinancial institutions.  Competitionamong financial institutions is based upon interest rates offered on depositaccounts, interest rates charged on loans, other credit and service charges relatingto loans, the quality and scope of the services rendered, the convenience ofbanking facilities, and, in the case of loans to commercial borrowers, relativelending limits.  We compete withcommercial banks, credit unions, savings institutions, mortgage banking firms,consumer finance companies, securities brokerage firms, insurance companies,money market funds and other mutual funds, as well as other super-regional,national and international financial institutions that operate offices in theCharleston area and elsewhere.

 

As of June 30, 2008, there were 29 financialinstitutions other than us in the Charleston market area, 26 in 

 

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the Myrtle Beach market area and 24 in the Hilton Headmarket area.  We compete with theseinstitutions 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 someservices, such as extensive and established branch networks and trust services,which we do not provide.  In addition,many of our non-bank competitors are not subject to the same extensive federalregulations that govern bank holding companies and federally insured banks.

 

**Employees**

 

As of December 31,2008, we had 81 full-time employees and 3 part-time employees.

 

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**SUPERVISION AND 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 our operations.  It is intended only to briefly summarize somematerial provisions.

 

**Recent Legislative and RegulatoryInitiatives to Address Financial and Economic Crises.**

 

The Congress, TreasuryDepartment and the federal banking regulators, including the FDIC, have takenbroad action since early September 2008 to address volatility in the U.S.banking system.

 

In October 2008, theEmergency Economic Stabilization Act of 2008 (“EESA”) wasenacted. The EESA authorizes the Treasury Department to purchase fromfinancial institutions and their holding companies up to $700 billion inmortgage loans, mortgage-related securities and certain other financialinstruments, including debt and equity securities issued by financialinstitutions and their holding companies in a troubled asset relief program (“TARP”).  Thepurpose of TARP is to restore confidence and stability to the U.S. bankingsystem and to encourage financial institutions to increase their lending tocustomers and to each other.  The Treasury Department has allocated$250 billion towards the TARP Capital Purchase Program (“CPP”).  Underthe CPP, Treasury will purchase debt or equity securities from participatinginstitutions.  The TARP also will include direct purchases orguarantees of troubled assets of financial institutions. Participants inthe CPP are subject to executive compensation limits and are encouraged toexpand their lending and mortgage loan modifications.

 

On December 19,2008, as part of the TARP CPP, we entered into a Letter Agreement and SecuritiesPurchase Agreement (collectively, the “CPP Purchase Agreement”) with theTreasury Department, pursuant to which we sold (i) 14,448 shares of ourFixed Rate Cumulative Perpetual Preferred Stock, Series T (the “Series TPreferred Stock”) and (ii) a warrant (the “CPP Warrant”) to purchase571,821 shares of our common stock for an aggregate purchase price of$14,448,000 million in cash.

 

The Series TPreferred Stock will qualify as Tier 1 capital and will be entitled tocumulative dividends at a rate of 5% per annum for the first five years, and 9%per annum thereafter.  We must consultwith the Commission before we may redeem the Series T Preferred Stock but,contrary to the original restrictions in the EESA, will not necessarily berequired to raise additional equity capital in order to redeem this stock.  The Warrant has a 10-year term and isimmediately exercisable upon its issuance, with an exercise price, subject toanti-dilution adjustments, equal to $3.79 per share of the common stock.  Please see the Form 8-K we filed withthe SEC on December 19, 2008, for additional information about the Series TPreferred Stock and the Warrant.

 

EESA also increased FDICdeposit insurance on most accounts from $100,000 to $250,000.  Thisincrease is in place until the end of 2009 and is not covered by depositinsurance premiums paid by the banking industry.

 

Following a systemic riskdetermination, the FDIC established the Temporary Liquidity Guarantee Program (“TLGP”)on October 14, 2008.  The TLGP includes the Transaction AccountGuarantee Program (“TAGP”), which provides unlimited deposit insurance coveragethrough December 31, 2009 for noninterest-bearing transaction accounts(typically business checking accounts) and certain funds swept intononinterest-bearing savings accounts.  Institutions participating inthe TLGP pay a 10 basis points fee (annualized) on the balance of each coveredaccount in excess of $250,000, while the extra deposit insurance is inplace.  The TLGP also includes the Debt Guarantee Program (“DGP”),under which the FDIC guarantees certain senior unsecured debt of FDIC-insuredinstitutions and their holding companies.  The unsecured debt must beissued on or after October 14, 2008

 

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and not later than June 30,2009, and the guarantee is effective through the earlier of the maturity dateor June 30, 2012.  On March 17, 2009, the FDIC adopted aninterim rule that extends the DGP and imposes surcharges on existing ratesfor certain debt issuances.  Thisextension allows institutions that have issued guaranteed debt before April 1,2009 to issue guaranteed debt during the extended issuance period that ends October 31,2009.  For such institutions, theguarantee on debt issued on or after April 1, 2009, will expire no laterthan December 31, 2012.  The DGPcoverage limit is generally 125% of the eligible entity’s eligible debtoutstanding on September 30, 2008 and scheduled to mature on or before June 30,2009 or, for certain insured institutions, 2% of their liabilities as of September 30,2008.  Depending on the term of the debt maturity, the nonrefundableDGP fee ranges from 60 to 110 basis points (annualized) for covered debtoutstanding until the earlier of maturity or June 30, 2012 and 75 to 125basis points (annualized) for covered debt outstanding until after June 30,2012.  The TAGP and DGP are in effect for all eligible entities,unless the entity opted out on or before December 5, 2008.  Wehave not opted out of either program.

 

On February 17,2009, the American Recovery and Reinvestment Act (the “Recovery Act”) wassigned into law in an effort to, among other things, create jobs and stimulategrowth in the United States economy.  TheRecovery Act specifies appropriations of approximately $787 billion for a widerange of Federal programs and will increase or extend certain benefits payableunder the Medicaid, unemployment compensation, and nutrition assistanceprograms.  The Recovery Act also reducesindividual and corporate income tax collections and makes a variety of otherchanges to tax laws.  The Recovery Actalso imposes certain limitations on compensation paid by TARP participants,which includes programs under TARP such as the CPP in which we participate.

 

**TidelandsBancshares, Inc.**

 

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.***  Underthe Bank Holding Company Act, a bank holding company is generally permitted toengage in, or acquire direct or indirect control of more than 5% of the votingshares of any company engaged in, the following activities:

 

·                  banking ormanaging or controlling banks;

 

·                  furnishingservices to or performing services for our subsidiaries; and

 

·                  any activitythat the Federal Reserve determines to be so closely related to banking as tobe a proper incident to the business of banking.

 

Activities that theFederal Reserve has found to be so closely related to banking as to be a properincident to the business of banking include:

 

·                  factoringaccounts receivable;

 

·                  making,acquiring, brokering or servicing loans and usual related activities;

 

·                  leasing personalor real property;

 

·                  operating anon-bank depository institution, such as a savings association;

 

·                  trust companyfunctions;

 

·                  financial andinvestment advisory activities;

 

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·                  conductingdiscount securities brokerage activities;

 

·                  underwriting anddealing in government obligations and money market instruments;

 

·                  providingspecified management consulting and counseling activities;

 

·                  performingselected data processing services and support services;

 

·                  acting as agentor broker in selling credit life insurance and other types of insurance inconnection with credit transactions; and

 

·                  performingselected insurance underwriting activities.

 

As a bank holding company we also can elect to be treated as a “financialholding company,” which would allow us to engage in a broader array ofactivities.  In sum, a financial holdingcompany can engage 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, andsubject to certain exceptions, the Bank Holding Company Act and the Change inBank Control Act, together with regulations promulgated there under, requireFederal Reserve approval prior to any person or company acquiring “control” ofa bank holding company.  Control is conclusivelypresumed to exist if an individual or company acquires 25% or more of any classof voting securities of a bank holding company. Following the relaxing of these restrictions by the Federal Reserve in September 2008,control will be rebuttably presumed to exist if a person acquires more than 33%of the total equity of a bank or bank holding company, of which it may own,control or have the power to vote not more than 15% of any class of votingsecurities.

 

***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 be required to provide a guarantee of the bank’s plan to return tocapital adequacy.  Additionally, underthe Bank Holding Company Act, the Federal Reserve Board may require a bankholding company to terminate any activity or relinquish control of a nonbanksubsidiary, other than a nonbank subsidiary of a bank, upon the Federal ReserveBoard’s determination that such activity or control constitutes a serious riskto the financial soundness or stability of any depository institutionsubsidiary of the bank holding company. Further, federal bank regulatory authorities have additional discretionto require a bank holding company to divest itself of any bank or nonbank subsidiariesif the 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 bankregulatory agency to maintain the capital of a subsidiary bank at a certainlevel would be assumed by the bankruptcy trustee and entitled to prioritypayment.

 

***CapitalRequirements.***  TheFederal Reserve Board imposes certain capital requirements on the bank holdingcompany under the Bank Holding Company Act, including a minimum leverage ratioand a minimum ratio of “qualifying” capital to risk-weighted assets.  These requirements are essentially the sameas those that apply to

 

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the bank and aredescribed below under “Tidelands Bank — Prompt Corrective Action.”  Subject to our capital requirements andcertain other restrictions, we are able to borrow money to make a capitalcontribution to the bank, and these loans may be repaid from dividends paidfrom the bank to the company.  Ourability to pay dividends depends on the bank’s ability to pay dividends to us, whichis subject to regulatory restrictions as described below in “Tidelands Bank —Dividends.”  We are also able to raisecapital for contribution to the bank by issuing securities without having toreceive regulatory approval, subject to compliance with federal and statesecurities laws.

 

***SouthCarolina State Regulation.***  As a South Carolina bank holding companyunder the South Carolina Banking and Branching Efficiency Act, we are subjectto limitations on sale or merger and to regulation by the South Carolina Boardof Financial Institutions (the “S. C. Board”). We are not required to obtain the approval of the S.C. Board prior toacquiring the capital stock of a national bank, but we must notify them atleast 15 days prior to doing so.  We mustreceive the S. C. Board’s approval prior to engaging in the acquisition of aSouth Carolina state chartered bank or another South Carolina bank holdingcompany.

 

**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 Institutionsand the Federal Deposit Insurance Corporation (the “FDIC”).  Deposits in the bank are insured by the FDICup to a maximum amount, which  iscurrently $100,000 for each non-retirement depositor and $250,000 for certainretirement-account depositors.  However,the FDIC has increased the coverage up to $250,000 for each non-retirementdepositor through December 31, 2009, and the bank is participating in theFDIC’s Temporary Liquidity Guarantee Program (discussed above in greaterdetail) which, in part, fully insures non-interest bearing transactionaccounts.

 

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 lossreserves;

 

·                  loans;

 

·                  investments;

 

·                  borrowings;

 

·                  deposits;

 

·                  mergers;

 

·                  issuances of securities;

 

·                  payment of dividends;

 

·                  interest rates payable on deposits;

 

·                  interest rates or fees chargeable onloans;

 

·                  establishment of branches;

 

·                  corporate reorganizations;

 

·                  maintenance of books and records; and

 

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·                  adequacy of staff training to carryon safe lending and 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 South Carolina Board of FinancialInstitutions also requires the bank to prepare quarterly reports on the bank’sfinancial condition in compliance with its minimum standards and procedures.

 

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 auditsystems;

 

·                  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 institution exceeds the required minimum level for each relevant capitalmeasure.  A well capitalized institutionis one (i) having a total capital ratio of 10% or greater, (ii) havinga tier 1 capital ratio of 6% or greater, (iii) having a leverage capitalratio of 5% or greater and (iv) that is not subject to any order orwritten directive to meet and maintain a specific capital level for any capitalmeasure.

 

·                  AdequatelyCapitalized — The institution meets the required minimum level for eachrelevant capital measure.  No capitaldistribution may be made that would result in the institution becomingundercapitalized.  An adequatelycapitalized institution is one (i) having a total capital ratio of 8% orgreater, (ii) having a tier 1 capital ratio of 4% or greater and (iii) havinga leverage capital ratio of 4% or greater or a leverage capital ratio of 3% orgreater if the institution is rated composite 1 under the CAMELS (Capital,Assets, Management, Earnings, Liquidity and Sensitivity to market risk) ratingsystem.

 

·                  Undercapitalized— The institution fails to meet the required minimum level for any relevantcapital measure.  An undercapitalizedinstitution is one (i) having a total capital ratio of less than 8% or (ii) havinga tier 1 capital ratio of less than 4% or (iii) having a leverage capitalratio of less than 4%, or if the institution is rated a composite 1 under theCAMELS rating system, a leverage capital ratio of less than 3%.

 

·                  SignificantlyUndercapitalized — The institution is significantly below the required minimumlevel for

 

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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%.

 

·                  CriticallyUndercapitalized — The institution fails to meet a critical capital level setby the appropriate federal banking agency. A critically undercapitalized institution is one having a ratio oftangible equity to total assets that is equal to or less than 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 interest 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,and is 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 of sucha management fee or the making of such would cause the bank to becomeundercapitalized, it could not pay a management fee or dividend to us.

 

Asof December 31, 2008, the bank was deemed to be “well capitalized.”

 

***Standardsfor Safety and Soundness.*** The Federal Deposit Insurance Act (“FDIA”) also requires the federalbanking regulatory agencies to prescribe, by regulation or guideline,operational and managerial standards for all insured depository institutionsrelating to: (i) internal controls, information systems and internal auditsystems; (ii) loan documentation; (iii) credit underwriting; (iv) interestrate risk exposure; and (v) asset growth. The agencies also must prescribe standards for asset quality, earningsand stock valuation, 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.

 

***Insurance of Accounts and Regulation by the FDIC.*****  The bank’s deposits areinsured up to applicable limits by the Deposit Insurance Fund of theFDIC.  The Deposit Insurance Fund is the successor to the BankInsurance Fund and the Savings Association Insurance Fund, which were mergedeffective March 31, 2006.  As

 

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insurer, the FDIC imposesdeposit insurance premiums and is authorized to conduct examinations of and torequire reporting by FDIC insured institutions.  It also may prohibitany FDIC insured institution from engaging in any activity the FDIC determinesby regulation or order to pose a serious risk to the insurancefund.  The FDIC also has the authority to initiate enforcementactions against savings institutions, after giving the Office of ThriftSupervision an opportunity to take such action, and may terminate the depositinsurance if it determines that the institution has engaged in unsafe orunsound practices or is in an unsafe or unsound condition.

 

Under regulationseffective January 1, 2007, the FDIC adopted a new risk-based premiumsystem that provides for quarterly assessments based on an insured institution’sranking in one of four risk categories based upon supervisory and capitalevaluations.   For deposits held as of March 31, 2009,institutions are assessed at annual rates ranging from 12 to 50 basispoints, depending on each institution’s risk of default as measured byregulatory capital ratios and other supervisorymeasures.   Effective April 1, 2009, assessments willtake into account each institution’s reliance on securedliabilities and brokered deposits.  This will result in assessmentsranging from 7 to 77.5 basis points.  We anticipate our future insurancecosts to be higher than in previous periods. Based on current FDIC requirements and our current status, and assumingour status would be the same on April 1, 2009.  However, we are not currently able toaccurately determine the amount of additional cost.

 

FDIC insured institutionsare required to pay a Financing Corporation assessment, in order to fund theinterest on bonds issued to resolve thrift failures in the 1980s.  Forthe first quarter of 2009, the Financing Corporation assessment equaled1.14 basis points for domestic deposits.  These assessments, whichmay be revised based upon the level of deposits, will continue until the bondsmature in the years 2017 through 2019.

 

The FDIC may terminatethe deposit insurance of any insured depository institution, including thebank, if it determines after a hearing that the institution has engaged inunsafe or unsound practices, is in an unsafe or unsound condition to continueoperations or has violated any applicable law, regulation, rule, order orcondition imposed by the FDIC.  It also may suspend depositinsurance temporarily during the hearing process for the permanent terminationof insurance, if the institution has no tangible capital.  If insurance ofaccounts is terminated, the accounts at the institution at the time of thetermination, less subsequent withdrawals, shall continue to be insured for aperiod of six months to two years, as determined by theFDIC.  Management of the bank is not aware of any practice, conditionor violation that might lead to termination of the bank’s deposit insurance.

 

***Transactionswith Affiliates and Insiders.***  The company is a legal entity separate anddistinct from the bank and its other subsidiaries.  Various legal limitations restrict the bankfrom lending or otherwise supplying funds to the company or its non-banksubsidiaries.  The company and the bankare subject to Sections 23A and 23B of the Federal Reserve Act and FederalReserve 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 one affiliate,to 10% of the bank’s capital and surplus and, as to all affiliates combined, to20% of the bank’s capital and surplus. Furthermore, within the foregoing limitations as to amount, each coveredtransaction must meet specified collateral requirements.  The bank is forbidden to purchase low qualityassets 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

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with third parties and (ii) mustnot involve more than the normal risk of repayment or present other unfavorablefeatures.

 

***Branching****.*  Under current SouthCarolina law, we may open branch offices throughout South Carolina with theprior 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, federallegislation has been passed that permits interstate branching by banks ifallowed by state law, and interstate merging by banks.  However, South Carolina law, with limitedexceptions, currently permits branching across state lines only throughinterstate mergers.

 

***Anti-TyingRestrictions***. Under amendments to the Bank Holding Company Act and Federal Reserveregulations, a bank is prohibited from engaging in certain tying or reciprocityarrangements with its customers.  Ingeneral, a bank may not extend credit, lease, sell property, or furnish anyservices or fix or vary the consideration for these on the condition that (i) thecustomer obtain or provide some additional credit, property, or services fromor to the bank, the bank holding company or subsidiaries thereof or (ii) thecustomer may not obtain some other credit, property, or services from acompetitor, except to the extent reasonable conditions are imposed to assurethe soundness of the credit extended. Certain arrangements are permissible: a bank may offer combined-balanceproducts and may otherwise offer more favorable terms if a customer obtains twoor more traditional bank products; and certain foreign transactions are exemptfrom the general rule.  A bank holdingcompany or any bank affiliate also is subject to anti-tying requirements inconnection with electronic benefit transfer services.

 

***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 certainconditions imposed by their respective banking regulators, national andstate-chartered banks are permitted to form “financial subsidiaries” that mayconduct financial or incidental activities, thereby permitting banksubsidiaries to engage in certain activities that previously wereimpermissible.  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 of the bank are subject to avariety of statutes and regulations designed to protect consumers.  Interest and other charges collected orcontracted for by the bank are subject to state usury laws and federal lawsconcerning interest rates.  The bank’sloan operations are also subject to federal laws applicable to credittransactions, such as the:

 

·                  The federalTruth-In-Lending Act, governing disclosures of credit terms to consumerborrowers;

 

·                  The HomeMortgage Disclosure Act of 1975, requiring financial institutions to provideinformation to enable the public and public officials to determine whether afinancial institution is fulfilling its obligation to help meet the housingneeds of the community it serves;

 

·                  The Equal CreditOpportunity Act, prohibiting discrimination on the basis of race, creed orother prohibited factors in extending credit;

 

·                  The Fair CreditReporting Act of 1978, as amended by the Fair and Accurate Credit TransactionsAct, governing the use and provision of information to credit reportingagencies, certain identity theft protections and certain credit and otherdisclosures;

 

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·                  The Fair DebtCollection Act, governing the manner in which consumer debts may be collectedby collection agencies; and

 

·                  The Rules andregulations of the various federal agencies charged with the responsibility ofimplementing these federal laws.

 

The deposit operations ofthe bank also are subject to:

 

·                  the Right toFinancial Privacy Act, which imposes a duty to maintain confidentiality ofconsumer financial records and prescribes procedures for complying withadministrative subpoenas of financial records; and

 

·                  the ElectronicFunds Transfer Act and Regulation E issued by the Federal Reserve Board toimplement that Act, which governs automatic deposits to and withdrawals fromdeposit accounts and customers’ rights and liabilities arising from the use ofautomated teller machines and other electronic banking services.

 

***EnforcementPowers.***  The bankand its “institution-affiliated parties,” including its management, employees,agents, independent contractors, and consultants such as attorneys and accountantsand others who participate in the conduct of the financial institution’saffairs, are subject to potential civil and criminal penalties for violationsof law, regulations or written orders of a government agency.  These practices can include the failure of aninstitution to timely file required reports or the filing of false ormisleading information or the submission of inaccurate reports.  Civil penalties may be as high as $1,000,000a day for such violations.  Criminalpenalties for some financial institution crimes have been increased to 20years.  In addition, regulators areprovided with greater flexibility to commence enforcement actions againstinstitutions and institution-affiliated parties.  Possible enforcement actions include thetermination of deposit insurance. Furthermore, banking agencies’ power to issue cease-and-desist orderswere expanded.  Such orders may, amongother things, require affirmative action to correct any harm resulting from aviolation or practice, including restitution, reimbursement, indemnificationsor guarantees against loss.  A financialinstitution may also be ordered to restrict its growth, dispose of certainassets, rescind agreements or contracts, or take other actions as determined bythe ordering agency to be appropriate.

 

***Anti-MoneyLaundering.*** Financial institutions must maintain anti-money laundering programs thatinclude established internal policies, procedures and controls; a designatedcompliance officer; an ongoing employee training program; and testing of theprogram by an independent audit function. The company and the bank are also prohibited from entering intospecified financial transactions and account relationships and must meetenhanced standards for due diligence and “knowing your customer” in theirdealings with foreign 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 USAPATRIOT Act became effective on October 26, 2001, amended, in part, theBank Secrecy Act, and provides, in part, for the facilitation of informationsharing among governmental entities and financial institutions for the purposeof combating terrorism and money laundering by enhancing anti-money launderingand financial transparency laws, as well as enhanced information collectiontools 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

 

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## **beviolating U.S. laws and regulations and requires enhanced due diligencerequirements for financial institutions that administer, maintain, or manageprivate bank accounts 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 of Congress.  OFAC has sent, and will send, our bankingregulatory agencies lists of names of persons and organizations suspected ofaiding, 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 any notifications.  The bank actively checks high-risk OFAC areassuch as new accounts, wire transfers and customer files.  The bank performs these checks utilizingsoftware, which is updated each time a modification is made to the listsprovided by OFAC and other agencies of Specially Designated Nationals andBlocked Persons.

 

***Privacy and Credit Reporting*. **Financial institutions are required todisclose their policies for collecting and protecting confidentialinformation.  Customers generally mayprevent financial institutions from sharing nonpublic personal financialinformation with nonaffiliated third parties except under narrow circumstances,such as the processing of transactions requested by the consumer or when thefinancial institution is jointly sponsoring a product or service with anonaffiliated 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 isthe bank’s policy not to disclose any personal information unless required bylaw.

 

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, nationwide basis,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 Federal Deposit Insurance Corporation ImprovementAct, the bank may not pay a dividend if, after paying the dividend, the bankwould be undercapitalized.

 

***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

 

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contain wide-rangingproposals for altering the structures, regulations and competitiverelationships of the nation’s financial institutions.  We cannot predict whether or in what form anyproposed regulation or statute will be adopted or the extent to which ourbusiness may be affected by any new regulation or statute.

 

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

 

·                  allowing check truncation withoutmaking it 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 accountholdersrequest verification, financial institutions produce the original check (or acopy that accurately represents the original) and demonstrate that the accountdebit was accurate and valid; and

 

·                  requiring the re-crediting of fundsto an individual’s account on the next business day after a consumer provesthat the financial institution has erred.

 

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**Item 1A.  Risk Factors.**

 

### **RISKFACTORS**

### ** **

***Thelack of seasoning of our loan portfolio makes it difficult to assess theadequacy of our loan loss reserves accurately and we may have higher creditlosses than we have reserved for in our allowance for loan losses.***

 

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

 

·                  anongoing review of the quality, mix and size of our overall loan portfolio;

·                  ourhistorical loan loss experience;

·                  evaluation of economic conditions;

·                  regular reviews of loan delinquenciesand loan portfolio quality; and

·                  the amount and quality of collateral,including guarantees, securing the loans.

 

However, there isno precise method of predicting credit losses, since any estimate of loanlosses is necessarily subjective and the accuracy depends on the outcome offuture events.  In addition, due to ourrapid growth over the past several years and our limited operating history, alarge portion of the loans in our loan portfolio was originated recently.  In general, loans do not begin to show signsof credit deterioration or default until they have been outstanding for someperiod of time, a process referred to as “seasoning.”  As a result, a portfolio of older loans willusually perform more predictably than a newer portfolio.  Because of the unpredictability in ourrelatively new loan portfolio, our allowance for loan losses may not beadequate.  As of December 31, 2008,we had 25 loans on nonaccrual status totaling approximately $11.5 million, andour allowance for loan loss was $7.6 million. In addition, we have charged-off a total of approximately $1.5 millionin loans since our inception.  At December 31,2008, approximately 66.0% of our loan portfolio was composed of construction,commercial mortgage and commercial and industrial loans.  Repayment of such loans is generallyconsidered more subject to market risk than residential mortgage loans.  Industry experience shows that a portion ofour loans will become delinquent and a portion of loans will require partial orfull charge-off.

 

Regardless of theunderwriting criteria utilized, our credit losses could exceed our allowancefor loan losses, as a result of various factors beyond our control, includingamong other things, changes in market conditions affecting the value of loancollateral and problems affecting the ability of our borrowers to repay theirloans.

 

***Weare exposed to higher credit risk by commercial real estate, commercial andindustrial, and construction lending.***

 

Commercial real estate,commercial and industrial and construction lending usually involves highercredit risks than that of single-family residential lending.  As of December 31, 2008, commercial realestate, commercial and industrial, residential construction and commercialconstruction accounted for approximately 25.1%, 6.0%, 18.3% and 16.6%, of ourtotal loan portfolio, respectively. These types of loans involve larger loan balances to a single borroweror groups of related borrowers. Commercial real estate loans may be affected to a greater extent thanresidential loans by adverse conditions in real estate markets or the economybecause commercial real estate borrowers’ ability to repay their loans dependson successful development of their properties, in addition to the factorsaffecting residential real estate borrowers. These loans also involve greater risk because they generally are notfully amortizing over the loan period, but have a balloon payment due atmaturity.  A borrower’s ability to make aballoon payment typically will depend on being able to either refinance theloan or sell the underlying property in a timely manner.

 

Commercial and industrialloans are typically based on the borrowers’ ability to repay the loans from thecash flow of their businesses.  Theseloans may involve greater risk because the availability of funds to repay eachloan depends substantially on the success of the business itself.  In addition, the collateral securing theloans have the following characteristics: (i) depreciate over time, (ii) difficultto appraise and liquidate, and (iii) fluctuate in value based on thesuccess of the business.

 

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Risk of loss on aconstruction loan depends largely upon whether our initial estimate of theproperty’s value at completion of construction equals or exceeds the cost ofthe property construction (including interest) and the availability ofpermanent take-out financing.  During theconstruction phase, a number of factors can result in delays and costoverruns.  If estimates of value areinaccurate or if actual construction costs exceed estimates, the value of theproperty securing the loan may be insufficient to ensure full repayment whencompleted through a permanent loan or by seizure of collateral.

 

Commercial real estate,commercial and industrial, and construction loans are more susceptible to arisk of loss during a downturn in the business cycle.  Our underwriting, review and monitoring cannoteliminate all of the risks related to these loans.

 

As of December 31,2008, our outstanding commercial real estate loans were equal to 386% of ourtotal capital.  The banking regulatorsare giving commercial real estate lending greater scrutiny, and may requirebanks with higher levels of commercial real estate loans to implement improvedunderwriting, internal controls, risk management policies and portfolio stresstesting, as well as possibly higher levels of allowances for losses and capitallevels as a result of commercial real estate lending growth and exposures.

 

***A significant portion of our loan portfolio is secured byreal estate, and events that negatively impact the real estate market couldhurt our business.***

 

Asignificant portion of our loan portfolio is secured by real estate.  As of December 31, 2008, approximately58.1% of our loans had real estate as a primary or secondary component ofcollateral.  The real estate collateralin each case provides an alternate source of repayment in the event of defaultby the borrower 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 shareholder’sequity could be adversely affected.  Actsof nature, including hurricanes, tornados, earthquakes, fires and floods, whichmay cause uninsured damage and other loss of value to real estate that securesthese loans, may also negatively impact our financial condition.

 

***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:

 

·                  theduration of the credit;

·                  the credit profile of a particularcustomer;

·                  the changes in economic and industryconditions; and

·                  in the case of a collateralized loan,risks resulting from uncertainties 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, 2008, approximately $44.6 million of our loans,or 77.6% of our bank’s capital, had loan-to-value ratios that exceededregulatory supervisory guidelines, of which 33 loans totaling approximately$13.2 million had loan-to-value ratios of 100% or more.  In addition, supervisory limits on commercialloan to value exceptions are set at 30% of a bank’s capital.  At December 31, 2008, $26.3 million ofour commercial loans, or 45.7% of our bank’s capital, exceeded the supervisoryloan to value ratio.  The number of loansin our portfolio with loan-to-value ratios in excess of supervisory guidelines,our internal guidelines, or both could increase the risk of delinquencies and defaultsin our portfolio.

 

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***Recentnegative developments in the financial industry and the domestic andinternational credit markets may adversely affect our operations and results.***

 

Negative developments inthe latter half of 2007 and during 2008 in the global credit and securitizationmarkets have resulted in uncertainty in the financial markets in general withthe expectation of the general economic downturn continuing during 2009.  As a result of this “credit crunch,”commercial as well as consumer loan portfolio performances have deteriorated atmany institutions and the competition for deposits and quality loans hasincreased significantly.  In addition,the values of real estate collateral supporting many commercial loans and homemortgages have declined and may continue to decline.  Bank and bank holding company stock priceshave been negatively affected, as has the ability of banks and bank holdingcompanies to raise capital or borrow in the debt markets.  As a result, significant new federal laws andregulations relating to financial institutions, including, without limitation,the EESA and the U.S. Treasury Department’s Capital Purchase Program, have beenadopted.  Furthermore, the potentialexists for new federal or state laws and regulations regarding lending andfunding practices and liquidity standards, and bank regulatory agencies areexpected to be active in responding to concerns and trends identified inexaminations, including the expected issuance of many formal enforcement orders.  Negative developments in the financialindustry and the domestic and international credit markets, and the impact ofnew legislation in response to those developments, may negatively impact ouroperations by restricting our business operations, including our ability tooriginate or sell loans, and adversely impact our financial performance.  We can provide no assurance regarding themanner in which any new laws and regulations will affect us.

 

***Recent legislative and regulatory initiatives to addressdifficult market and economic conditions may not stabilize the U.S. bankingsystem.***

 

The recently enacted EESAauthorizes the Treasury to purchase from financial institutions and theirholding companies up to $700 billion in mortgage loans, mortgage-related securitiesand certain other financial instruments, including debt and equity securitiesissued by financial institutions and their holding companies, under a troubledasset relief program, or “TARP.” The purpose of TARP is to restore confidenceand stability to the U.S. banking system and to encourage financialinstitutions to increase their lending to customers and to each other. TheTreasury has allocated $250 billion towards the TARP Capital Purchase Program.Under the TARP Capital Purchase Program, Treasury is purchasing equitysecurities from participating institutions. On December 19, 2008, weentered into the CPP Purchase Agreement with the Treasury providing for ourissuance of the Series T Preferred Stock and the CPP Warrant to Treasury.

 

In addition, the FDICcreated the Temporary Liquidity Guarantee Program (“TGLP”) as part of a largergovernment effort to strengthen confidence and encourage liquidity in thenation’s banking system.  The TLGP hastwo components. First, the TLGP includes the Transaction Account GuaranteeProgram (“TAGP”), which provides unlimited deposit insurance coverage through December 31,2009 for noninterest-bearing transaction accounts (typically business checkingaccounts) and certain funds swept into noninterest-bearing savingsaccounts.  Institutions participating inthe TLGP pay a 10 basis points fee (annualized) on the balance of each coveredaccount in excess of $250,000, while the extra deposit insurance is in place.  Second, the TLGP includes the Debt GuaranteeProgram (“DGP”), under which the FDIC guarantees certain senior unsecured debtof FDIC-insured institutions and their holding companies.  The unsecured debt must be issued on or afterOctober 14, 2008 and not later than June 30, 2009, and the guaranteeis effective through the earlier of the maturity date or June 30,2012.  The DGP coverage limit isgenerally 125% of the eligible entity’s eligible debt outstanding on September 30,2008 and scheduled to mature on or before June 30, 2009 or, for certaininsured institutions, 2% of their liabilities as of September 30,2008.  Depending on the term of the debtmaturity, the nonrefundable DGP fee ranges from 50 to 100 basis points(annualized) for covered debt outstanding until the earlier of maturity or June 30,2012.  The TAGP and DGP are in effect forall eligible entities, unless the entity opted out on or before December 5,2008. We have not opted out of either program.

 

On February 17,2009, the American Recovery and Reinvestment Act (the “Recovery Act”) wassigned into law in an effort to, among other things, create jobs and stimulategrowth in the United States economy.  TheRecovery Act specifies appropriations of approximately $787 billion for a widerange of Federal programs and will increase or extend certain benefits payableunder the Medicaid, unemployment compensation, and nutrition

 

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assistance programs.  The Recovery Act also reduces individual andcorporate income tax collections and makes a variety of other changes to taxlaws.  The Recovery Act also imposescertain limitations on compensation paid by TARP participants, which includesprograms under TARP such as the CPP in which we participate.

 

There can be no assurancethat these government actions will achieve their purpose.  The failure of the financial markets tostabilize, or a continuation or worsening of the current financial marketconditions, could have a material adverse affect on our business, our financialcondition, the financial condition of our customers, our common stock tradingprice, as well as our ability to access credit.  It could also resultin declines in our investment portfolio which could be “other-than-temporaryimpairments.”

 

***The securities purchase agreement between us and the Treasurylimits our ability to pay dividends on and repurchase our common stock.***

 

The securities purchaseagreement between us and the Treasury provides that prior to December 19,2011, unless we have redeemed the Series T Preferred Stock or the Treasuryhas transferred the Series T Preferred Stock to a third party, the consentof the Treasury will be required for us to (1) declare or pay any dividendor make any distribution on our common stock, or (2) redeem, purchase oracquire any shares of our common stock or other equity or capital securities,other than in connection with benefit plans consistent with past practice andcertain other circumstances specified in the purchase agreement.  These restrictions, together with thepotentially dilutive impact of the warrant described in the next risk factor,could have a negative effect on the value of our common stock.

 

***The warrant we issued to the Treasury may be dilutive toholders of our common stock.***

 

The ownership interest ofthe existing holders of our common stock will be diluted to the extent thewarrant we issued to the Treasury in conjunction with the sale to the Treasuryof the Series T Preferred Stock is exercised. The shares of common stockunderlying the warrant represent approximately 11.8% of the shares of ourcommon stock outstanding as of March 16, 2009 (including the sharesissuable upon exercise of the warrant in total shares outstanding). AlthoughTreasury has agreed not to vote any of the shares of common stock it receivesupon exercise of the warrant, a transferee of any portion of the warrant or ofany shares of common stock acquired upon exercise of the warrant is not boundby this restriction.

 

***Becauseof our participation in the Treasury Department’s Capital Purchase Program, weare subject to several restrictions including restrictions on compensation paidto our executives.***

 

Pursuant to the terms ofthe CPP Purchase Agreement between us and the Treasury, we adopted certainstandards for executive compensation and corporate governance for the periodduring which the Treasury holds the equity issued pursuant to the CPP PurchaseAgreement, including the common stock which may be issued pursuant to the CPPWarrant.  These standards generally applyto our Chief Executive Officer, Chief Financial Officer and the three next mosthighly compensated senior executive officers. The standards include (1) ensuringthat incentive compensation for senior executives does not encourageunnecessary and excessive risks that threaten the value of the financial institution;(2) required clawback of any bonus or incentive compensation paid to asenior executive based on statements of earnings, gains or other criteria thatare later proven to be materially inaccurate; (3) prohibition on makinggolden parachute payments to senior executives; and (4) agreement not todeduct for tax purposes executive compensation in excess of $500,000 for eachsenior executive.  In particular, thechange to the deductibility limit on executive compensation will likelyincrease the overall cost of our compensation programs in future periods andmay make it more difficult to attract suitable candidates to serve as executiveofficers.

 

***Legislation or regulatory changes could cause us to seek torepurchase the preferred stock and warrants that we sold to the U.S. Treasurypursuant to the Capital Purchase Program.***

 

Legislation that has beenadopted after we closed on our sale of Series T Preferred Stock andwarrants to the Treasury for $14.4 million pursuant to the CPP on December 19,2008, or any legislation or regulations that may be implemented in the future,may have a material impact on the terms of our CPP transaction with theTreasury.  If we determine that any suchlegislation or any regulations, in whole or in part, alter the terms of our CPPtransaction with the Treasury in ways that we believe are adverse to ourability to effectively manage our business, then it is

 

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possible that we may seekto unwind, in whole or in part, the CPP transaction by repurchasing some or allof the preferred stock and warrants that we sold to the Treasury pursuant tothe CPP.  If we were to repurchase all ora portion of such preferred stock or warrants, then our capital levels could bematerially reduced.

 

***Our continued operations andfuture growth may require us to raise additional capital in the future, butthat capital may not be available when it is needed.***

 

We are required byregulatory authorities to maintain adequate levels of capital to support ouroperations.  To support our continuedoperations, including any additional growth, we may need to raise additionalcapital.  In addition, we intend toredeem the Series T Preferred Stock that we issued to the Treasury underthe CPP before the dividends on the Series T Preferred Stock increase from5% per annum to 9% per annum in 2014, as we may need to raise additionalcapital to do so.  Our ability to raiseadditional capital will depend in part on conditions in the capital markets atthat time, which are outside our control, and our financial performance.  Accordingly, we may be unable to raiseadditional capital, if and when needed, on terms acceptable to us, or atall.  If we cannot raise additionalcapital when needed, our ability to continue our current operations or furtherexpand our operations through internal growth and acquisitions could bematerially impaired.  In addition, if wedecide to raise additional equity capital, your interest could be diluted.

 

***Aprolonged economic downturn, especially one affecting coastal South Carolina,could reduce our customer base, our level of deposits and demand for financialproducts such as loans.***

 

We are in uncertaineconomic times, including uncertainty with respect to financial markets thathave been volatile as a result of sub-prime mortgage related and othermatters.  Our success significantlydepends upon the growth in population, income levels, deposits and housingstarts in the Charleston, Myrtle Beach and Hilton Head market areas.  If the communities in which we operate do notgrow or if prevailing economic conditions locally or nationally areunfavorable, our business may not succeed. A prolonged economic downturn would likely contribute to thedeterioration of the credit quality of our loan portfolio and reduce our levelof customer deposits, which in turn would hurt our business.  Interest received on loans representedapproximately 78.8% of our interest income for the year-to-date period ended December 31,2008.  If the current economic downturn inthe economy as a whole, or in the Charleston, Myrtle Beach or Hilton Headmarkets continues for a prolonged period, borrowers may be less likely to repaytheir loans as scheduled or at all. Moreover, the value of real estate or other collateral that may secureour loans could be adversely affected. 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.  Aprolonged economic downturn could, therefore, result in losses that couldmaterially and adversely affect our business.

 

***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 exceptions as policyexceptions, financial statement exceptions and collateral exceptions.  As of December 31, 2008, approximately12.8% of the loans in our portfolio included collateral exceptions to our loanpolicies, which exceeds the 10% suggested by our regulators.  As a result of these exceptions, such loansmay have a higher risk of loss than the other loans in our portfolio that fullycomply with our loan policies.  Inaddition, we may be subject to regulatory action by federal or state bankingauthorities if they believe the number of exceptions in our loan portfoliorepresents an unsafe banking practice. Although we have taken steps to reduce the number of exceptions in ourloan portfolio, such as the hiring a chief credit officer and a chief riskofficer, we may not be successful in reducing the number of exceptions in ourloan portfolio.

 

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

 

Our profitability depends in large part on our net interest income,which is the difference between interest income from interest-earning assets,such as loans and investment securities, and interest expense oninterest-bearing liabilities, such as deposits and other borrowings.  Approximately 56.7% of our loans werevariable rate loans at December 31, 2008, which means that our interestincome will generally decrease in lower interest rate environments and rise inhigher interest rate environments.  Ournet interest income will be adversely affected if market interest rates changesuch that the interest we earn on loans and investments decreases faster thanthe interest we pay on deposits and borrowings. Many factors cause changes in interest rates, including governmentalmonetary policies and domestic and international economic and politicalconditions.  While we intend to managethe effects of changes in interest rates by adjusting the terms, including thematurities and pricing of our assets and liabilities, our efforts may not beeffective and our financial condition and results of operations could suffer.

 

***Wehave grown rapidly and do not expect to sustain this rate of growth for futureperiods.***

 

We have grown rapidlysince opening Tidelands Bank in October 2003.  However, we do not expect to sustain thisrate of growth and may not even 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 and consequently our historical results of operations are notnecessarily 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. Our current strategic objectives are to manage loan growth, manageportfolio risk and lower our overall funding costs, primarily through thegrowth of retail deposits.

 

***Weare dependent on key individuals and our continued success depends on our ability toidentify and retain individuals with experience and relationships in ourmarkets.  The loss of one or moreof these key individuals could curtail our growth and adversely affect ourprospects.***

 

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

 

To succeed in ourmarkets, we must identify and retain experienced key management members withlocal expertise and relationships in these markets.  We expect that competition for qualifiedmanagement in our markets will be intense and that there will be a limitednumber of qualified persons with knowledge of and experience in the communitybanking industry in these markets.  Inaddition, the process of identifying and recruiting individuals with thecombination of skills and attributes required to carry out our strategyrequires both management and financial resources and is often lengthy.  Our inability to identify, recruit and retaintalented personnel to manage our offices effectively would limit our growth andcould materially adversely affect our business, financial condition and resultsof operations.  The loss of the servicesof several such key personnel could adversely affect our growth strategy andprospects to the extent we are unable to replace such personnel.

 

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

 

Thebanking business is highly competitive, and we experience competition in ourmarket from many other financial institutions. We compete with commercial banks, credit unions, savings and loanassociations, mortgage banking firms, consumer finance companies, securitiesbrokerage firms, insurance companies, money market funds and other mutualfunds, as well as super-regional, national and international financialinstitutions that operate offices in our primary market areas and elsewhere.

 

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, such as BB&T, Bank of America, Wachovia andCarolina First

 

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Bank.  These institutions offer some services, suchas extensive and established branch networks and trust services that we do notprovide.  We also compete with localcommunity banks in our market.  There isa risk that we will not be able to compete successfully with other financialinstitutions in our market, and that we may have to pay higher interest ratesto attract deposits, accept lower yields on loans to attract loans and payhigher wages for new employees, resulting in reduced profitability.  In addition, competitors that are notdepository institutions are generally not subject to the extensive regulationsthat 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 $8.6 million at December 31, 2008.  Our internal lending limit was $5.2 millionat December 31, 2008.  Our legallending limit is significantly less than the limit for our larger competitorsand may affect our ability to seek relationships with larger businesses in ourmarket area.  We have been able to sellparticipations in our larger loans to other financial institutions, which hasallowed us to meet the lending needs of our customers requiring extensions ofcredit in excess of these limits; however, in the current economic environment,it has been difficult to sell participations to other financial institutions.

 

***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 its shareholders.***

 

Weoperate in a highly regulated industry and are subject to examination,supervision and comprehensive regulation by the South Carolina Board of FinancialInstitutions, the FDIC and the Federal Reserve Board.  Our compliance with these regulations iscostly and restricts certain of our activities, including payment of dividends,mergers and acquisitions, investments, loans and interest rates charged,interest rates paid on deposits and locations of offices.  We must also meet regulatory capitalrequirements.  If we fail to meet thesecapital and other regulatory requirements, our financial condition, liquidityand results of operations would be materially and adversely affected.  Our failure to remain “well capitalized” forregulatory purposes could affect customer confidence, our ability to grow, ourcost of funds and FDIC insurance, our ability to pay dividends on common stockand our ability to make acquisitions.

 

Thelaws and regulations applicable to the banking industry could change at anytime, and we cannot predict the effects of these changes on our business andprofitability.  For example, newlegislation or regulation could limit the manner in which we may conduct ourbusiness, including our ability to obtain financing, attract deposits and makeloans.  Many of these regulations areintended to protect depositors, the public and the FDIC, not shareholders.  In addition, the burden imposed by theseregulations may place us at a competitive disadvantage compared to competitorswho are less regulated.  The laws,regulations, interpretations and enforcement policies that apply to us havebeen subject to significant change in recent years, sometimes retroactivelyapplied, and may change significantly in the future.  Our cost of compliance could adversely affectour ability to operate profitably.  See “Supervisionand Regulation.”

 

***Weare exposed to changes in the regulation of financial services companies.***

 

Proposals for furtherregulation of the financial services industry are continually being introducedin the Congress of the United States of America and the General Assembly of theState of South Carolina.  The agenciesregulating the financial services industry also periodically adopt changes totheir regulations.  On September 7,2008, the U.S. Treasury Department announced that Fannie Mae (along withFreddie Mac) has been placed into conservatorship under the control of thenewly created Federal Housing Finance Agency. On October 3, 2008, EESA was signed into law, and on October 14,2008 the U.S. Treasury Department announced its Capital Purchase Program underEESA.  It is possible that additionallegislative proposals may be adopted or regulatory changes may be made thatwould have an adverse effect on our business. See “*Risk Factors — We are subject to extensiveregulation that could restrict our activities*” above.

 

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***We will face risks with respectto future expansion and acquisitions or mergers.***

 

Although we do not haveany current plans to do so, we may seek to acquire other financial institutionsor parts of those institutions.  We mayalso expand into new markets or lines of business or offer new products orservices.  These activities would involvea number of risks, including:

 

·                  the time and expense associated withidentifying and evaluating potential acquisitions and merger partners;

·                  using inaccurate estimates andjudgments to evaluate credit, operations, management and market risks withrespect to the target institution or assets;

·                  diluting our existing shareholders inan acquisition;

·                  the time and expense associated withevaluating new markets for expansion, hiring experienced local management andopening new offices, as there may be a substantial time lag between these activitiesbefore we generate sufficient assets and deposits to support the costs of theexpansion;

·                  taking a significant amount of timenegotiating a transaction or working on expansion plans, resulting inmanagement’s attention being diverted from the operation of our existingbusiness;

·                  the time and expense associated withintegrating the operations and personnel of the combined businesses;

·                  creating an adverse short-term effecton our results of operations; and

·                  losing key employees and customers asa result of an acquisition that is poorly received.

 

We have neveracquired another institution before, so we lack experience in handling any ofthese risks.  There is also a risk thatany expansion effort will not be successful.

 

***Theaccuracy of our financial statements and related disclosures could be affectedbecause we are exposed to conditions or assumptions different from thejudgments, assumptions or estimates used in our critical accounting policies.***

 

The preparation offinancial statements and related disclosure in conformity with accountingprinciples generally accepted in the United States of America (“GAAP”) requiresus to make judgments, assumptions and estimates that affect the amountsreported in our consolidated financial statements and accompanying notes.  Our critical accounting policies, included inthis Form 10-K for the year ended December 31, 2008, describe thosesignificant accounting policies and methods used in the preparation of ourconsolidated financial statements that are considered “critical” by us becausethey require judgments, assumptions and estimates that materially impact ourconsolidated financial statements and related disclosures.  As a result, if future events differsignificantly from the judgments, assumptions and estimates in our criticalaccounting policies, such events or assumptions could have a material impact onour audited consolidated financial statements and related disclosures.

 

***Weare exposed to the possibility that more prepayments may be made by customersto pay down loan balances, which could reduce our interest income andprofitability.***

 

Prepayment rates stemfrom consumer behavior, conditions in the housing and financial markets,general United States economic conditions, and the relative interest rates onfixed-rate and adjustable-rate loans. Therefore, changes in prepayment rates are difficult to predict.  Recognition of deferred loan originationcosts and premiums paid in originating these loans are normally recognized overthe contractual life of each loan.  Asprepayments occur, the rate at which net deferred loan origination costs andpremiums are expensed will accelerate. The effect of the acceleration of deferred costs and premiumamortization may be mitigated by prepayment penalties paid by the borrower whenthe loan is paid in full within a certain period of time.  If prepayment occurs after the period of timewhen the loan is subject to a prepayment penalty, the effect of theacceleration of premium and deferred cost amortization is no longer mitigated.  We recognize premiums paid on mortgage-backedsecurities as an adjustment from interest income over the expected life of thesecurity based on the rate of repayment of the securities.  Acceleration of prepayments on the loansunderlying a mortgage-backed security shortens the life of the security,increases the rate at which premiums are expensed and further reduces interestincome.  We may not be able to reinvestloan and security prepayments at rates comparable to the prepaid instrumentparticularly in a period of declining interest rates.

 

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***Effortsto comply with Sarbanes-Oxley Act will involve significant expenditures, andnon-compliance with the Sarbanes-Oxley Act may adversely affect us.***

 

The Sarbanes-Oxley Act of2002, and the related rules and regulations promulgated by the Securitiesand Exchange Commission that are now applicable to us, have increased thescope, complexity and cost of corporate governance, reporting and disclosurepractices.  We have experienced, and weexpect to continue to experience, greater compliance costs, including costsrelated to internal controls, as a result of the Sarbanes-Oxley Act.  For example, for the year ended December 31,2008, we were required to comply with Section 404 of the Sarbanes-OxleyAct and our management has issued a report on our internal controls overfinancial reporting.  Our independentregistered public accounting firm will be required to provide an attestation withrespect to management’s report on our internal controls over financialreporting as of December 31, 2009. We expect the applicability of these rules and regulations to uswill continue to increase our accounting, legal and other costs, and to makesome activities more difficult, time consuming and costly.  In the event that we are unable to maintainor achieve compliance with the Sarbanes-Oxley Act and related rules, we may beadversely affected.

 

Wehave evaluated our internal control systems in order to allow management toreport on our internal control over financial reporting, as required by Section 302and 404 of the Sarbanes-Oxley Act.  Inthe future, if we or our independent auditors were to identify significantdeficiencies or material weaknesses in our internal control over financialreporting that we could not remediate in a timely manner, or if we are unableto receive a positive attestation from our independent registered publicaccounting firm, the trading price of our common stock could decline, ourability to obtain any necessary equity or debt financing could suffer, and ourcommon stock could ultimately be delisted from The NASDAQ Global Market.  In this event, the liquidity of our commonstock would be severely limited and the market price of our common stock wouldlikely decline 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.

 

***The FDIC Deposit Insurance assessments thatwe are required to pay may materially increase in the future, which would havean adverse effect on our earnings and our ability to pay our liabilities asthey come due.***

 

As a member institution of the FDIC, we arerequired to pay quarterly deposit insurance premium assessments to theFDIC.  During the year ended December 31,2008, we paid $484,000 in deposit insurance. Due to the recent failure of several unaffiliated FDIC insurancedepository institutions, and the FDIC’s new Temporary Liquidity GuaranteeProgram, the deposit insurance premium assessments paid by all banks willlikely increase.  Inaddition, new FDIC requirements shift a greater share of any increase insuch assessments onto institutions with higher risk profiles, including bankswith heavy reliance on brokered deposits, such as our bank.

 

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

 

Our operations areconcentrated in and our loan portfolio consists almost entirely of loans topersons and businesses located in coastal South Carolina.  Similarly, the collateral for many of ourloans consists of real and personal property located in this same geographicarea.  This area is susceptible tohurricanes which could cause extensive damage to the general region.  Disaster conditions resulting from anyhurricane that hits in this area would adversely affect the local economies andreal estate markets, 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 resultingfrom any hurricane could also result in continued economic uncertainty thatcould negatively impact businesses in those areas.  Consequently, our ability to continue tooriginate loans may be impaired by adverse changes in local and regionaleconomic conditions in this area following any hurricane.

 

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***We are exposed to the possibility of technology failure.***

 

We rely on our computer systems and the technology ofoutside service providers. Our daily operations depend on the operationaleffectiveness of their technology. We rely on our systems to accurately trackand record our assets and liabilities. If our computer systems or outside technologysources become unreliable, fail, or experience a breach of security, ourability to maintain accurate financial records may be impaired, which couldmaterially affect our business operations and financial condition.

 

**Item 1B.  Unresolved Staff Comments.**

 

[Not applicable.]

 

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**Item2.  Description of Property.**

 

The following table setsforth the location of our main banking office, banking offices and operationscenter, as well as certain information relating to these facilities.

 
| **Type of Office**             | ** ** | **Location**                                                | ** ** | **Year  Opened** | ** ** | **Total Retail  Deposits as of  December 31, 2008** | ** ** | **Leased or  Owned** |
|------------------------------------------|------------|-------------------------------------------------------------|------------|------------------|------------|------------------------------------------------------------------------------|------------|---------------------------|
| Main Office                              |       | 875 Lowcountry Boulevard in Mount Pleasant, South  Carolina |       | 2004             |       | $                                                                            | 89,637,000 |                      | Leased |
|                                     |       |                                                        |       |             |       |                                                                         |       |                      |
| Summerville Branch Office                |       | 1510 Trolley Road in Summerville, South Carolina            |       | 2007             |       | $                                                                            | 40,663,000 |                      | Owned |
|                                     |       |                                                        |       |             |       |                                                                         |       |                      |
| Myrtle Beach Branch Office               |       | 1312 Professional Drive in Myrtle Beach, South  Carolina    |       | 2007             |       | $                                                                            | 50,590,000 |                      | Leased |
|                                     |       |                                                        |       |             |       |                                                                         |       |                      |
| Park West Branch Office - Mount Pleasant |       | 1100 Park West Blvd. in Mount Pleasant, South  Carolina     |       | 2007             |       | $                                                                            | 15,240,000 |                      | Owned |
|                                     |       |                                                        |       |             |       |                                                                         |       |                      |
| West Ashley Branch Office - Charleston   |       | 946 Orleans Road in Charleston, South Carolina              |       | 2007             |       | $                                                                            | 36,812,000 |                      | Leased |
|                                     |       |                                                        |       |             |       |                                                                         |       |                      |
| Bluffton Branch Office                   |       | 52 Burnt Church Road in Bluffton, South Carolina            |       | 2007             |       | $                                                                            | 30,539,000 |                      | Leased |
|                                     |       |                                                        |       |             |       |                                                                         |       |                      |
| Murrells Inlet Branch Office             |       | 11915 Plaza Drive in Murrells Inlet, South Carolina         |       | 2008             |       | $                                                                            | 13,587,000 |                      | Leased |
|                                     |       |                                                        |       |             |       |                                                                         |       |                      |
| Operations Center                        |       | 840 Lowcountry Boulevard in Mount Pleasant, South  Carolina |       | 2007             |       | N/A                                                                          |       | Owned                     |

 

**Item3.  Legal Proceedings.**

 

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

 

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

 

No matter wassubmitted to a vote of security holders during the fourth quarter of the fiscalyear covered 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, 2008, we hadapproximately 504 shareholders of record.

 

The following table shows the reported high and lowclosing prices for shares of our common stock published by NASDAQ beginningwith the first quarter of 2007.  Thesequotations reflect inter-dealer prices, without retail mark-up, mark-down orcommissions, and may not represent actual transactions.

 

| ** **     | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
| **2008**       |       |     |       |    |       |
| Fourth Quarter |       | $        | 6.51       |    | $          | 2.49 |   |
| Third Quarter  |       | 8.95     |       | 5.80    |       |
| Second Quarter |       | 10.50    |       | 8.50    |       |
| First Quarter  |       | 11.46    |       | 9.00    |       |
|           |       |     |       |    |       |
| **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   |       |

 

We have not declared or paidany cash dividends on our common stock since our inception.  For the foreseeable future we do not intendto declare cash dividends.  We intend toretain earnings to grow our business and strengthen our capital base.  Our ability to pay dividends depends on theability of our subsidiary, Tidelands Bank, to pay dividends to us.  As a South Carolina state bank, the bank mayonly pay dividends out of its net profits, after deducting expenses, includinglosses and bad debts.  In addition, thebank is prohibited from declaring a dividend on its shares of common stockuntil its surplus equals its stated capital.

 

Pursuant to the terms of the CPP PurchaseAgreement between us and the Treasury, prior to December 19, 2011, unlesswe have redeemed the Series T Preferred Stock or the Treasury hastransferred the Series T Preferred Stock to a third party, the consent ofthe Treasury will be required for us to declare or pay any dividend or make anydistribution on our common stock.

 

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**EquityCompensation Plan Information**

 

Thefollowing table sets forth the equity compensation plan information at December 31,2008.  All option information has beenadjusted to reflect all prior stock splits and dividends.

 
| **Plan Category**                                      | ** ** | **Number of securities  to be issued upon exercise  of outstanding options,  warrants and rights(a)** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights (b)** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation plans  (c) (excluding securities  reflected in column(a))** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                        |       |                                                                                                                                                    |       |                                                                                                                 |       |                                                                                                                                                                                                                |       |
| Equity  compensation plans approved by security holders (1) |       | 777,537                                                                                                                                                 |       | $                                                                                                                    | 10.31      |                                                                                                                                                                                                                | 4,469      |   |
|                                                        |       |                                                                                                                                                    |       |                                                                                                                 |       |                                                                                                                                                                                                                |       |
| Equity  compensation plans not approved by security holders |       | —                                                                                                                                                  |       | —                                                                                                               |       | —                                                                                                                                                                                                              |       |
|                                                        |       |                                                                                                                                                    |       |                                                                                                                 |       |                                                                                                                                                                                                                |       |
| Total                                                       |       | 777,537                                                                                                                                                 |       | $                                                                                                                    | 10.31      |                                                                                                                                                                                                                | 4,469      |   |

 

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(1)                The number of sharesavailable for issuance under our 2004 Stock Incentive Plan automaticallyincreases each time we issue additional shares of stock so that the totalnumber of shares issuable under the plan at all times equal 20% of the thenoutstanding shares of stock.  Each of our organizers received an option topurchase one share of common stock for $8.80 per share for every three sharesthey purchased in our initial public offering, up to a maximum of 12,500 sharesper organizer, and the issuance of options was ratified by our shareholders.

 

**Item6.  Selected Financial Data.**

 

Not applicable.

 

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**Item7.  Management’s Discussion and Analysisor Plan of Operation.**

 

*The following discussion reviews our results of operations andassesses our financial condition.  Youshould read the following discussion and analysis in conjunction with ourconsolidated financial statements and the related notes included elsewhere inthis report.  Our discussion and analysisfor the years ended December 31, 2008, 2007 and 2006 is based on ouraudited financial statements for such periods. The following discussion describes our results of operations for theyear ended December 31, 2008 as compared to December 31, 2007 and2006, and also analyzes our financial condition as of December 31, 2008 ascompared to December 31, 2007.*

 

**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 $715.2 million, net loans to $454.3 million,deposits to $561.2 million, and shareholders’ equity to $52.0 million.

 

The following table setsforth selected measures of our financial performance for the periods indicated.

 

| ** **                 | ** ** | **For the Years Ended December 31,** | ** ** |
|----------------------------|------------|---------------------------------------------------------------|------------|
| ** **                 | ** ** | **2008**                                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                 | ** ** | **(dollars in thousands)**                          | ** ** |
| Net income  (loss)         |       | $                                                             | (4,955     | ) | $ | 413 |   | $ | 1,489 |   |
| Total assets               |       | 715,182                                                       |       | 512,270 |   | 336,572 |   |
| Total net loans            |       | 454,332                                                       |       | 387,192 |   | 269,743 |   |
| Total deposits             |       | 561,225                                                       |       | 388,169 |   | 259,133 |   |
| Shareholders’  equity |       | 51,959                                                        |       | 40,995 |   | 41,820 |   |
|                            |            |                                                               |            |  |  |  |  |  |  |  |

 

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 which we pay interest, and advancesfrom the Federal Home Loan Bank of Atlanta (FHLB).  Consequently, one of the key measures of oursuccess is net interest income, or the difference between the income on ourinterest-earning assets, such as loans and investments, and the expense on ourinterest-bearing liabilities, such as deposits and advances from the FHLB.  Another key measure is the spread between theyield we earn on these interest-earning assets and the rate we pay on ourinterest-bearing liabilities, which is called our net interest spread.

 

We have included a number of tables to assist in ourdescription of these measures.  Forexample, the “Average Balances, Income and Expenses, and Rates” tables show forthe periods indicated the average balance for each category of our assets andliabilities, as well as the average yield we earned or the average rate we paidwith respect to each category.  A review ofthese tables show that our loans historically have provided  higher interest yields than our other typesof interest-earning assets, which is why we have invested a substantialpercentage of our earning assets into our loan portfolio.  Similarly, the “Rate/Volume Analysis” tableshelp demonstrate the impact of changing interest rates and changing volume ofassets and liabilities during the periods shown.  We also track the sensitivity of our variouscategories of assets and liabilities to changes in interest rates, and we haveincluded “Interest Sensitivity Analysis” tables to help explain this.  Finally, we have included a number of tablesthat provide detail about our investment securities, our loans, our depositsand other borrowings.

 

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.  In the “Loans”and “Allowance for Loan Losses” sections, we have included a detaileddiscussion of this process, as well as several tables describing our allowancefor loan losses.

 

In addition toearning interest on our loans and investments, we earn income through fees andother charges to our customers.  Wedescribe the various components of this noninterest income, as well as ournoninterest expense, in the “Noninterest Income” and “Noninterest Expense”sections.

 

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In response to financialconditions affecting the banking system and financial markets and the potentialthreats to the solvency of investment banks and other financial institutions,the United States government has taken unprecedented actions. On October 3,2008, President Bush signed into law the EESA.  Pursuant to the EESA, theU.S. Treasury has the authority to, among other things, purchase mortgages,mortgage-backed securities, and other financial instruments from financialinstitutions for the purpose of stabilizing and providing liquidity to the U.S.financial markets. On October 14, 2008, the U.S. Department of Treasuryannounced the Capital Purchase Program (“CPP”) under the EESA, pursuant towhich the Treasury will make senior preferred stock investments in participatingfinancial institutions.  On December 19,2008, as part of the CPP established by the Treasury under the EESA, we enteredinto the CPP Purchase Agreement, pursuant to which the company issued and soldto Treasury (i) 14,448 shares of the company’s  Series T Preferred Stock, and (ii) aten-year warrant to purchase up to 571,821 shares of our common stock, for an aggregate purchase price of$14,448,000 in cash.

 

The following discussion and analysis also identifiessignificant factors that have affected our financial position and operatingresults during the periods included in the accompanying financialstatements.  We encourage you to readthis discussion and analysis in conjunction with our financial statements andthe other statistical information included in this report.

 

#### **Critical Accounting Policies**

#### ** **

We haveadopted various accounting policies that govern the application of accountingprinciples generally accepted in the United States and with general practiceswithin the banking industry in the preparation of our financialstatements.  Our significant accountingpolicies are described in the footnotes to our audited consolidated financialstatements as of December 31, 2008.

 

Certainaccounting policies involve significant judgments and assumptions by us thathave a material impact on the carrying value of certain assets andliabilities.  We consider theseaccounting policies to be critical accounting policies.  The judgment and assumptions we use are basedon historical experience and other factors, which we believe to be reasonableunder the circumstances.  Because of thenature of the judgment and assumptions we make, actual results could differfrom these judgments and estimates that could have a material impact on thecarrying values of our assets and liabilities and our results of operations.

 

Webelieve the allowance for loan losses is the critical accounting policy thatrequires the most significant judgment and estimates used in preparation of ourconsolidated financial statements.  Someof the more critical judgments supporting the amount of our allowance for loanlosses include judgments about the credit worthiness of borrowers, theestimated value of the underlying collateral, the assumptions about cash flow,determination of loss factors for estimating credit losses, the impact ofcurrent events and conditions and other factors impacting the level of probableinherent losses.  Under differentconditions or using different assumptions, the actual amount of credit lossesincurred by us may be different from management’s estimates provided in ourconsolidated financial statements.  Referto the portion of this discussion that addresses our allowance for loan lossesfor a more complete discussion of our processes and methodology for determiningour allowance for loan losses.

 

**Results of Operations**

 

***Income Statement Review***

 

*Summary*

 

Our netloss was approximately $5.0 million for the year ended December 31, 2008,compared to net income of $413,000 and $1.5 million for the years ended December 31,2007 and 2006, respectively.  Net lossbefore income tax benefit was $7.7 million, compared to net income beforeincome tax expense of $688,000 and $2.4 million for the years ended December 31,2007 and 2006, respectively.  Incomparing year-ends December 31, 2008 and 2007, the $8.3 million decreasein net income before income tax effect was primarily a result of a pre-tax impairment charge of $4.6million related to the government placing the Federal National MortgageAssociation and the Federal Home Loan Mortgage Corporation into conservatorshipand our provisional expense for credit losses of $4.7 million.  Noninterest expense increased in 2008primarily as a result of increases in salaries and employee

 

37

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benefits, and occupancy expense offset by increases of $2.2 million innet interest income before provision for loan losses. Noninterest incomedecreased from $1.4 million for the year ended December 31, 2007 to a lossof $2.8 million for the year ended December 31, 2008.  For the years ended December 31, 2007and 2006, the $1.7 million decrease in net income before tax expense resultedfrom increases of $2.4 million in net interest income before income tax expenseand $568,000 in other income partially offset by a $4.8 million increase innoninterest expense.  Noninterest incomeincreased from $787,000 for the year ended December 31, 2006 to $1.4million for the year ended December 31, 2007.  We recorded provisions for loan losses of$4.7 million, $1.0 million and $1.2 million for the years ended December 31,2008, 2007 and 2006, 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 has historically been the primary driver of the increase in netinterest income. During the years ended December 31, 2008 and 2007, ourloan portfolio increased $70.6 million and $118.1 million, respectively.  We anticipate the growth in loans will drivethe growth in assets and the growth in net interest income once the economicconditions improve.  However, we do notexpect to sustain the same growth rate in our loan portfolio as we haveexperienced in the past.

 

Our decision to grow the loan portfolio at itshistorical pace has created the need for a higher level of capital and the needto increase deposits and borrowings. This loan growth strategy also resulted in a significant portion of ourassets being in higher earning loans rather than in lower yieldinginvestments.  At December 31, 2008,loans represented 64.6% of total assets, while securities and federal fundssold represented 30.2% of total assets. While we plan to continue our focus on increasing our loan portfolio, wealso anticipate increasing the size of the investment portfolio during theongoing economic recession as loan demand softens and investment yields becomemore attractive on a relative basis.

 

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 branch expansionenvironment, which in turn allowed us to focus on growing our loanportfolio.  At December 31, 2008,retail deposits represented $277.1 million, or 42.0% of total funding, whichincludes total deposits plus borrowings. Borrowings represented $98.4 million, or 14.9% of total funding, andwholesale deposits represented $284.1 million, or 43.1% 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. 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 office 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 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 these branchlocations on obtaining lower cost deposits that are less affected by risingrates.

 

We plan to continue to offer aggressive rates oninvestment checking and money market accounts. Our goal is to maintain a higher percentage of assets being funded byretail deposits and to increase the percentage of low-cost transaction accountsto total deposits.  No assurance can begiven that these objectives will be achieved. Although we anticipate that our new full service banking offices willassist us in meeting these objectives, we believe that the current depositstrategies 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.

 

38

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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 31,2008 increased because we had more interest-earning assets thaninterest-bearing liabilities.  For theyears ended December 31, 2008, 2007 and 2006, average interest-earningassets exceeded average interest-bearing liabilities by $18.2 million, $27.2million, and $27.6 million, respectively.

 

The impact of the Federal Reserve’s interest rate cutssince August 2007 resulted in a decrease in both the yields on ourvariable rate 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, 2008, asa result of the bank having fewer interest-bearing liabilities thaninterest-earning assets that repriced as market rates decreased over theperiod.  Our net interest margins for theyears ended December 31, 2008, 2007 and 2006 were 2.50%, 2.99% and 3.60%,respectively.  During the year ended December 31,2007, the net interest spread and net interest margin decreased from comparableamounts in 2006 as a result of the bank having more interest-earningliabilities than interest-bearing assets that repriced as market rated began toincrease over the period.

 

39

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*Years Ended December 31,2008, 2007 and 2006*

 

The following table sets forth information related toour average balance sheet, average yields on assets, and average costs of liabilities.  We derived these yields by dividing income orexpense by the average balance of the corresponding assets or liabilities.  We derived average balances from the daily balancesthroughout the periods indicated.  Duringthe three years ended December 31, 2008, 2007 and 2006, we had nosecurities purchased with agreements to resell. All investments were owned at an original maturity of over one year.

 

**AverageBalances, Income and Expenses, and Rates**

 
| ** **                                       | ** ** | **For the Year Ended  December 31, 2008** | ** ** | **For the Year Ended  December 31, 2007** | ** ** | **For the Year Ended  December 31, 2006** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                       | ** ** | **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                       |       | $                                                                  | 251        |                                                               | $          | 5                                                                  |       | 2.04 | % | $ | 283 |   | $ | 16 |   | 5.74 | % | $ | 51 |   | $ | 3 |   | 5.15 | % |
| Federal funds  sold                              |       | 17,123                                                             |       | 281                                                                |       | 1.64                                                               | %          | 13,573 |   | 702 |   | 5.17 | % | 6,103 |   | 323 |   | 5.29 | % |
| Taxable  investment securities                   |       | 119,238                                                            |       | 6,805                                                              |       | 5.71                                                               | %          | 42,885 |   | 2,463 |   | 5.74 | % | 24,483 |   | 1,307 |   | 5.34 | % |
| Non-taxable  investment securities.              |       | 7,172                                                              |       | 287                                                                |       | 4.00                                                               | %          | 11,035 |   | 440 |   | 3.98 | % | 180 |   | 7 |   | 3.79 | % |
| Loans receivable                                 |       | 433,629                                                            |       | 27,379                                                             |       | 6.31                                                               | %          | 339,774 |   | 27,805 |   | 8.18 | % | 242,349 |   | 20,130 |   | 8.31 | % |
| Total earning  assets                            |       | 577,413                                                            |       | 34,757                                                             |       | 6.02                                                               | %          | 407,550 |   | 31,426 |   | 7.71 | % | 273,166 |   | 21,770 |   | 7.97 | % |
|                                             |       |                                                               |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Nonearning  assets:                              |       |                                                               |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and due from  banks                         |       | 3,863                                                              |       |                                                               |       |                                                               |       | 1,577 |   |   |   |   |   | 2,031 |   |   |   |   |   |
| Mortgage loans  held for sale                    |       | 510                                                                |       |                                                               |       |                                                               |       | 1,640 |   |   |   |   |   | 1,323 |   |   |   |   |   |
| Premises and  equipment, net                     |       | 19,099                                                             |       |                                                               |       |                                                               |       | 14,974 |   |   |   |   |   | 6,453 |   |   |   |   |   |
| Other assets                                     |       | 18,844                                                             |       |                                                               |       |                                                               |       | 12,256 |   |   |   |   |   | 4,353 |   |   |   |   |   |
| Allowance for  loan losses                       |       | (4,889                                                             | )          |                                                               |       |                                                               |       | (4,117 | ) |   |   |   |   | (3,032 | ) |   |   |   |   |
| Total nonearning  assets                         |       | 37,427                                                             |       |                                                               |       |                                                               |       | 26,330 |   |   |   |   |   | 11,128 |   |   |   |   |   |
| Total assets                                     |       | $                                                                  | 614,840    |                                                               |       |                                                               |       |   | $ | 433,880 |   |   |   |   |   | $ | 284,294 |   |   |   |   |   |
|                                             |       |                                                               |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                   |       |                                                               |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest bearing  transaction accounts           |       | $                                                                  | 28,576     |                                                               | 723        |                                                               | 2.53       | % | $ | 6,718 |   | 240 |   | 3.58 | % | $ | 3,697 |   | 115 |   | 3.11 | % |
| Savings &  money market                 |       | 173,471                                                            |       | 4,806                                                              |       | 2.77                                                               | %          | 186,732 |   | 9,081 |   | 4.86 | % | 133,311 |   | 6,228 |   | 4.67 | % |
| Time deposits  less than $100,000                |       | 203,217                                                            |       | 8,624                                                              |       | 4.24                                                               | %          | 131,130 |   | 6,936 |   | 5.29 | % | 73,897 |   | 3,716 |   | 5.03 | % |
| Time deposits  greater than $100,000             |       | 63,180                                                             |       | 2,635                                                              |       | 4.17                                                               | %          | 10,418 |   | 562 |   | 5.39 | % | 10,531 |   | 487 |   | 4.62 | % |
| Junior  subordinated debentures                  |       | 11,493                                                             |       | 724                                                                |       | 6.30                                                               | %          | 8,248 |   | 561 |   | 6.80 | % | 7,073 |   | 470 |   | 6.65 | % |
| Advances from FHLB                               |       | 40,915                                                             |       | 1,436                                                              |       | 3.51                                                               | %          | 20,575 |   | 1,012 |   | 4.92 | % | 7,847 |   | 423 |   | 5.38 | % |
| Securities sold  under repurchase agreement      |       | 35,187                                                             |       | 1,258                                                              |       | 3.58                                                               | %          | 14,828 |   | 736 |   | 4.96 | % | 7,804 |   | 424 |   | 5.44 | % |
| Federal funds  purchased                         |       | 187                                                                |       | 8                                                                  |       | 4.25                                                               | %          | 856 |   | 47 |   | 5.50 | % | 540 |   | 28 |   | 5.14 | % |
| ESOP borrowings                                  |       | 2,774                                                              |       | 116                                                                |       | 4.17                                                               | %          | 854 |   | 60 |   | 7.02 | % | — |   | — |   | — | % |
| Other borrowings                                 |       | 220                                                                |       | 12                                                                 |       | 5.53                                                               | %          | — |   | — |   | — | % | 834 |   | 57 |   | 6.85 | % |
| Total  interest-bearing liabilities              |       | 559,220                                                            |       | 20,342                                                             |       | 3.64                                                               | %          | 380,359 |   | 19,235 |   | 5.06 | % | 245,534 |   | 11,948 |   | 4.87 | % |
|                                             |       |                                                               |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Noninterest-bearing  liabilities:                |       |                                                               |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                  |       | 12,272                                                             |       |                                                               |       |                                                               |       | 10,550 |   |   |   |   |   | 9,693 |   |   |   |   |   |
| Other liabilities                                |       | 3,391                                                              |       |                                                               |       |                                                               |       | 1,710 |   |   |   |   |   | 1,395 |   |   |   |   |   |
| Shareholders’  equity                       |       | 39,957                                                             |       |                                                               |       |                                                               |       | 41,261 |   |   |   |   |   | 27,672 |   |   |   |   |   |
|                                             |       |                                                               |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total liabilities  and shareholders’ equity |       | $                                                                  | 614,840    |                                                               |       |                                                               |       |   | $ | 433,880 |   |   |   |   |   | $ | 284,294 |   |   |   |   |   |
| Net interest  income                             |       |                                                               |       | $                                                                  | 14,415     |                                                               |       |   |   |   | $ | 12,191 |   |   |   |   |   | $ | 9,822 |   |   |   |
| Net interest  spread                             |       |                                                               |       |                                                               |       | 2.38                                                               | %          |   |   |   |   | 2.65 | % |   |   |   |   | 3.10 | % |
| Net interest  margin                             |       |                                                               |       |                                                               |       | 2.50                                                               | %          |   |   |   |   | 2.99 | % |   |   |   |   | 3.60 | % |

 

----

(1) Includesnonaccruing loans

 

40

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Ournet interest spread was 2.38%, 2.65%, and 3.10% for the years ended December 31,2008, 2007 and 2006, respectively.  Thenet interest spread is the difference between the yield we earn on ourinterest-earning assets and the rate we pay on our interest-bearingliabilities.

 

Thenet interest margin is calculated as net interest income divided by averageinterest-earning assets.  Our netinterest margin for the years ended December 31, 2008, 2007 and 2006 was2.50%, 2.99% and 3.60%, respectively. During 2008, interest-earning assetsaveraged $577.4 million, compared to $407.6 million in 2007 and $273.2 millionin 2006. During the same periods, average interest-bearing liabilities were$559.2 million, $380.4 million and $245.5 million, respectively.

 

The net interest spread and net interest margindecreased during the year ended December 31, 2008, as a result of the bankhaving more interest-bearing liabilities than interest-earning 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, 2007, 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 largestcomponent of our income, was $14.4 million, $12.2 million and $9.8 million forthe years ended December 31, 2008, 2007 and 2006, respectively.  The increase in 2008 and 2007 resulted fromthe net effect of higher levels of both average earning assets andinterest-bearing liabilities, rather than from an increase in the net interestspread.

 

The $2.2 million increase in netinterest income for the year ended December 31, 2008, compared to the sameperiod in 2007, resulted from a $3.3 million increase in interest income offsetby a $1.1 million increase in interest expense. The $2.4 million increase in net interest income for the year ended December 31,2007, compared to the same period in 2006, resulted from a $9.7 millionincrease in interest income offset by a $7.3 million increase in interestexpense.

 

Interest income for theyear ended December 31, 2008 was $34.8 million, consisting primarily of$27.4 million on loans, $7.1 million on investments and interest bearingbalances, and $281,000 on federal funds sold. Interest income for the year ended December 31, 2007 was $31.4million, consisting primarily of $27.8 million on loans, $2.9 million oninvestments and interest bearing balances, and $702,000 on federal fundssold.  Interest income for the year endedDecember 31, 2006 was $21.8 million, consisting of $20.1 million on loans,$1.3 million on investments and interest bearing balances, and $323,000 onfederal funds sold.  Interest and fees onloans represented 78.8%, 88.5% and 92.5% of total interest income for the yearsended December 31, 2008, 2007 and 2006, respectively.  Income from investments, federal funds soldand interest bearing balances represented 21.2%, 11.5%, and 7.5% of totalinterest income for the years ended December 31, 2008, 2007 and 2006,respectively.  The high percentage ofinterest income from loans related to our strategy to maintain a significantportion of our assets in higher earning loans compared to lower yieldinginvestments.  Average loans represented75.1%, 83.4% and 88.7% of average interest-earning assets for the years ended December 31,2008, 2007 and 2006, respectively.

 

Interest expense for the year ended December 31,2008 was approximately $20.3 million, consisting primarily of $16.8 millionrelated to deposits, $1.4 million related to FHLB advances, $1.3 millionrelated to securities sold under repurchase agreements, $724,000 related tojunior subordinated debentures, $116,000 related to ESOP borrowings and $20,000federal funds purchased and other borrowings. Interest expense for the yearended December 31, 2007 was approximately $19.2 million, consistingprimarily of $16.8 million related to deposits, $736,000 related to securities soldunder repurchase agreements, $107,000 federal funds purchased and otherborrowings, $561,000 related to junior subordinated debentures and $1.0 millionrelated to FHLB advances. Interest expense for the year ended December 31,2006 was approximately $11.9 million, consisting of $10.5 million related todeposits, $424,000 related to securities sold under repurchase agreements and$85,000 federal funds purchased and other borrowings, $470,000 related tojunior subordinated debentures and $423,000 related to FHLB advances.  Interest expense on deposits for the yearsended December 31, 2008, 2007 and 2006 represented 82.5%, 87.4% and 88.3%respectively, of total interest expense, while interest expense on borrowingsrepresented 17.5%, 12.6% and 11.7%, respectively, of total interest expense.During the year ended December 31, 2008, average interest-bearingliabilities were higher by $178.9 million than for the same period in 2007,while other borrowings and federal funds

 

41

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purchasedaveraged $449,000 lower, FHLB advances averaged $20.3 million higher, juniorsubordinated debentures averaged $3.2 million higher, ESOP borrowings averaged$1.9 million higher and securities sold under repurchase agreement averaged$20.4 million higher than for the same period ended December 31,2007.  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 averaged $7.0 million higher than for the same periodended December 31, 2006.

 

*Rate/Volume Analysis*

 

Netinterest income can be analyzed in terms of the impact of changing interestrates and changing volume.  The followingtables set forth the effect which the varying levels of interest-earning assetsand interest-bearing liabilities and the applicable rates have had on changesin net interest income for the periods presented.

 
| ** **                                   | ** ** | **Year Ended  December 31, 2008 vs. December 31, 2007** | ** ** | **Year Ended  December 31, 2007 vs. December 31, 2006** | ** ** |
|----------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|
| ** **                                   | ** ** | **Increase (Decrease) Due to**                                              | ** ** | **Increase (Decrease) Due to**                                              | ** ** |
| ** **                                   | ** ** | **Volume**                                                                                 | ** ** | **Rate**                                                                                   | ** ** | **Rate/  Volume** | ** ** | **Total** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **Rate/  Volume** | ** ** | **Total** | ** ** |
| ** **                                   | ** ** | ** **                                                                                 | ** ** | ** **                                                                                 | ** ** | ** ** | ** ** | **(in thousands)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest income                              |       |                                                                                       |       |                                                                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans                                        |       | $                                                                                          | 7,681      |                                                                                       | $          | (6,352 | ) | $ | (1,755 | ) | $ | (426 | ) | $ | 8,093 |   | $ | (298 | ) | $ | (120 | ) | $ | 7,675 |   |
| Taxable  investment securities               |       | 4,385                                                                                      |       | (15                                                                                        | )          | (27 | ) | 4,343 |   | 982 |   | 100 |   | 74 |   | 1,156 |   |
| Non-taxable  investment securities           |       | (154                                                                                       | )          | 2                                                                                          |       | (1 | ) | (153 | ) | 412 |   | — |   | 21 |   | 433 |   |
| Federal funds  sold                          |       | 183                                                                                        |       | (480                                                                                       | )          | (125 | ) | (422 | ) | 395 |   | (8 | ) | (8 | ) | 379 |   |
| Interest bearing  balances                   |       | (2                                                                                         | )          | (10                                                                                        | )          | 1 |   | (11 | ) | 12 |   | — |   | 1 |   | 13 |   |
| Total interest  income                       |       | 12,093                                                                                     |       | (6,855                                                                                     | )          | (1,907 | ) | 3,331 |   | 9,894 |   | (206 | ) | (32 | ) | 9,656 |   |
|                                         |       |                                                                                       |       |                                                                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest expense                             |       |                                                                                       |       |                                                                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits                                     |       | 6,700                                                                                      |       | (4,813                                                                                     | )          | (1,917 | ) | (30 | ) | 5,409 |   | 570 |   | 293 |   | 6,272 |   |
| Junior  subordinated debentures              |       | 221                                                                                        |       | (41                                                                                        | )          | (17 | ) | 163 |   | 78 |   | 11 |   | 2 |   | 91 |   |
| Advances from  FHLB                          |       | 1,000                                                                                      |       | (290                                                                                       | )          | (286 | ) | 424 |   | 685 |   | (36 | ) | (59 | ) | 590 |   |
| Securities sold  under repurchase agreements |       | 1,010                                                                                      |       | (206                                                                                       | )          | (282 | ) | 522 |   | 382 |   | (37 | ) | (33 | ) | 312 |   |
| Federal funds  purchased                     |       | (37                                                                                        | )          | (11                                                                                        | )          | 8 |   | (40 | ) | 16 |   | 2 |   | 1 |   | 19 |   |
| ESOP borrowings                              |       | 135                                                                                        |       | (24                                                                                        | )          | (55 | ) | 56 |   | — |   | — |   | 60 |   | 60 |   |
| Other borrowings                             |       | —                                                                                     |       | —                                                                                     |       | 12 |   | 12 |   | (57 | ) | (57 | ) | 57 |   | (57 | ) |
| Total interest  expense                      |       | 9,029                                                                                      |       | (5,385                                                                                     | )          | (2,537 | ) | 1,107 |   | 6,513 |   | 453 |   | 321 |   | 7,287 |   |
|                                         |       |                                                                                       |       |                                                                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest  income                         |       | $                                                                                          | 3,064      |                                                                                       | $          | (1,470 | ) | $ | 630 |   | $ | 2,224 |   | $ | 3,381 |   | $ | (659 | ) | $ | (353 | ) | $ | 2,369 |   |

 

*Provision forLoan Losses*

 

We have established an allowance for loan lossesthrough a provision for loan losses charged as an expense on our statement ofoperations.  We review our loan portfolioperiodically to evaluate our outstanding loans and to measure both theperformance of the portfolio and the adequacy of the allowance for loanlosses.  Please see the discussion belowunder “Balance Sheet Review - Provision and Allowance for Loan Losses” for adescription of the factors we consider in determining the amount of theprovision we expense each period to maintain this allowance.

 

Included in the statementof operations for the years ended December 31, 2008, 2007 and 2006 is anoncash expense related to the provision for loan losses of approximately $4.7million, $1.0 million and $1.2 million, respectively.  The allowance for loan losses wasapproximately $7.6 million, $4.2 million and $3.5 million as of December 31,2008, 2007 and 2006, respectively.  Theallowance for loan losses as a percentage of gross loans was 1.65% at December 31,2008, 1.06% at December 31, 2007 and 1.27% at December 31, 2006.  At December 31, 2008, we had 25nonperforming loans totaling approximately $11.5 million.  Net charge offs amounted to approximately$1.2 million for the year ended December 31, 2008.  We had three nonperforming loans totalingapproximately $389,000 at December 31, 2007.

 

42

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*Noninterest Income (Loss)*

 

The following table setsforth information related to our noninterest income:

 
| ** **                                    | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                    | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                    | ** ** | **(in thousands)**                     | ** ** |
| Service fees on  deposit accounts             |       | $                                           | 36         |   | $ | 35 |   | $ | 24 |   |
| Residential  mortgage origination fees        |       | 349                                         |       | 651 |   | 573 |   |
| Origination  income on mortgage loans sold    |       | 34                                          |       | 113 |   | 91 |   |
| Gain (loss) on  sale of investment securities |       | 509                                         |       | 38 |   | (137 | ) |
| Gain on sale of  other real estate            |       | 5                                           |       | — |   | — |   |
| Gain on sale of  property and equipment       |       | 8                                           |       | 10 |   | 14 |   |
| Other service  fees and commissions           |       | 362                                         |       | 193 |   | 144 |   |
| Bank owned life  insurance                    |       | 484                                         |       | 290 |   | 59 |   |
| Impairment on  securities available for sale  |       | (4,596                                      | )          | — |   | — |   |
| Other                                         |       | 33                                          |       | 25 |   | 19 |   |
| Total  noninterest income (loss)              |       | $                                           | (2,776     | ) | $ | 1,355 |   | $ | 787 |   |

 

Noninterest income (loss)for the year ended December 31, 2008 was approximately $2.8 million, adecrease of $4.1 million compared to noninterest income of $1.4 million duringthe same period in 2007. The decrease was attributable to the impairment of thebank’s preferred stocks in Federal National Mortgage Association (“FNMA” or “FannieMae”) and Federal Home Loan Mortgage Corporation (“FHLMC” or “Freddie Mac”). Asa result of recent actions by the U.S. Treasury Department and the FederalHousing Finance Agency, effective in the third quarter of 2008, the Companyrecorded a pretax, non-cash impairment charge of $4.6 million for theother-than-temporary impairment (“OTTI”) of its investments in perpetualpreferred securities issued by Fannie Mae and Freddie Mac.

 

Noninterest income forthe year ended December 31, 2007 was approximately $1.4 million, anincrease of $568,000 compared to noninterest income of $787,000 during the sameperiod in 2006. The increase was attributable to an increase in mortgageorigination income, income related to bank owned life insurance, other servicefees and other income.

 

Residential mortgageorigination fees consist primarily of late charge fees and mortgage originationfees we receive on residential loans funded and closed by a third party.  Residential mortgage origination fees were$349,000, $651,000 and $573,000 for the years ended December 31, 2008,2007 and 2006, respectively.  Thedecrease of $302,000 in 2008 related primarily to a decline in volume in themortgage department. Origination income on mortgage loans sold includes theinterest income collected on mortgage payments prior to selling these loans toinvestors.  We received $34,000 oforigination income on mortgage loans sold in 2008, compared to $113,000 in 2007and $91,000 in 2006. We anticipate that the level of mortgage origination feeswill continue to decrease if the mortgage refinancing business declines due todeteriorating economic conditions. Further, changes in state law regarding the oversight of mortgagebrokers and lenders could increase our costs of operations and affect ourmortgage origination volume which could negatively impact our noninterest incomein the future.

 

Service fees on depositsconsist primarily of service charges on our checking, money market, and savingsaccounts.  Deposit fees were $36,000,$35,000 and $24,000 for the years ended December 31, 2008, 2007, and 2006,respectively. The additional $1,000 and $11,000 in income for 2008 and 2007,respectively, resulted from the larger number of customer accounts.   Similarly, other service fees, commissionsand the fee income received from customer non-sufficient funds (“NSF”)transactions increased $169,000 to $362,000 for the year ended December 31,2008 when compared to the same period in 2007. Other service fees, commissions,and the fee income received from customer NSF transactions increased $49,000 to$193,000 for the year ended December 31, 2007 and increased $89,000 to$144,000 for the year ended December 31, 2006. The increase is attributedto the growing number of customers to whom we provide financial services.

 

An additional $194,000and $231,000 in noninterest income was primarily attributable to the income

 

43

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received from bank ownedlife insurance for the year ended December 31, 2008 and 2007. Other incomeconsists primarily of fees received on debit and credit card transactions,income from sales of checks, and the fees received on wire transfers.  Other income was $33,000, $25,000 and $19,000for the years ended December 31, 2008, 2007 and 2006, respectively.

 

*Noninterest Expense*

 

The following table setsforth information related to our noninterest expense.

** **
| ** **                                | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                | ** ** | **(in thousands)**                     | ** ** |
| Salaries and  benefits                    |       | $                                           | 8,322      |   | $ | 6,918 |   | $ | 4,484 |   |
| Occupancy                                 |       | 1,423                                       |       | 1,030 |   | 486 |   |
| Furniture and  equipment expense          |       | 735                                         |       | 484 |   | 298 |   |
| Professional  fees                        |       | 1,180                                       |       | 1,108 |   | 511 |   |
| Advertising and  marketing                |       | 750                                         |       | 647 |   | 250 |   |
| Insurance                                 |       | 684                                         |       | 360 |   | 108 |   |
| Data processing  and related costs        |       | 448                                         |       | 275 |   | 179 |   |
| Telephone                                 |       | 162                                         |       | 153 |   | 75 |   |
| Postage                                   |       | 23                                          |       | 26 |   | 24 |   |
| Office supplies,  stationery and printing |       | 151                                         |       | 171 |   | 74 |   |
| Other                                     |       | 750                                         |       | 661 |   | 535 |   |
| Total  noninterest expense                |       | $                                           | 14,628     |   | $ | 11,833 |   | $ | 7,024 |   |

 

We incurred noninterestexpense of $14.6 million for the year ended December 31, 2008, compared to$11.8 million for the year ended December 31, 2007, and $7.0 million forthe year ended December 31, 2006. For the year ended December 31, 2008, the $1.4 million increase insalaries and employee benefits and $393,000 increase in occupancy expenseaccounted for 64.3% of the $2.8 million increase in noninterest expense for theyear ended December 31, 2008, compared to the same period in 2007.  A significant portion of the increase inoccupancy expenses is related to the addition of new branches.  In 2005, management committed to theexpansion of the bank’s branch network, including the construction of newfacilities in the Charleston and Myrtle Beach markets.  Due to the variable timing associated withthe construction projects, the new facility construction projects during 2007,coincided with projects that were begun in 2006.  Accordingly, occupancy expenses were$335,000, $486,000 and $1.0 million for years ending 2005, 2006 and 2007,respectively.  As of December 31,2008, occupancy expenses increased to $1.4 million.  These branch locations provide increasedvisibility and new customer traffic to the bank.  With these new customers, both loan anddeposit accounts increase, and additional revenue is generated through interestincome on loans and service charges on deposit accounts.

 

As a result of the bank’sbranching strategy, staffing levels have grown over the same period.  Full-time equivalent employees were 40, 60,88 and 83 for the years ending 2005, 2006, 2007 and 2008, respectively.  Salary and benefit expense was $8.3 million,$6.9 million and $4.5 million for the years ended December 31, 2008, 2007and 2006, respectively.  Salaries andbenefits represented 56.9%, 58.5% and 63.8% of our total noninterest expensefor the years ended December 31, 2008, 2007 and 2006, respectively.  The $1.4 million increase in salaries andbenefits expense in 2008 compared to 2007 resulted primarily from increases of$1.2 million in base compensation, $1,000 more in stock compensation expense,$611,000 in higher benefits costs and a decrease of $371,000 in additionalincentive compensation. The $1.2 million increase in base compensation expenserelated to the cost of 9 additional employees hired in 2008, a full year’sexpense for the 27 people hired in 2007, as well as annual salary increases.The $2.4 million increase in salaries and benefits expense in 2007 compared to2006 resulted primarily from increases of $1.9 million in base compensation,$228,000 in additional incentive compensation, $452,000 more in stockcompensation expense and $326,000 in higher benefits costs.  The $1.9 million increase in base compensationexpense related to the cost of employing 27 additional employees in 2007, aswell as annual salary increases.

 

The remaining $998,000increase resulted primarily from an increase of $72,000 in professional fees,

 

44

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$251,000 in furniture andequipment expense, $103,000 in marketing costs, $324,000 in insurance costs,$173,000 in data processing and related costs and $75,000 in otherexpense.  These increases were primarilyrelated to the expansion of our services and facilities.  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 63.0% of the $4.8 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 $1.8 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 $303,000 inother expense.

 

A significant portion ofthe increase in professional fees is related to additional legal, audit andcompliance expenses.  The increase inmarketing expense relates to expanding our market awareness in the Charleston,Myrtle Beach and Hilton Head markets, while a significant portion of theincrease in other expense was due to increased costs of postage, officesupplies, and additional staff education and training.

 

Data processing andrelated costs were $448,000, $275,000 and $179,000 for the years ended December 31,2008, 2007 and 2006, respectively. During the year ended December 31, 2008, our data processing costsfor our core processing system were $347,000 compared to $218,000 for the yearended December 31, 2007 and $113,000 for the year ended December 31,2006.  We have contracted with an outsidecomputer service company to provide our core data processing services.  A significant portion of the fee charged byour third party processor is directly related to the number of loan and depositaccounts and the related number of transactions, all of which have growncommensurate with the overall growth of the bank’s assets and liabilities.

 

Income tax benefit wasapproximately $2.7 million for the year ended December 31, 2008 comparedto income tax expense of $275,000 and $874,000 for the year ended December 31,2007 and 2006, respectively.  The incometax (benefit) expense is based on an effective tax rate of 35.3%, 40.0% and37.0% for the year ended December 31, 2008, 2007 and 2006, respectively.

 

***Balance Sheet Review***

 

*General*

 

At December 31, 2008, we had total assets of$715.2 million, consisting principally of $454.3 million in net loans, $242,000in mortgage loans held for sale, $171.8 million in investment securities, $40.4million in federal funds sold, $19.4 million in net premises, furniture andequipment, and $2.5 million in cash and due from banks.  Our liabilities at December 31, 2008totaled $663.2 million, consisting principally of $561.2 million in deposits,$20.0 million in securities sold under agreements to repurchase, $14.4 millionin junior subordinated debentures, $60.8 million in FHLB advances, and $2.6million in borrowings related to the ESOP. At December 31, 2008, our shareholders’ equity was $52.0 million.

 

*Federal FundsSold*

 

AtDecember 31, 2008, our $40.4 million in short-term investments in federalfunds sold on an overnight basis comprised 5.6% of total assets, compared to$1.9 million, or 0.4% of total assets, at December 31, 2007.

 

*Investments*

 

AtDecember 31, 2008, the $171.8 million in our available for sale investmentsecurities portfolio represented approximately 24.0% of our total assets,compared to $88.0 million, or 17.2% of total assets, at December 31,2007.  We held U.S. government agencysecurities, securities of government sponsored enterprises, municipal andmortgage-backed securities with a fair value of $171.8 million and an amortizedcost of $169.3 million for a net unrealized gain of $2.5 million.  We utilized the investment portfolio toprovide additional income and to absorb liquidity on occasion. We anticipatemaintaining an investment portfolio to provide both increased earnings andliquidity.  As additional deposits areobtained, we anticipate maintaining or increasing the relative size of theinvestment portfolio.

 

45

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Contractualmaturities and yields on our investments at December 31, 2008 are shown inthe following table.  Expected maturitiesmay differ from contractual maturities because issuers may have the right tocall or prepay obligations with 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                      |   | $                                    | —     |                                                       | —     | %                                                           | $          | —                        |       | —     | %          | — |   | — | % | — |   | — | % | — |   | — | % |
| Government-  sponsored enterprises |   | —                               |       | —                                                     | %          | —                                                      |       | —                        | %          | 14,321     |       | 5.56 | % | 47,894 |   | 5.88 | % | 62,215 |   | 5.81 | % |
| Mortgage-backed  securities        |   | —                               |       | —                                                     | %          | —                                                      |       | —                        | %          | 375        |       | 5.21 | % | 103,792 |   | 5.89 | % | 104,167 |   | 5.89 | % |
| Municipals                         |   | —                               |       | —                                                     | %          | —                                                      |       | —                        | %          | 1,045      |       | 3.87 | % | 4,343 |   | 3.97 | % | 5,388 |   | 3.95 | % |
| Preferred stocks                   |   | —                               |       | —                                                     | %          | —                                                      |       | —                        | %          | —     |       | — | % | — |   | — | % | — |   | — | % |
| Total                              |   | $                                    | —     |                                                       | —     | %                                                           | $          | —                        |       | —     | %          | $ | 15,741 |   | 5.44 | % | $ | 156,029 |   | 5.83 | % | $ | 171,770 |   | 5.79 | % |
|                                    |        |                                      |            |                                                            |            |                                                             |            |                               |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

AtDecember 31, 2008, our investments included Government sponsoredenterprises, which consist of securities issued by the Federal Farm CreditBank, Federal Home Loan Bank, Federal Home Loan Mortgage Corporation andFederal National Mortgage Association with amortized costs of approximately$12.5 million, $6.4 million, $10.0 million, and $32.2 million,respectively.  Mortgage-backed securitiesconsist of securities issued by the Federal National Mortgage Association,Federal Home Loan Mortgage Corporation and Government National MortgageAssociation with amortized costs of approximately $36.7 million, $3.5 millionand $62.4 million, respectively. Municipals consist of securities issued byvarious different municipalities with an amortized cost of $5.6 million.

 

AtDecember 31, 2008, the fair value of investments issued by the FederalFarm Credit Bank, Federal Home Loan Bank, Federal Home Loan MortgageCorporation and Federal National Mortgage Association was approximately $12.9million, $6.5 million, $10.2 million, and $32.6 million, respectively.  Mortgage-backed securities consist ofsecurities issued by the Federal National Mortgage Association, Federal HomeLoan Mortgage Corporation and Government National Mortgage Association withfair value of approximately $38.1 million, $3.6million and $62.4 million,respectively. Municipals consist of securities issued by various differentmunicipalities with a fair value of $5.4 million.

 

Othernonmarketable equity securities at December 31, 2008 consisted of FederalHome Loan Bank stock with a cost of $3.7 million and other investments of$152,000.

 

46

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Theamortized costs and the fair value of our investments at December 31,2008, 2007 and 2006 are shown in the following table.

# ** **

| ** **                        | ** ** | **December 31, 2008** | ** ** | **December 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|-----------------------------------|------------|---------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                        | ** ** | **Amortized  Cost**             | ** ** | **Fair  Value**                 | ** ** | **Amortized  Cost**             | ** ** | **Fair  Value** | ** ** | **Amortized  Cost** | ** ** | **Fair  Value** | ** ** |
| ** **                        | ** ** | **(in thousands)**         | ** ** |
| Available for  Sale:              |       |                            |       |                            |       |                            |       |   |   |   |   |   |   |
| U.S. Government  agencies         |       | $                               | —     |                            | $          | —                          |       | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Government-sponsored  enterprises |       | 61,106                          |       | 62,215                          |       | 47,272                          |       | 47,917 |   | 27,620 |   | 27,674 |   |
| Mortgage-backed  securities       |       | 102,615                         |       | 104,167                         |       | 23,979                          |       | 24,247 |   | 6,108 |   | 6,204 |   |
| Municipals                        |       | 5,595                           |       | 5,388                           |       | 12,440                          |       | 12,400 |   | 3,626 |   | 3,626 |   |
| Preferred stock                   |       | —                          |       | —                          |       | 3,553                           |       | 3,472 |   | — |   | — |   |
| Total                             |       | $                               | 169,316    |                            | $          | 171,770                         |       | $ | 87,244 |   | $ | 88,036 |   | $ | 37,354 |   | $ | 37,504 |   |

# ** **

# **Loans**

# ** **

Sinceloans typically provide higher interest yields than other types ofinterest-earning assets, a substantial percentage of our earning assets areinvested in our loan portfolio.  Averageloans for the years ended December 31, 2008 and 2007 were $433.6 millionand $339.8 million, respectively.  Grossloans outstanding at December 31, 2008 and 2007 were $462.0 million and$391.3 million, respectively.

 

Loanssecured by real estate mortgages are the principal component of our loanportfolio.  Most of our real estate loansare secured by residential or commercial property.  We do not generally originate traditionallong term residential mortgages for the portfolio, but we do issue traditionalsecond mortgage residential real estate loans and home equity lines ofcredit.  We obtain a security interest inreal estate whenever possible, in addition to any other availablecollateral.  This collateral is taken toincrease the likelihood of the ultimate repayment of the loan.  Generally, we limit the loan-to-value ratioon loans we make to 85%.  Due to theshort time our portfolio has existed, the current mix may not be indicative ofthe ongoing portfolio mix.  We attempt tomaintain a relatively diversified loan portfolio to help reduce the riskinherent in concentration in certain types of collateral.

 

47

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The following tablesummarizes the composition of our loan portfolio at December 31, 2008,2007, 2006, 2005 and 2004:

 
| ** **                               | ** ** | **2008**                             | ** ** | **2007**             | ** ** | **2006**   | ** ** | **2005**             | ** ** | **2004**   | ** ** |
|------------------------------------------|------------|--------------------------------------|------------|----------------------|------------|------------|------------|----------------------|------------|------------|------------|
| ** **                               | ** ** | **(dollars in thousands)** | ** ** |
| ** **                               | ** ** | **Amount**                           | ** ** | **% of  Total** | ** ** | **Amount** | ** ** | **% of  Total** | ** ** | **Amount** | ** ** | **% of  Total** | ** ** | **Amount** | ** ** | **% of  Total** | ** ** | **Amount** | ** ** | **% of  Total** | ** ** |
| *Commercial*                             |       |                                 |       |                 |       |       |       |                 |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Commercial and  industrial               |       | $                                    | 27,443     |                 | 6.0        | %          | $          | 24,350               |       | 6.2        | %          | $ | 24,631 |   | 9.0 | % | $ | 11,360 |   | 6.3 | % | $ | 7,173 |   | 13.0 | % |
|                                     |       |                                 |       |                 |       |       |       |                 |       |       |       |   |   |   |   |   |   |   |   |   |   |
| *Real  Estate*                           |       |                                 |       |                 |       |       |       |                 |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Mortgage                                 |       | 268,500                              |       | 58.1                 | %          | 204,068    |       | 52.2                 | %          | 124,715    |       | 45.7 | % | 85,025 |   | 47.3 | % | 29,837 |   | 54.0 | % |
| Construction                             |       | 161,298                              |       | 34.9                 | %          | 159,815    |       | 40.8                 | %          | 122,210    |       | 44.7 | % | 81,878 |   | 45.6 | % | 16,918 |   | 30.6 | % |
| Total real estate                        |       | 429,798                              |       | 93.0                 | %          | 363,883    |       | 93.0                 | %          | 246,925    |       | 90.4 | % | 166,903 |   | 92.9 | % | 46,755 |   | 84.6 | % |
|                                     |       |                                 |       |                 |       |       |       |                 |       |       |       |   |   |   |   |   |   |   |   |   |   |
| *Consumer*                               |       |                                 |       |                 |       |       |       |                 |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Consumer                                 |       | 4,936                                |       | 1.1                  | %          | 3,467      |       | 0.9                  | %          | 1,901      |       | 0.7 | % | 1,708 |   | 1.0 | % | 1,509 |   | 2.7 | % |
| Deferred  origination fees, net          |       | (210                                 | )          | (0.1                 | )%         | (350       | )          | (0.1                 | )%         | (247       | )          | (0.1 | )% | (311 | ) | (0.2 | )% | (146 | ) | (0.3 | )% |
|                                     |       |                                 |       |                 |       |       |       |                 |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Total gross  loans, net of deferred fees |       | 461,967                              |       | 100.0                | %          | 391,350    |       | 100.0                | %          | 273,210    |       | 100.0 | % | 179,660 |   | 100.0 | % | 55,291 |   | 100.0 | % |
| Less — allowance  for loan losses   |       | (7,635                               | )          |                 |       | (4,158     | )          |                 |       | (3,467     | )          |   |   | (2,245 | ) |   |   | (700 | ) |   |   |
| Total loans, net                         |       | $                                    | 454,332    |                 |       |       | $          | 387,192              |       |       |       | $ | 269,743 |   |   |   | $ | 177,415 |   |   |   | $ | 54,591 |   |   |   |

 

*Maturities and Sensitivity of Loans to Changes in InterestRates*

 

Theinformation in the following table is based on the contractual maturities ofindividual loans, including loans that may be subject to renewal at theircontractual maturity.  Renewal of suchloans is subject to review and credit approval, as well as modification ofterms upon maturity.  Actual repaymentsof loans may differ from the maturities reflected below because borrowers havethe right to prepay obligations with or without prepayment penalties.

 

Thefollowing table summarizes the loan maturity distribution by type and relatedinterest rate characteristics at December 31, 2008.

 
| ** **                                 | ** ** | **One year  or less** | ** ** | **After one  but  within  five years** | ** ** | **After five  years** | ** ** | **Total** | ** ** |
|--------------------------------------------|------------|---------------------------------|------------|--------------------------------------------------|------------|----------------------------|------------|-----------|------------|
| ** **                                 | ** ** | **(in thousands)**         | ** ** |
| Commercial                                 |       | $                               | 15,296     |                                             | $          | 9,964                      |       | $         | 2,183      |   | $ | 27,443 |   |
| Real estate                                |       | 154,866                         |       | 210,593                                          |       | 64,339                     |       | 429,798   |       |
| Consumer                                   |       | 1,465                           |       | 2,778                                            |       | 693                        |       | 4,936     |       |
| Deferred  origination fees, net            |       | (24                             | )          | (186                                             | )          | —                     |       | (210      | )          |
| Total gross  loans, net of deferred fees   |       | $                               | 171,603    |                                             | $          | 223,149                    |       | $         | 67,215     |   | $ | 461,967 |   |
|                                       |       |                            |       |                                             |       |                       |       |      |       |
| Gross loans  maturing after one year with: |       |                            |       |                                             |       |                       |       |      |       |
| Fixed interest rates                       |       |                            |       |                                             |       |                       |       | $         | 159,860    |   |
| Floating  interest rates                   |       |                            |       |                                             |       |                       |       | 130,690   |       |
| Total                                      |       |                            |       |                                             |       |                       |       | $         | 290,550    |   |

 

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*Provision and Allowance for LoanLosses*

 

Wehave established an allowance for loan losses through a provision for loanlosses charged to expense on our statement of operations.  The allowance is maintained at a level deemedappropriate by management to provide adequately for known and inherent lossesin the portfolio.  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.

 

More specifically, indetermining our allowance for loan loss we review loans for specific andimpaired reserves based on current appraisals less estimated closing costs.General and unallocated reserves applied to loans are determined usinghistorical loss trends applied to risk rated loans grouped by FDIC call reportclassification code.  The general andunallocated reserves are calculated by applying the appropriate historical lossratio to the loan categories grouped by risk rating (pass, special mention,substandard and doubtful). The quantitative value of the qualitative factors, asdescribed below, is then applied to this amount to determine the general andunallocated reserve for the specific loans within this rating category andparticular loan category. Impaired loans are excluded from this analysis. Thesum of all such amounts determines our general and unallocated reserves.

 

We also track loans toperform migration analysis on our portfolio and analyze loans grouped by callreport categories. The first step in this process is to risk grade each andevery loan in the portfolio based on one common set of parameters. Theseparameters include items like debt to worth, liquidity of the borrower, networth, experience in a particular field and other factors such as underwritingexceptions. Weight is also given to the relative strength of any guarantors onthe loan.  Due to our short operatinghistory and only recent experience with problem assets, the results of ourmigration analysis have yet to provide significant relevant information withrespect to determining the general allowance related to non-impaired loans. Weanticipate, however, that this analysis will eventually provide us withhistorical behavioral indications by credit grading as we develop sufficienthistory to analyze the general allowance related to non-impaired loans.

 

After risk grading eachloan, we then use twelve qualitative factors to analyze the trends in theportfolio and external influences that can have an effect on the portfolio.These twelve factors include the concentration of credit risk, delinquencytrends, economic and business conditions, external factors, internal staffinglevels of management and staff, lending policies and procedures, loss andrecovery trends, nature and volume of the portfolio, non-accrual trends, otheradjustments, problem loan trends, and the quality of our loan reviewsystem.  A quantitative value is assignedto each of the twelve factors, which, when added together, creates a netqualitative weight.  The net qualitativeweight is then added to the minimum loss ratio. Negative trends in the loan portfolio increase the quantitative valuesassigned to each of the qualitative factors and, therefore, increases the lossratio.  As a result, an increased lossratio will result in a higher allowance for loan loss.  For example, as general economic and businessconditions decline, this qualitative factor’s quantitative value will increase,which will increase the net qualitative weight and the loss ratio (assuming allother qualitative factors remain constant). Similarly, positive trends in the loan portfolio, such as an improvementin general economic and business conditions, will decrease the quantitativevalue assigned to this qualitative factor, thereby decreasing the netqualitative weight (assuming all other qualitative factors remainconstant).  These factors are reviewedand updated by the bank’s Risk Management Committee on a quarterly basis toarrive at a consensus.

 

We then create a lossrange by applying average historical industry loss rates for the last 18 yearsto determine the level of the allowance for loan and lease losses on thenon-impaired loans in the portfolio.  Weutilize an 18 year time frame, as we believe it includes numerous completeeconomic cycles.  As such, we considerthe time frame vast enough to include both favorable and problematic industrytrends relevant in determining historical loss

 

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rates.  We have determined the loss ratio to be thehistorical industry net charge-off ratio by call report loan category, whichcorresponds with the loan categories utilized in our migration analysis.

 

Separately, we review allimpaired loans individually to determine a specific allocation for each. In ourassessment of impaired loans, we consider the primary source of repayment whendetermining whether loans are collateral dependent or not.  We also regularly assess loan collectibilityusing relevant internal and external factors. Internal factors consideredinclude the concentration of credit across the portfolio, current delinquencyratios and trends, the experience level of management and staff, our adherenceto lending policies and procedures, current loss and recovery trends, thenature and volume of the portfolio’s categories, current non-accrual andproblem loan trends, the quality of our loan review system, and other factorswhich include collateral, loan to value ratio, and policy exceptions.  External factors considered include thecurrent economic and business environment, which includes indicators such asnational GDP, pricing indicators, employment statistics, housing statistics,market indicators, financial regulatory economic analysis, and economicforecasts from reputable sources. These internal and external factors representthe qualitative factors utilized in the determination of our appropriate lossreserve.

 

Periodically,we adjust the amount of the allowance based on changing circumstances.  We recognize loan losses to the allowance andadd subsequent recoveries back to the allowance for loan losses.  There can be no assurance that charge-offs ofloans in future periods will not exceed the allowance for loan losses asestimated at any point in time or that provisions for loan losses will not besignificant to a particular accounting period, especially considering the overallweakness in the commercial real estate market in our market areas.

 

Thefollowing table summarizes the activity related to our allowance for loanlosses.

 
| ** **                                | ** ** | **December 31,**                | ** ** |
|-------------------------------------------|------------|--------------------------------------|------------|
| ** **                                | ** ** | **2008**                             | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                | ** ** | **(dollars in thousands)** | ** ** |
| Balance,  beginning of year               |       | $                                    | 4,158      |   | $ | 3,467 |   | $ | 2,245 |   | $ | 700 |   | $ | 135 |   |
| Charge offs,  Commercial and Industrial   |       | (313                                 | )          | (116 | ) | — |   | — |   | — |   |
| Charge offs,  Real Estate Mortgage        |       | (756                                 | )          | — |   | — |   | — |   | — |   |
| Charge offs,  Real Estate Construction    |       | (73                                  | )          | (218 | ) | — |   | — |   | — |   |
| Charge offs,  Consumer                    |       | (47                                  | )          | (1 | ) | — |   | — |   | — |   |
| Recoveries                                |       | 1                                    |       | 1 |   | — |   | — |   | — |   |
| Provision for  loan losses                |       | 4,665                                |       | 1,025 |   | 1,222 |   | 1,545 |   | 565 |   |
| Balance, end of  year                     |       | $                                    | 7,635      |   | $ | 4,158 |   | $ | 3,467 |   | $ | 2,245 |   | $ | 700 |   |
|                                      |       |                                 |       |   |   |   |   |   |   |   |   |
| Total loans outstanding  at end of period |       | $                                    | 461,967    |   | $ | 391,350 |   | $ | 273,210 |   | $ | 179,660 |   | $ | 55,291 |   |
| Allowance for  loan losses to gross loans |       | 1.65                                 | %          | 1.06 | % | 1.27 | % | 1.25 | % | 1.27 | % |
| Net charge-offs  to average loans         |       | 0.27                                 | %          | 0.10 | % | 0.00 | % | 0.00 | % | 0.00 | % |

 

We evaluate the adequacyof the allowance for loan losses by utilizing our credit grading system that weapply to each loan.  We have retained anindependent consultant to review the loan files on a test basis to confirm thegrading of each loan.

 

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*NonperformingAssets*

 

The following table setsforth our nonperforming assets.

 
| ** **                                                  | ** ** | **December 31,**                | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                  | ** ** | **2008**                             | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                  | ** ** | **(dollars in thousands)** | ** ** |
| Nonaccrual loans                                            |       | $                                    | 11,482     |   | $ | 389 |   | $ | 1,965 | ** ** | **$** | **—** | ** ** | **$** | **—** | ** ** |
| Loans 90 days or  more past due and still accruing interest |       | —                               |       | — |   | — |   | — |   | — |   |
| Loans  restructured or otherwise impaired                   |       | —                               |       | — |   | — |   | — |   | — |   |
| Total impaired  loans                                       |       | 11,482                               |       | 389 |   | 1,965 |   | — |   | — |   |
| Other real  estate owned                                    |       | 1,801                                |       | — |   | — |   | — |   | — |   |
| Total  nonperforming assets                                 |       | $                                    | 13,283     |   | $ | 389 |   | $ | 1,965 |   | $ | — |   | $ | — |   |
| ** **                                                  | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Nonperforming  assets to total assets                       |       | 1.86                                 | %          | 0.08 | % | 0.58 | % | 0.00 | % | 0.00 | % |

 

During the fourthquarter of 2008, as the global economic environment crumbled, affecting ourregional market, borrowers that had previously satisfactorily maintained theircredit positions began to have difficulty with the repayment of theirobligations.  As an institutionconcentrating in real estate lending, the slow down in the residential andcommercial real estate activities coupled with the sharp decline in the stockmarket values exacerbated the stress on the liquidity position of ourborrowers. The resulting lack of liquidity cushion manifested in our loans pastdue 30-89 days and non-performing assets. Consequently, we experiencedsignificant increases in loans on our watch list, past due loans, non-accrualloans and other real estate owned.

 

The bank had 25nonperforming assets at December 31, 2008 totaling $11.5 million and threenonperforming assets totaling $389,000 at December 31, 2007.  As of December 31, 2006, we had twononperforming assets totaling $2.0 million. There were three loans and tworelationships in non-accrual at December 31, 2007.  Two of the loans totaling $314,475 wereresolved by December 31, 2008, while the total number of loans innon-accrual status increased to 25 (representing 18 relationships) at December 31,2008.  Of the total increase innon-accrual loans, $925,315 of it related to three loans made to the samecustomer who experienced medical and marital problems affecting his ability topay the loans.  The remaining balance ofnon-accural loans relate to worsening economic conditions experienced from theyear earlier period.  At December 31,2008, 2007, and 2006, the allowance for loan losses was $7.6 million, $4.2million and $3.5 million, respectively, or 1.65%, 1.06% and 1.27%,respectively, of outstanding loans.  Weare committed to working with borrowers to help them overcome their difficultiesand will review loans on a loan by loan basis. However, despite our commitment, resolution across the portfolio isdependent on improvements in employment, housing, and overall economicconditions at the local, regional, and national levels.

 

As of December 31,2008, we had 59 loans with a current principal balance of $22.9 million on thewatch list, compared to 33 loans with a current principal balance of $11.0million at September 30, 2008. The watch list is the classificationutilized by us when we have an initial concern about the financial health of aborrower.  We then gather currentfinancial information about the borrower and evaluate our current risk in thecredit. We will then either move it to “substandard” or back to its originalrisk rating after a review of the information. There are times when we mayleave the loan on the “watch list,” if, in management’s opinion, there arerisks that cannot be fully evaluated without the passage of time, and want toreview it on a more regular basis.  Loanson the watch list are not considered “potential problem loans” until they aredetermined by management to be classified as substandard.

 

Loans past due 30-89 daysamounted to $12.4 million at December 31, 2008. The significant increasefrom $2.6 million from the year before related to the economic deteriorationnoted above. Past due loans are often regarded as a precursor to further creditproblems which would lead to future increases in non-accrual loans and otherreal estate owned.  At December 31,2008, there were no loans past due greater than 90 days that were not alreadyplaced on nonaccrual.  Generally, a loanis placed on nonaccrual status when it becomes 90 days past due as to principalor interest, or when we believe, after considering economic and businessconditions and collection efforts, that the borrower’s financial condition issuch that collection of the loan is doubtful. A payment of interest

 

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on a loan that isclassified as nonaccrual is applied against the principal balance.  During the year ended December 31, 2008,we received approximately $452,000 in interest income in relation to loans onnonaccrual status at year end.  Foregoneinterest income related to loans on nonaccrual status was approximately$396,000 during the year ended December 31, 2008.

 

As expected,collateral values have declined as a result of the current economicenvironment. According to the Federal Housing Finance Agency’s Home Priceindex, home prices in the Charleston and Myrtle Beach, South Carolina marketshave declined 1.94% and 4.74%, respectively, for the year ended December 31,2008. This compares to declines during that period for the State of SouthCarolina and the country as a whole of 3.42% and 8.27%, respectively.  To determine current collateral values weobtain new appraisals on loan renewals and potential problem loans. In theprocess of estimating collateral values for non-performing loans, managementevaluates markets for stagnation or distress and discounts appraised values ona property by property basis.  Currently,management does not review collateral values for properties located in stagnantor distressed residential areas if the loan is performing and not up forrenewal.

 

*Deposits*

 

Our primary source of funds for loansand investments is our deposits. National and local market trends over the past several years suggestthat consumers have moved an increasing percentage of discretionary savingsfunds into investments such as annuities, stocks and mutual funds.  Accordingly, it has become more difficult toattract local deposits.  We have chosento obtain a portion of money market and certificates of deposits from outsideof our market.  The deposits obtainedoutside of our market area generally have lower rates than rates being offeredfor similar deposit products in our local market.  We also utilize wholesale deposits in certaininstances to obtain deposits with more favorable maturities than are readilyavailable in our local market.  Weanticipate that the ratio of wholesale deposits to total deposits will declineas our full service banking offices mature. The amount of wholesale deposits was $284.1 million, or 50.6% of totaldeposits, at December 31, 2008, compared to $226.8 million, or 58.4% oftotal deposits, at December 31, 2007.

 

Weanticipate being able to either renew or replace these wholesale deposits whenthey mature, although we may not be able to replace them with deposits with thesame terms or rates.  Our loan-to-depositratio was 82.3% and 100.8% at December 31, 2008 and 2007, respectively.

 

Thefollowing table shows the average balance amounts and the average rates paid ondeposits held by us for the years ended December 31, 2008, 2007 and 2006.

 
| ** **                           | ** ** | **December 31, 2008**      | ** ** | **December 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | **Amount**                           | ** ** | **Rate**                        | ** ** | **Amount**                      | ** ** | **Rate** | ** ** | **Amount** | ** ** | **Rate** | ** ** |
| ** **                           | ** ** | **(dollars in thousands)** | ** ** |
| Noninterest  bearing demand deposits |       | $                                    | 12,272     |                            | —     | %                               | $          | 10,550 |   | — | % | $ | 9,693 |   | — | % |
| Interest bearing  demand deposits    |       | 28,576                               |       | 2.53                            | %          | 6,718                           |       | 3.58 | % | 3,697 |   | 3.11 | % |
| Savings and  money market accounts   |       | 173,471                              |       | 2.77                            | %          | 186,732                         |       | 4.86 | % | 133,311 |   | 4.67 | % |
| Time deposits  less than $100,000    |       | 203,217                              |       | 4.24                            | %          | 131,130                         |       | 5.10 | % | 73,897 |   | 4.89 | % |
| Time deposits  greater than $100,000 |       | 63,180                               |       | 4.17                            | %          | 10,418                          |       | 5.39 | % | 10,531 |   | 4.62 | % |
| Total deposits                       |       | $                                    | 480,716    |                            | 3.49       | %                               | $          | 345,548 |   | 4.80 | % | $ | 231,129 |   | 4.52 | % |

 

Allof our time deposits are certificates of deposits.  The maturity distribution of our timedeposits of $100,000 or more at December 31, 2008, 2007 and 2006 is asfollows:

 
| ** **                     | ** ** | **2008**                | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                     | ** ** | **(in thousands)** | ** ** |
| Three months or  less          |       | $                       | 17,243     |     | $          | 7,344    |       | $ | 2,812 |   |
| Over three  through six months |       | 43,867                  |       | 20,111   |       | 3,084    |       |
| Over six though  twelve months |       | 17,514                  |       | 1,183    |       | 1,207    |       |
| Over twelve  months            |       | 14,201                  |       | 1,238    |       | 711      |       |
| Total                          |       | $                       | 92,825     |     | $          | 29,876   |       | $ | 7,814 |   |

 

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Theincrease in time deposits of $100,000 or more for the year ended December 31,2008 compared to the same period in 2007 resulted from our funding the growthof the bank with a variety of time deposit products, including retail timedeposits.

 

**Borrowings and OtherInterest-Bearing Liabilities**

 

Thefollowing table outlines our various sources of borrowed funds during the yearsended December 31, 2008, 2007, and 2006, and the amounts outstanding at theend of each period, at the maximum point for each component during the periodsand on average for each period, and the average interest rate that we paid foreach borrowing source.  The maximummonth-end balance represents the high indebtedness for each component ofborrowed funds at any time during each of 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, 2008:** |       |                                 |       |            |       |                    |       |                                  |       |   |   |
| Securities sold  under agreement to repurchase        |       | $                                    | 20,000     |            | 3.76       | %                       | $          | 50,000                                |       | $ | 35,187 |   | 3.58 | % |
| Junior  subordinated debentures                       |       | 14,434                               |       | 6.98            | %          | 14,434                  |       | 11,493                                |       | 6.30 | % |
| Advances from  FHLB                                   |       | 60,800                               |       | 2.71            | %          | 60,800                  |       | 40,915                                |       | 3.51 | % |
| Federal funds  purchased                              |       | —                               |       | —          | %          | 2,963                   |       | 187                                   |       | 4.25 | % |
| ESOP borrowings                                       |       | 2,600                                |       | 2.25            | %          | 2,900                   |       | 2,774                                 |       | 4.17 | % |
| Other borrowings                                      |       | 616                                  |       | 4.25            | %          | 616                     |       | 220                                   |       | 5.53 | % |
|                                                  |       |                                 |       |            |       |                    |       |                                  |       |   |   |
| **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 | % |
| ESOP borrowings                                       |       | 2,428                                |       | 6.50            | %          | 2,428                   |       | 854                                   |       | 7.02 | % |
| Federal funds  purchased                              |       | —                               |       | —          | %          | 10,870                  |       | 856                                   |       | 5.50 | % |
|                                                  |       |                                 |       |            |       |                    |       |                                  |       |   |   |
| **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 | % |
| Advance 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 | % |

 

**Capital Resources**

 

Total shareholders’equity was $52.0 million at December 31, 2008 and $41.0 million at December 31,2007.  The increase is attributable toadditional paid in capital related to the ESOP of $124,920, an increase in theguarantee of ESOP borrowings of $95,360, net of current year reductions, thenet proceeds of from the issuance of preferred stock and common stock warrantsof $14,448,000, an increase of $1,030,616 in the fair value of available forsale securities and stock-based compensation expense of $700,509, net of theloss of $4,954,583 for the year ended December 31, 2008. Since ourinception, we have not paid any cash dividends.

 

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Thefollowing table shows the return on average assets (net income divided byaverage total assets), return on average equity (net income divided by averageequity), and average equity to average assets ratio (average equity divided byaverage total assets) for the years ended December 31, 2008, 2007 and2006:

 
| ** **                | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|----------|------------|
| Return on  average assets |       | (0.81    | )%         | 0.10     | %          | 0.52     | %          |
| Return on  average equity |       | (12.40   | )%         | 1.00     | %          | 5.38     | %          |
| Equity to assets  ratio   |       | 6.50     | %          | 9.51     | %          | 9.73     | %          |

 

The Federal Reserve andbank regulatory agencies require bank holding companies and financialinstitutions to maintain capital at adequate levels based on a percentage ofassets and off-balance sheet exposures, adjusted for risk weights ranging from0% to 100%.  Under the capital adequacyguidelines, 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.

 

Tobe considered “well-capitalized,” we must maintain total risk-based capital ofat least 10%, Tier 1 capital of at least 6%, and a leverage ratio of at least5%. To be considered “adequately capitalized” under capital guidelines, we mustmaintain a minimum total risk-based capital of 8%, with at least 4% being Tier1 capital.  In addition, we must maintaina minimum Tier 1 leverage ratio of at least 4%.

 

Thefollowing table sets forth the company’s various capital ratios at December 31,2008 and 2007.  For all periods, thecompany was in compliance with regulatory capital requirements established bythe Federal Reserve Board’s Capital Adequacy Guidelines for Bank HoldingCompanies.

 

**Tidelands Bancshares, Inc.**

 
| ** **                       | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
| Leverage ratio                   |       | 9.03     | %          | 9.58     | %          |
| Tier 1  risk-based capital ratio |       | 12.96    | %          | 11.39    | %          |
| Total risk-based  capital ratio  |       | 14.20    | %          | 12.39    | %          |

 

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

 

**Tidelands Bank**

 
| ** **                       | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
| Leverage ratio                   |       | 7.49     | %          | 9.93     | %          |
| Tier 1  risk-based capital ratio |       | 10.77    | %          | 11.80    | %          |
| Total risk-based  capital ratio  |       | 12.02    | %          | 12.80    | %          |

 

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 the companyand the bank.  Net proceeds from theoffering were approximately $14.9 million. Upon closing the transaction, the holding company line of credit wasrepaid in full. On February 22, 2006, Tidelands Statutory Trust, anon-consolidated subsidiary of the company, issued and sold floating ratecapital securities of the trust, generating net proceeds of $8.0 million.  The trust loaned these proceeds to the companyto use for general corporate purposes, primarily to provide capital to thebank. The junior subordinated debentures qualify as Tier 1 capital underFederal Reserve 

 

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Board guidelines. On October 10,2006, we closed a public offering in which 1,200,000 shares of our common stockwere issued at a purchase price of $15.00 per share.  Net proceeds after deducting the underwriter’sdiscount and expenses were $16.4 million.

 

On June 20, 2008,Tidelands Statutory Trust II (“Trust II”), a non-consolidated subsidiary of thecompany, issued and sold fixed/floating rate capital securities of the trust,generating proceeds of $6.0 million. Trust II loaned these proceeds to the company to use for generalcorporate purposes, primarily to provide capital to the bank.  The junior subordinated debentures qualifiesas Tier I under Federal Reserve Board guidelines.

 

On December 19, 2008, we entered into the CPP Purchase Agreementwith the Treasury, pursuant to which the company issued and sold to Treasury (i) 14,448shares of the company’s Series T Preferred Stock, having a liquidationpreference of $1,000 per share, and (ii) a ten-year warrant to purchase upto 571,821 shares of the company’scommon stock, par value $0.01 per share, at an initial exercise price of $3.79per share, for an aggregate purchase price of $14,448,000 in cash.   The Series T Preferred Stock qualifiesas Tier 1 capital under Federal Reserve Board guidelines.

 

**Effect of Inflation and ChangingPrices**

 

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

 

Unlike most industrial companies, ourassets 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 the effectof changing prices and inflation in general. In addition, interest rates may generally increase as the rate ofinflation increases, although not necessarily in the same magnitude.  As discussed previously, we seek to managethe relationships between interest sensitive assets and liabilities in order toprotect against wide rate fluctuations, including those resulting frominflation.

 

**Off-Balance SheetRisk**

 

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, 2008, unfunded commitments to extend credit were$32.5 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, 2008, there werecommitments totaling approximately $762,000 under letters of credit. The creditrisk and collateral involved in issuing letters of credit is essentially the sameas that involved in extending loan facilities to customers.  Since most of the letters of credit areexpected to expire without being drawn upon, they do not necessarily representfuture cash requirements.

 

Exceptas disclosed in this report, we are not involved in off-balance sheetcontractual relationships, unconsolidated related entities that haveoff-balance sheet arrangements, or transactions that could result in liquidityneeds 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

 

55

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marketrisk, such as foreign currency exchange rate risk and commodity price risk, donot generally arise in the normal course of our business.

 

Weactively monitor and manage our interest rate risk exposure principally bymeasuring our interest sensitivity “gap,” and net interest income simulations.Interest sensitivity gap is the positive or negative dollar difference betweenassets and liabilities that are subject to interest rate repricing within agiven period of time.  Interest ratesensitivity can be managed by repricing assets or liabilities, sellingsecurities available for sale, replacing an asset or liability at maturity, oradjusting the interest rate during the life of an asset or liability.  Managing the amount of assets and liabilitiesrepricing in this same time interval helps to hedge the risk and minimize theimpact on net interest income of rising or falling interest rates.  We generally would benefit from increasingmarket rates of interest when we have an asset-sensitive gap position andgenerally would benefit from decreasing market rates of interest when we areliability-sensitive.

 

Approximately 56.7% of our loans were variable rateloans at December 31, 2008 and 82.6% of interest-bearing liabilitiesreprice within one year. However, interest rate movements typically result inchanges in interest rates on assets that are different in magnitude from thecorresponding changes in rates paid on liabilities.   While, a substantial portion of our loansreprice within the first three months of the year, a larger majority of ourdeposits will reprice within a 12-month period.   However, our gap analysis is not a preciseindicator of our interest sensitivity position. The analysis presents only a static view of the timing of maturities andrepricing opportunities, without taking into consideration that changes ininterest rates do not affect all assets and liabilities equally.  For example, rates paid on a substantialportion of core deposits may change contractually within a relatively shorttime frame, but those rates are viewed by us as significantly lessinterest-sensitive than market-based rates such as those paid on noncoredeposits.  Net interest income may beaffected by other significant factors in a given interest rate environment,including changes in the volume and mix of interest-earning assets andinterest-bearing liabilities.

 

**Liquidity and Interest Rate Sensitivity**

 

Liquidity represents the ability of a company toconvert assets into cash or cash equivalents without significant loss, and theability to raise additional funds by increasing liabilities.  Liquidity management involves monitoring oursources and uses of funds in order to meet our day-to-day cash flow requirementswhile maximizing profits.  Liquiditymanagement is made more complicated because different balance sheet componentsare 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, 2008 and 2007, our liquid assets,which consist of cash and due from banks and federal funds sold, amounted to$42.8 million and $2.7 million, or 6.00% and 0.5% of total assets,respectively.  Our available for salesecurities at December 31, 2008 and 2007 amounted to $171.8 million and$88.0 million, or 24.0% and 17.2% of total assets, respectively.  Investment securities traditionally provide asecondary source of liquidity since they can be converted into cash in a timelymanner.  However, approximately $64.1million of these securities are pledged against outstanding debt or borrowinglines of credit.  Therefore, the relateddebt would need to be repaid prior to the securities being sold in order forthese securities to be converted 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.  We maintain four federal funds purchasedlines of credit with correspondent banks totaling $27.5 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, 2008, we had $60.8million in total advances and letters of credit from the FHLB with an excesslendable collateral value of approximately $8.6 million.

 

Asset/liabilitymanagement is the process by which we monitor and control the mix andmaturities of our assets and liabilities. The essential purposes ofasset/liability management are to ensure adequate liquidity and to maintain anappropriate balance between interest sensitive assets and liabilities in orderto minimize potentially

 

56

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adverseimpacts on earnings from changes in market interest rates.  Our risk management committee monitors andconsiders methods of managing exposure to interest rate risk.  The risk management committee is responsiblefor maintaining the level of interest rate sensitivity of our interestsensitive assets and liabilities within board-approved limits.

 

Thefollowing table sets forth information regarding our rate sensitivity, as of December 31,2008, at each of the time intervals.  Theinformation in the table may not be indicative of our rate sensitivity positionat other points in time.  In addition,the maturity distribution implied in the table may differ from the contractualmaturities of the earning assets and interest-bearing liabilities presented dueto consideration of prepayment speeds under various interest rate changescenarios and other embedded optionality in the application of the interestrate sensitivity methods described above.

** **
| ** **                                       | ** ** | **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                              |       | $                                    | 40,375     |                                                      | $          | —                                               |       | $                      | —     |      | $          | — |   | $ | 40,375 |   |
| Investment  securities                           |       | 15,908                               |       | 56,632                                                    |       | 45,519                                               |       | 53,711                 |       | 171,770   |       |
| Loans                                            |       | 266,335                              |       | 20,438                                                    |       | 113,460                                              |       | 61,734                 |       | 461,967   |       |
| Total  interest-earning assets                   |       | $                                    | 322,618    |                                                      | $          | 77,070                                               |       | $                      | 158,979    |      | $          | 115,445 |   | $ | 674,112 |   |
|                                             |       |                                 |       |                                                      |       |                                                 |       |                   |       |      |       |
| Interest-bearing  liabilities:                   |       |                                 |       |                                                      |       |                                                 |       |                   |       |      |       |
| Money market and  NOW                            |       | $                                    | 229,494    |                                                      | $          | —                                               |       | $                      | —     |      | $          | — |   | $ | 229,494 |   |
| Regular savings                                  |       | 350                                  |       | —                                                    |       | —                                               |       | —                 |       | 350       |       |
| Time deposits                                    |       | 81,792                               |       | 175,725                                                   |       | 61,096                                               |       | 635                    |       | 319,248   |       |
| Junior  subordinated debentures                  |       | 8,248                                |       | —                                                    |       | —                                               |       | 6,186                  |       | 14,434    |       |
| Securities sold  under agreements to repurchase  |       | —                               |       | —                                                    |       | 20,000                                               |       | —                 |       | 20,000    |       |
| Advances from  Federal Home Loan Bank            |       | 35,800                               |       | —                                                    |       | 6,000                                                |       | 19,000                 |       | 60,800    |       |
| ESOP borrowings                                  |       | 2,600                                |       | —                                                    |       | —                                               |       | —                 |       | 2,600     |       |
| Other borrowings                                 |       | 616                                  |       | —                                                    |       | —                                               |       | —                 |       | 616       |       |
| Total  interest-bearing liabilities              |       | $                                    | 358,900    |                                                      | $          | 175,725                                              |       | $                      | 87,096     |      | $          | 25,821 |   | $ | 647,542 |   |
|                                             |       |                                 |       |                                                      |       |                                                 |       |                   |       |      |       |
| Period gap                                       |       | $                                    | (36,282    | )                                                         | $          | (98,655                                              | )          | $                      | 71,883     |      | $          | 89,624 |   | $ | 26,570 |   |
| Cumulative gap                                   |       | $                                    | (36,282    | )                                                         | $          | (134,937                                             | )          | $                      | (63,054    | )         | $          | 26,570 |   | $ | 26,570 |   |
|                                             |       |                                 |       |                                                      |       |                                                 |       |                   |       |      |       |
| Ratio of  cumulative gap to total earning assets |       | (5.38                                | )%         | (20.02                                                    | )%         | (9.35                                                | )%         | 3.94                   | %          | 3.94      | %          |

 

57

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**Item8:  Financial Statements andSupplementary Data.**

** **

**INDEX TO AUDITED FINANCIAL STATEMENTS**

 

**TIDELANDSBANCSHARES, INC. AND SUBSIDIARY**

 
| Report of Independent Registered Public Accounting  Firm                                                                                             |   | F-2    |
|------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                                                                 |   |   |
| Consolidated Balance Sheets as of December 31,  2008 and 2007                                                                                   |   | F-3    |
|                                                                                                                                                 |   |   |
| Consolidated Statements of Operations for the years  ended December 31, 2008, 2007 and 2006                                                     |   | F-4    |
|                                                                                                                                                 |   |   |
| Consolidated Statements of Changes in Shareholders’  Equity and Comprehensive Income for the years ended December 31, 2008,  2007 and 2006 |   | F-5    |
|                                                                                                                                                 |   |   |
| Consolidated Statements of Cash Flows for the years  ended December 31, 2008, 2007 and 2006                                                     |   | F-6    |
|                                                                                                                                                 |   |   |
| Notes to Consolidated Financial Statements                                                                                                           |   | F-7    |

 

The accompanying notesare integral to these financial statements.

 

F-1

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## **REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

## ** **

The Board of Directors

Tidelands Bancshares, Inc.

Mount Pleasant, South Carolina

 

We have audited the accompanying consolidated balance sheets ofTidelands Bancshares, Inc. and its subsidiary as of December 31, 2008and 2007 and the related consolidated statements of operations, changes inshareholders’ equity and comprehensive income, and cash flows for each of thethree years in the period ended December 31, 2008.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

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

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of TidelandsBancshares, Inc., and its subsidiary, as of December 31, 2008 and2007 and the results of their operations and their cash flows for each of thethree years in the period ended December 31, 2008, in conformity with U.S.generally accepted accounting principles.

 

We were not engaged to examine management’s assessment of about theeffectiveness of Tidelands Bancshares, Inc.’s internal control overfinancial reporting as of December 31, 2008 included in the accompanyingManagement’s Report on Internal Control over Financial Reporting and,accordingly, we do not express an opinion thereon.

 

 

Elliott Davis, PLLC

Charlotte, North Carolina

March 16, 2009

 

The accompanying notesare integral to these financial statements.

 

F-2

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**TidelandsBancshares, Inc. and Subsidiary**

# **Consolidated Balance Sheets**

 
| ** **                                                                                                                                                                              | ** ** | **December 31,** | ** **      | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|-----------------|-----------------------|------------|
| ** **                                                                                                                                                                              | ** ** | **2008**              | ** **      | **2007**              | ** ** |
| **Assets:**                                                                                                                                                                             |       |                  |            |                  |       |
| Cash and cash  equivalents:                                                                                                                                                             |       |                  |            |                  |       |
| Cash and due  from banks                                                                                                                                                                |       | $                     | 2,471,797       |                  | $          | 724,957 |   |
| Federal funds  sold                                                                                                                                                                     |       | 40,375,000            |            | 1,945,000             |       |
| Total cash and  cash equivalents                                                                                                                                                        |       | 42,846,797            |            | 2,669,957             |       |
| Securities  available-for-sale                                                                                                                                                          |       | 171,769,851           |            | 88,036,109            |       |
| Nonmarketable  equity securities                                                                                                                                                        |       | 3,807,140             |            | 2,060,940             |       |
| Total securities                                                                                                                                                                        |       | 175,576,991           |            | 90,097,049            |       |
| Mortgage loans  held for sale                                                                                                                                                           |       | 241,500               |            | 1,426,800             |       |
| Loans receivable                                                                                                                                                                        |       | 461,967,217           |            | 391,349,869           |       |
| Less allowance  for loan losses                                                                                                                                                         |       | 7,635,173             |            | 4,158,324             |       |
| Loans, net                                                                                                                                                                              |       | 454,332,044           |            | 387,191,545           |       |
| Premises,  furniture and equipment, net                                                                                                                                                 |       | 19,411,592            |            | 17,759,388            |       |
| Accrued interest  receivable                                                                                                                                                            |       | 3,337,660             |            | 3,164,124             |       |
| Bank owned life  insurance                                                                                                                                                              |       | 13,335,170            |            | 7,849,156             |       |
| Other assets                                                                                                                                                                            |       | 6,101,069             |            | 2,111,572             |       |
| Total assets                                                                                                                                                                            | ** ** | **$**                 | **715,182,823** | ** **            | **$**      | **512,269,591** | ** ** |
|                                                                                                                                                                                    |       |                  |            |                  |       |
| **Liabilities:**                                                                                                                                                                        |       |                  |            |                  |       |
| Deposits:                                                                                                                                                                               |       |                  |            |                  |       |
| Noninterest-bearing  transaction accounts                                                                                                                                               |       | $                     | 12,133,098      |                  | $          | 10,191,152 |   |
| Interest-bearing  transaction accounts                                                                                                                                                  |       | 46,987,209            |            | 8,460,166             |       |
| Savings and  money market                                                                                                                                                               |       | 182,856,286           |            | 199,833,835           |       |
| Time deposits  $100,000 and over                                                                                                                                                        |       | 92,825,486            |            | 29,876,086            |       |
| Other time  deposits                                                                                                                                                                    |       | 226,423,397           |            | 139,808,202           |       |
| Total deposits                                                                                                                                                                          |       | 561,225,476           |            | 388,169,441           |       |
|                                                                                                                                                                                    |       |                  |            |                  |       |
| Securities sold  under agreements to repurchase                                                                                                                                         |       | 20,000,000            |            | 41,040,000            |       |
| Junior  subordinated debentures                                                                                                                                                         |       | 14,434,000            |            | 8,248,000             |       |
| Advances from  Federal Home Loan Bank                                                                                                                                                   |       | 60,800,000            |            | 29,000,000            |       |
| ESOP borrowings                                                                                                                                                                         |       | 2,600,000             |            | 2,427,500             |       |
| Other borrowings                                                                                                                                                                        |       | 615,837               |            | —                |       |
| Accrued interest  payable                                                                                                                                                               |       | 2,841,473             |            | 1,341,161             |       |
| Other  liabilities                                                                                                                                                                      |       | 706,605               |            | 1,088,319             |       |
| Total  liabilities                                                                                                                                                                      |       | 663,223,391           |            | 471,314,421           |       |
| Commitments and  contingencies                                                                                                                                                          |       | —                |            | —                |       |
|                                                                                                                                                                                    |       |                  |            |                  |       |
| **Shareholders’  equity:**                                                                                                                                                         |       |                  |            |                  |       |
| Preferred stock,  $1,000 par value, 10,000,000 shares authorized, 14,448 issued and outstanding  at December 31, 2008                                                              |       | 13,335,752            |            | —                |       |
| Common stock,  $.01 par value, 10,000,000 shares authorized; 4,277,176 and 4,277,176 shares  issued and outstanding at December 31, 2008 and December 31, 2007,  respectively |       | 42,772                |            | 42,772                |       |
| Common  stock-warrants, 571,821 shares outstanding at December 31, 2008                                                                                                            |       | 1,112,248             |            | —                |       |
| Unearned ESOP  shares                                                                                                                                                                   |       | (2,522,860            | )               | (2,427,500            | )          |
| Capital surplus                                                                                                                                                                         |       | 43,364,255            |            | 42,788,666            |       |
| Retained  earnings (deficit)                                                                                                                                                            |       | (4,905,419            | )               | 49,164                |       |
| Accumulated  other comprehensive income                                                                                                                                                 |       | 1,532,684             |            | 502,068               |       |
| Total  shareholders’ equity                                                                                                                                                        |       | 51,959,432            |            | 40,955,170            |       |
| Total  liabilities and shareholders’ equity                                                                                                                                        | ** ** | **$**                 | **715,182,823** | ** **            | **$**      | **512,269,591** | ** ** |

 

The accompanying notesare integral to these financial statements.

 

F-3

----

 

**Tidelands Bancshares, Inc.and Subsidiary**

**ConsolidatedStatements of Operations**

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

** **
| ** **                                                        | ** ** | **2008**      | ** **     | **2007**      | ** ** | **2006**      | ** ** |
|-------------------------------------------------------------------|------------|---------------|----------------|---------------|------------|---------------|------------|
| **Interest  income:**                                             | ** ** | ** **    | ** **     | ** **    | ** ** | ** **    | ** ** |
| Loans, including  fees                                            |       | $             | 27,378,906     |          | $          | 27,805,332    |       | $ | 20,130,292 |   |
| Securities  available-for-sale, taxable                           |       | 6,805,459     |           | 2,462,876     |       | 1,306,995     |       |
| Securities  available-for-sale, non-taxable                       |       | 286,844       |           | 439,719       |       | 6,832         |       |
| Federal funds  sold                                               |       | 280,973       |           | 701,701       |       | 323,084       |       |
| Other interest  income                                            |       | 5,116         |           | 16,211        |       | 2,648         |       |
| Total interest  income                                            |       | 34,757,298    |           | 31,425,839    |       | 21,769,851    |       |
| **Interest  expense:**                                            | ** ** | ** **    | ** **     | ** **    | ** ** | ** **    | ** ** |
| Time deposits  $100,000 and over                                  |       | 2,634,756     |           | 562,024       |       | 486,814       |       |
| Other deposits                                                    |       | 14,153,141    |           | 16,256,750    |       | 10,059,639    |       |
| Other borrowings                                                  |       | 3,554,669     |           | 2,415,800     |       | 1,401,680     |       |
| Total interest  expense                                           |       | 20,342,566    |           | 19,234,574    |       | 11,948,133    |       |
| **Net  interest income**                                          |       | 14,414,732    |           | 12,191,265    |       | 9,821,718     |       |
| Provision for  loan losses                                        |       | 4,665,000     |           | 1,025,000     |       | 1,222,000     |       |
| **Net  interest income after provision for loan losses**          |       | 9,749,732     |           | 11,166,265    |       | 8,599,718     |       |
|                                                              |       |          |           |          |       |          |       |
| **Noninterest  income (loss):**                                   | ** ** | ** **    | ** **     | ** **    | ** ** | ** **    | ** ** |
| Service charges  on deposit accounts                              |       | 36,340        |           | 35,476        |       | 23,631        |       |
| Residential  mortgage origination income                          |       | 383,341       |           | 764,130       |       | 664,454       |       |
| Gain (loss) on  sale of securities available-for-sale             |       | 509,373       |           | 37,637        |       | (136,628      | )          |
| Gain on sale of  real estate                                      |       | 12,865        |           | 9,488         |       | 13,686        |       |
| Other service  fees and commissions                               |       | 362,029       |           | 192,697       |       | 144,236       |       |
| Bank owned life  insurance                                        |       | 484,352       |           | 290,032       |       | 59,124        |       |
| Other than  temporary impairment on securities available-for-sale |       | (4,596,200    | )              | —        |       | —        |       |
| Other                                                             |       | 32,352        |           | 25,407        |       | 18,614        |       |
| Total  noninterest income (loss)                                  |       | (2,775,548    | )              | 1,354,867     |       | 787,117       |       |
| **Noninterest  expense:**                                         | ** ** | ** **    | ** **     | ** **    | ** ** | ** **    | ** ** |
| Salaries and  employee benefits                                   |       | 8,322,117     |           | 6,918,015     |       | 4,483,848     |       |
| Net occupancy                                                     |       | 1,423,198     |           | 1,029,784     |       | 486,311       |       |
| Furniture and  equipment                                          |       | 734,497       |           | 484,146       |       | 297,637       |       |
| Other operating                                                   |       | 4,147,955     |           | 3,400,883     |       | 1,756,233     |       |
| Total  noninterest expense                                        |       | 14,627,767    |           | 11,832,828    |       | 7,024,029     |       |
| **Income  (loss) before income taxes**                            |       | (7,653,583    | )              | 688,304       |       | 2,362,806     |       |
| Income tax  expense (benefit)                                     |       | (2,699,000    | )              | 275,000       |       | 874,000       |       |
| **Net  income (loss)**                                            | ** ** | **$**         | **(4,954,583** | **)**         | **$**      | **413,304**   | ** ** | **$** | **1,488,806** | ** ** |
| **Earnings  (loss) per common share**                             | ** ** | ** **    | ** **     | ** **    | ** ** | ** **    | ** ** |
| Basic earnings  (loss) per share                                  | ** ** | **$**         | **(1.22**      | **)**         | **$**      | **0.10**      | ** ** | **$** | **0.45** | ** ** |
| Diluted earnings  (loss) per share                                | ** ** | **$**         | **(1.22**      | **)**         | **$**      | **0.10**      | ** ** | **$** | **0.44** | ** ** |
| **Weighted  average common shares outstanding**                   | ** ** | ** **    | ** **     | ** **    | ** ** | ** **    | ** ** |
| Basic                                                             | ** ** | **4,050,301** | ** **     | **4,214,910** | ** ** | **3,327,103** | ** ** |
| Diluted                                                           | ** ** | **4,050,301** | ** **     | **4,270,005** | ** ** | **3,327,505** | ** ** |

 

The accompanying notesare integral to these financial statements.

 

F-4

----

 

**Tidelands Bancshares, Inc.and Subsidiary**

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

**For theyears ended December 31, 2008, 2007 and 2006**

 
| ** **                                                               | ** ** | ** **            | ** ** | ** ** | ** ** | ** **               | ** ** | ** **    | ** ** | ** **  | ** ** | ** **   | ** **     | ** **        | ** ** | ** **     | ** ** | **Accumulated**        | ** **     | ** ** | ** ** |
|--------------------------------------------------------------------------|------------|-----------------------|------------|------------|------------|--------------------------|------------|---------------|------------|-------------|------------|--------------|----------------|-------------------|------------|----------------|------------|------------------------|----------------|------------|------------|
| ** **                                                               | ** ** | ** **            | ** ** | ** ** | ** ** | **Common**               | ** ** | ** **    | ** ** | ** **  | ** ** | **Unearned** | ** **     | ** **        | ** ** | **Retained**   | ** ** | **other**              | ** **     | ** ** | ** ** |
| ** **                                                               | ** ** | **Common Stock** | ** ** | **Stock**  | ** ** | **Preferred Stock** | ** ** | **ESOP**      | ** ** | **Capital** | ** ** | **Earnings** | ** **     | **comprehensive** | ** ** | ** **     | ** ** |
| ** **                                                               | ** ** | **Shares**            | ** ** | **Amount** | ** ** | **Warrants**             | ** ** | **Shares**    | ** ** | **Amount**  | ** ** | **Shares**   | ** **     | **Surplus**       | ** ** | **(deficit)**  | ** ** | **income (loss)** | ** **     | **Total**  | ** ** |
| **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** | ** ** |
| ** **                                                               | ** ** | ** **            | ** ** | ** ** | ** ** | ** **               | ** ** | ** **    | ** ** | ** **  | ** ** | ** **   | ** **     | ** **        | ** ** | ** **     | ** ** | ** **             | ** **     | ** ** | ** ** |
| Allocation of  unearned ESOP shares                                      |       |                  |       |       |       |                     |       |          |       |        |       |         |           | (124,920          | )          |           |       |                   |           | (124,920   | )          |
| Stock based  compensation expense                                        |       |                  |       |       |       |                     |       |          |       |        |       |         |           | 700,509           |       |           |       |                   |           | 700,509    |       |
| Net proceeds  from issuance of preferred stock and common stock warrants |       |                  |       |       |       | 1,112,248                |       | 14,448        |       | 13,335,752  |       |         |           |              |       |           |       |                   |           | 14,448,000 |       |
| Guarantee of  ESOP borrowings, net of current year repayments            |       |                  |       |       |       |                     |       |          |       |        |       | (95,360      | )              |              |       |           |       |                   |           | (95,360    | )          |
| Net loss                                                                 |       |                  |       |       |       |                     |       |          |       |        |       |         |           |              |       | (4,954,583     | )          |                   |           | (4,954,583 | )          |
| Other  comprehensive income, net of taxes of $631,667                    | ** ** | ** **            |       |       | ** ** | ** **               | ** ** | ** **    |       |        |       |         |           |              |       |           |       | 1,030,616              |           | 1,030,616  |       |
| Comprehensive  loss                                                      |       |                  |       |       |       |                     |       |          |       |        |       |         |           |              |       |           |       |                   |           | (3,923,967 | )          |
| **Balance,  December 31, 2008**                                     | ** ** | **4,277,176**         | ** ** | **$**      | **42,772** | ** **               | **$**      | **1,112,248** | ** ** | **14,448**  | ** ** | **$**        | **13,335,752** | ** **        | **$**      | **(2,522,860** | **)**      | **$**                  | **43,364,255** | ** ** | **$**      | **(4,905,419** | **)** | **$** | **1,532,684** | ** ** | **$** | **51,959,432** | ** ** |

 

The accompanying notesare integral to these financial statements.

 

F-5

----

 

**TidelandsBancshares, Inc. and Subsidiary**

**Consolidated Statements of Cash Flows**

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

 
| ** **                                                                                   | ** ** | **2008**     | ** **     | **2007**     | ** ** | **2006**       | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------|----------------|--------------|------------|----------------|------------|
| **Cash  flows from operating activities:**                                                   |       |         |           |         |       |           |       |
| Net income  (loss)                                                                           |       | $            | (4,954,583     | )            | $          | 413,304        |       | $ | 1,488,806 |   |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities:    |       |         |           |         |       |           |       |
| Provision for  loan losses                                                                   |       | 4,665,000    |           | 1,025,000    |       | 1,222,000      |       |
| Depreciation and  amortization expense                                                       |       | 883,785      |           | 575,079      |       | 278,129        |       |
| Discount accretion  and premium amortization                                                 |       | (26,587      | )              | (36,236      | )          | (35,739        | )          |
| Stock based  compensation expense                                                            |       | 700,509      |           | 699,964      |       | 247,586        |       |
| Increase in  deferred income tax                                                             |       | (2,285,890   | )              | (211,396     | )          | (135,768       | )          |
| Proceeds from  sale of residential mortgages held-for-sale                                   |       | 28,700,877   |           | 52,245,300   |       | 41,466,629     |       |
| Disbursements  for residential mortgages held-for-sale                                       |       | (27,515,577  | )              | (51,114,666  | )          | (42,859,214    | )          |
| Decrease in  accrued interest receivable                                                     |       | (173,536     | )              | (1,243,845   | )          | (1,015,051     | )          |
| Increase in  accrued interest payable                                                        |       | 1,500,312    |           | 369,729      |       | 526,433        |       |
| Increase in cash  surrender value of life insurance                                          |       | (484,352     | )              | (290,032     | )          | (59,124        | )          |
| Gain from sale  of real estate                                                               |       | (12,865      | )              | (9,488       | )          | (13,686        | )          |
| (Gain) loss from  sale of securities available-for-sale                                      |       | (509,373     | )              | (37,637      | )          | 136,628        |       |
| Other than  temporary impairment on securities available-for-sale                            |       | 4,596,200    |           | —       |       | —         |       |
| Increase in  other assets                                                                    |       | (529,889     | )              | (229,338     | )          | (668,227       | )          |
| Increase  (decrease) in other liabilities                                                    |       | (381,714     | )              | 688,818      |       | 244,598        |       |
| Net cash  provided by operating activities                                                   |       | 4,172,317    |           | 2,844,556    |       | 824,000        |       |
| **Cash  flows from investing activities:**                                                   | ** ** | ** **   | ** **     | ** **   | ** ** | ** **     | ** ** |
| Purchases of  nonmarketable equity securities                                                |       | (1,746,200   | )              | (878,840     | )          | (1,031,500     | )          |
| Purchases of  securities available-for-sale                                                  |       | (153,041,623 | )              | (64,389,788  | )          | (38,719,833    | )          |
| Proceeds from  sales of securities available-for-sale                                        |       | 55,037,945   |           | 12,514,016   |       | 11,428,559     |       |
| Proceeds from  calls and maturities of securities available-for-sale                         |       | 11,871,982   |           | 2,059,570    |       | 1,893,347      |       |
| Net increase in  loans receivable                                                            |       | (73,606,103  | )              | (118,473,417 | )          | (93,549,961    | )          |
| Purchase of bank  owned life insurance                                                       |       | (5,001,662   | )              | —       |       | (7,500,000     | )          |
| Purchase of  premises, furniture and equipment, net                                          |       | (2,527,908   | )              | (9,540,078   | )          | (3,531,438     | )          |
| Net cash used by  investing activities                                                       |       | (169,013,569 | )              | (178,708,537 | )          | (131,010,826   | )          |
| **Cash  flows from financing activities:**                                                   | ** ** | ** **   | ** **     | ** **   | ** ** | ** **     | ** ** |
| Net increase in  demand deposits, interest-bearing transaction accounts and savings accounts |       | 23,491,440   |           | 64,233,139   |       | 23,023,661     |       |
| Net increase in  certificates of deposit and other time deposits                             |       | 149,564,595  |           | 64,803,605   |       | 61,460,584     |       |
| Proceeds on  other borrowings                                                                |       | 615,837      |           | —       |       | —         |       |
| Repayments on  notes payable and other borrowings                                            |       | —       |           | —       |       | (1,571,151     | )          |
| Proceeds from  securities sold under agreements to repurchase                                |       | —       |           | 31,040,000   |       | 3,500,000      |       |
| Repayments on  securities sold under agreements to repurchase                                |       | (21,040,000  | )              | —       |       | —         |       |
| Proceeds from  junior subordinated debentures                                                |       | 6,186,000    |           | —       |       | 8,248,000      |       |
| Proceeds from  FHLB advances                                                                 |       | 31,800,000   |           | 13,000,000   |       | 16,000,000     |       |
| Proceeds from  ESOP borrowings                                                               |       | 472,500      |           | 2,527,500    |       | —         |       |
| Repayment of  ESOP borrowings                                                                |       | (300,000     | )              | (100,000     | )          | —         |       |
| Increase in  unearned ESOP shares                                                            |       | (220,280     | )              | (2,427,500   | )          | —         |       |
| Proceeds from  issuance of common stock, net                                                 |       | —       |           | —       |       | 16,454,045     |       |
| Proceeds from issuance  of preferred stock, net                                              |       | 13,335,752   |           | —       |       | —         |       |
| Proceeds from  issuance of common stock-warrants                                             |       | 1,112,248    |           | —       |       | —         |       |
| Proceeds from  exercise of stock options                                                     |       | —       |           | 43,199       |       | 257,625        |       |
| Net cash  provided by financing activities                                                   |       | 205,018,092  |           | 173,119,943  |       | 127,372,764    |       |
| **Net  increase (decrease) in cash and cash equivalents**                                    |       | 40,176,840   |           | (2,744,038   | )          | (2,814,062     | )          |
| **Cash  and cash equivalents, beginning of period**                                          |       | 2,669,957    |           | 5,413,995    |       | 8,228,057      |       |
| **Cash  and cash equivalents, end of period**                                                | ** ** | **$**        | **42,846,797** | ** **   | **$**      | **2,669,957**  | ** ** | **$** | **5,413,995** | ** ** |
| **Cash  paid during the period for:**                                                        | ** ** | ** **   | ** **     | ** **   | ** ** | ** **     | ** ** |
| Income taxes                                                                                 | ** ** | **$**        | **—**     | ** **   | **$**      | **160,107**    | ** ** | **$** | **1,298,152** | ** ** |
| Interest                                                                                     | ** ** | **$**        | **18,842,254** | ** **   | **$**      | **18,864,846** | ** ** | **$** | **11,421,701** | ** ** |

### ** **

The accompanying notesare integral to these financial statements.

 

F-6

----

 

### **NOTE 1 - SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

### ** **

**Organization**- Tidelands Bancshares, Inc. (the “Company”) was incorporated on January 31,2002 to serve as a bank holding company for its subsidiary, Tidelands Bank (the“Bank”).  The Company operated as adevelopment stage company from January 31, 2002 to October 5,2003.  Tidelands Bank commenced businesson October 6, 2003.  The principalbusiness activity of the Bank is to provide banking services to domesticmarkets, principally in Charleston, Dorchester, Berkeley, Horry and Beaufortcounties in South Carolina.  The Bank isa state-chartered commercial bank, and its deposits are insured by the FederalDeposit Insurance Corporation.  Theconsolidated financial statements include the accounts of the parent companyand its wholly-owned subsidiary after elimination of all significantintercompany balances and transactions. On February 22, 2006, the Companyformed Tidelands Statutory Trust I for the purpose of issuing trust preferredsecurities. In accordance with current accounting guidance, the Trust is notconsolidated in these financial statements. On June 20, 2008, the Companyformed Tidelands Statutory Trust II for the purpose of issuing trust preferredsecurities. In accordance with current accounting guidance, the Trust is notconsolidated in these financial statements. As further discussed in Note 19, onDecember 19, 2008, as part of the Capital Purchase Program established bythe U.S. Department of the Treasury under the Emergency Economic StabilizationAct of 2008, Tidelands Bancshares, Inc. issued 14,448 preferred shares and571,821warrants in return for $14.4 million in cash, to the U.S. Department ofTreasury.

 

**Management’s Estimates** - Thepreparation of consolidated financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of income andexpenses during the reporting period. Actual results could differ from those estimates.

 

Material estimates that are particularly susceptible to significantchange relate to the determination of the allowance for losses on loans,including valuation allowances for impaired loans, and the valuation of realestate acquired in connection with foreclosures or in satisfaction of loans.  In connection with the determination of theallowances for losses on loans and foreclosed real estate, management obtainsindependent appraisals for significant properties.  Management must also make estimates indetermining the estimated useful lives and methods for depreciating premisesand equipment.

 

While management uses available information to recognize losses onloans and foreclosed real estate, future additions to the allowances may benecessary based on changes in local economic conditions.  In addition, regulatory agencies, as anintegral part of their examination process, periodically review the Bank’sallowances for losses on loans and foreclosed real estate. Such agencies mayrequire the Bank to recognize additions to the allowances based on their judgmentsabout information available to them at the time of their examination.  Because of these factors, it is reasonablypossible that the allowances for losses on loans and foreclosed real estate maychange materially in the near term.

 

**Concentrations of 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 loans to individuals and small businesses for variouspersonal and commercial purposes primarily in the Charleston metropolitan area(which includes Charleston, Dorchester, and Berkeley counties), Horry andBeaufort 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 monitoring potential concentrations of loans toparticular borrowers or groups of borrowers, industries and geographic regions,management monitors exposure to credit risk from concentrations of lendingproducts and practices such as loans that subject borrowers to substantialpayment increases (e.g., principal deferral periods, loans with initialinterest-only periods, etc.), and loans with high loan-to-value ratios.   Additionally, there are industry practicesthat could subject the Company to increased credit risk should economicconditions change over the course

 

F-7

----

 

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 not subjectthe Company to unusual credit risk.

 

The Company’s investment portfolio consists principally of obligationsof the United States and its agencies or its corporations.  In the opinion of management, there is noconcentration of credit risk in its investment portfolio.  The Company places its deposits andcorrespondent accounts with and sells its federal funds to high qualityinstitutions.  Management believes creditrisk associated with correspondent accounts is not significant.

 

**Securities Available-for-Sale**-Securities available-for-sale are carried at amortized cost and adjusted toestimated market value by recognizing the aggregate unrealized gains or lossesin a valuation account.  Aggregate marketvaluation adjustments are recorded in shareholders’ equity net of deferredincome taxes.  Reductions in market valueconsidered by management to be other than temporary are reported as a realizedloss and a reduction in the cost basis of the security. The adjusted cost basisof investments available-for-sale is determined by specific identification andis used in computing the gain or loss upon sale.

 

**Nonmarketable Equity Securities**- Nonmarketable equity securities include the cost of the Company’s investmentin the stock of the Federal Home Loan Bank and stock in community bank holdingcompanies.  The  Federal Home Loan Bank stock has no quotedmarket value and no ready market exists. Investment in the Federal Home Loan Bank is a condition of borrowingfrom the Federal Home Loan Bank, and the stock is pledged to collateralize suchborrowings.  Dividends received on thisstock are included as interest income on securities available-for-sale.

 

**Loans Receivable** - Loans arestated at their unpaid principal balance. Interest income on loans is computed based upon the unpaid principalbalance.  Interest income is recorded inthe period earned.

 

The accrual of interest income is generally discontinued when a loanbecomes contractually 90 days past due as to principal or interest.  Management may elect to continue the accrualof interest when the estimated net realizable value of collateral exceeds theprincipal balance and accrued interest. A payment of interest on a loan that isclassified as nonaccrual is applied against the principal balance. Other realestate owned is carried at net realizable value.

 

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

### ** **

Under Statement of Financial Accounting Standards (“SFAS”)No. 114, *Accounting by Creditors for Impairment of aLoan,*and SFAS 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 is measured based on the present value of expectedfuture cash flows discounted at the loan’s effective interest rate or the fairvalue of the collateral if the loan is collateral dependent.  When management determines that a loan isimpaired, the difference between the Company’s investment in the related loanand the present value of the expected future cash flows, or the fair value ofthe collateral, is charged to bad debt expense with a corresponding entry tothe allowance for loan losses.  Theaccrual of interest is discontinued on an impaired loan when managementdetermines the borrower may be unable to meet payments as they become due.

 

**Allowance for Loan Losses -**An allowance for loan losses is maintained at a level deemed appropriate bymanagement to provide adequately for known and inherent losses in the loanportfolio.  The allowance for loan lossesrepresents an amount which the Company believes will be adequate to absorbprobable losses on existing

 

F-8

----

 

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 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 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.

 

**ResidentialMortgage Loans Held-for-Sale** - The Company’s residentialmortgage lending activities for sale in the secondary market are comprised ofaccepting residential mortgage loan applications, qualifying borrowers tostandards established by investors, funding residential mortgage loans andselling mortgage 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 rate lock commitments to borrowers based on pricesquoted by secondary market investors. When rates are locked with borrowers, a sales commitment is immediatelyentered (on a best efforts basis) at a specified price with a secondary marketinvestor.  Accordingly, any potentialliabilities associated with rate lock commitments are offset by salescommitments to investors.

 

**Premises, Furniture and Equipment**- Premises, furniture and equipment are stated at cost, less accumulateddepreciation.  The provision fordepreciation is computed by the straight-line method, based on the estimateduseful lives for furniture and equipment of five to 10 years and buildings of40 years.  Leasehold improvements areamortized over the life of the leases, which range from one to 40 years.  The cost of assets sold or otherwise disposedof and the related allowance for depreciation are eliminated from the accountsand the resulting gains or losses are reflected in the income statement when incurred.  Maintenance and repairs are charged tocurrent expense.  The costs of majorrenewals and improvements are capitalized.

 

**Securities Sold Under Agreements to Repurchase**- The Bank enters into sales of securities under agreements to repurchase.  Fixed-coupon repurchase agreements 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 taxesare the sum of amounts currently payable to taxing authorities and the netchanges in income taxes payable or refundable in future years.  Income taxes deferred to future years aredetermined utilizing a liability approach. This method gives consideration to the future tax consequencesassociated with differences between financial accounting and tax bases ofcertain assets and liabilities which are principally the allowance for loanlosses, depreciable premises and equipment, and the net operating loss carryforward.

 

**Retirement Plans** - TheCompany has a 401(k) profit sharing plan, which provides retirementbenefits to substantially all officers and employees who meet certain age andservice requirements.  The plan includesa “salary reduction” feature pursuant to Section 401(k) of theInternal Revenue Code.  At itsdiscretion, the Bank can make matching contributions of $.25 for every dollarcontributed up to 6% of the participants’ annual compensation. Additionally,the Company maintains supplemental retirement plans for certain highlycompensated employees designed to offset the impact of regulatory limits onbenefits under qualified pension plans. There are supplemental retirement plansin place for certain current employees.

 

F-9

----

 

**Bank Owned Life Insurance** -Bank owned life insurance (“BOLI”) represents life insurance on the lives ofcertain current and former employees who have provided positive consentallowing the Bank to be the beneficiary of such policies. The Bank purchasesBOLI in order to use its earnings to help offset the costs of the Bank’sbenefit expenses including pre- and post-retirement employee benefits.Increases in the cash surrender value (“CSV”) of the policies, as well as deathbenefits received net of any CSV, are recorded in other non-interest income,and are not subject to income taxes. The CSV of the policies are recorded asassets of the Bank. Any amounts owed to employees from policy benefits arerecorded as liabilities of the Bank. The Company reviews the financial strengthof the insurance carriers prior to the purchase of BOLI and annuallythereafter. BOLI with any individual carrier is limited to 15% of tier onecapital and BOLI in total is limited to 25% of tier one capital based onCompany policy.

 

**Stock Option Plan** - On May 10,2004, the Company established the 2004 Tidelands Bancshares, Inc. StockIncentive Plan (“Stock Plan”) that provides for the granting of options topurchase 20% of the outstanding shares of the Company’s common stock to directors,officers, or employees of the Company. The per-share exercise price of incentive stock options granted underthe Stock Plan may not be less than the fair market value of a share on thedate of grant and vest based on continued service with the Company for aspecified period, generally two to five years following the date of grant.  The per-share exercise price of stock optionsgranted is determined by a committee appointed by the Board of Directors.  The expiration date of any option may not begreater than 10 years from the date of grant. Options that expire, unexercised or are forfeited become available forreissuance.

 

**Employee Stock Ownership Plan******— The Companyestablished the Tidelands Bancshares, Inc. Employee Stock Ownership Plan (“ESOP”)for the exclusive benefit of all eligible employees and their beneficiariessubject to authority to amend, from time to time, or terminate, the ESOP. TheESOP is primarily designed to invest in common stock of the Company and ispermitted to purchase Company common stock with contributions to the ESOP madeby the Company.  Also, the ESOP ispermitted to borrow money and use the loan proceeds to purchase Company commonstock. The money and Company common stock in the ESOP is intended to grow taxfree until retirement, death, permanent disability or other severance ofemployment with the Company.  When anemployee retires, he/she will receive the value of the accounts that have beenset up for the contributions to the ESOP. An employee may also be eligible for benefits in the event of death,permanent disability or 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** - Basicearnings per share represent income available to shareholders divided by theweighted-average number of common shares outstanding during the period.  Dilutive earnings per share reflectadditional common shares that would have been outstanding if dilutive potentialcommon shares had been issued.  Potentialcommon shares that may be issued by the Company relate solely to outstandingstock options and are determined using the treasury stock method.  Weighted average shares outstanding arereduced for shares encumbered by the ESOP borrowings.

 

### **Comprehensive Income**- Accounting principles generally require thatrecognized 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-salesecurities, are reported as a separate component of the equity section of thebalance sheet, such items, along with net income, are components ofcomprehensive income.

### ** **

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

 

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

 

**Off-Balance-Sheet Financial Instruments**- 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.

 

F-10

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**Recently Issued Accounting Pronouncements** - The following is a summary of recent authoritativepronouncements that could impact the accounting, reporting, and/or disclosureof financial information by the Company.

 

In December 2007, theFinancial Accounting Standards Board (“FASB”) issued SFAS No. 141(R), “BusinessCombinations,” (“SFAS 141(R)”) which replaces SFAS 141. SFAS 141(R) establishesprinciples and requirements for how an acquirer in a business combinationrecognizes and measures in its financial statements the identifiable assetsacquired, the liabilities assumed, and any controlling interest; recognizes andmeasures goodwill acquired in the business combination or a gain from a bargainpurchase; and determines what information to disclose to enable users of thefinancial statements to evaluate the nature and financial effects of thebusiness combination. SFAS 141(R) is effective for acquisitions by theCompany taking place on or after January 1, 2009. Early adoption isprohibited. Accordingly, a calendar year-end company is required to record anddisclose business 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.

 

Also, in December 2007, theFASB 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 casesminority interest is reported as a liability and in others it is reported inthe mezzanine section between liabilities and equity. Specifically, SFAS 160requires the recognition of a noncontrolling interest (minority interest) asequity in the consolidated financial 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 was effective for theCompany on January 1, 2009.  SFAS160 will have no impact on the Company’s financial position, results ofoperations or cash flows.

 

In March 2008, the FASBissued SFAS No. 161, “Disclosures about Derivative Instruments and HedgingActivities,” (“SFAS 161”).  SFAS 161requires enhanced disclosures about an entity’s derivative and hedgingactivities, thereby improving the transparency of financial reporting.  It is intended to enhance the currentdisclosure framework in SFAS 133 by requiring that objectives for usingderivative instruments be disclosed in terms of underlying risk and accountingdesignation. This disclosure is intended to convey the purpose of derivativeuse in terms of the risks that the entity is intending to manage. SFAS 161 waseffective for the Company on January 1, 2009 and will result in additionaldisclosures if the Company enters into any material derivative or hedgingactivities.

 

In February 2008, the FASBissued FASB Staff Position No. 140-3, “Accounting for Transfers ofFinancial Assets and Repurchase Financing Transactions,” (“FSP 140-3”). This FSP provides guidance on accounting for a transfer of a financial assetand the transferor’s repurchase financing of the asset.  This FSP presumesthat an initial transfer of a financial asset and a repurchase financing areconsidered part of the same arrangement (linked transaction) under SFAS 140.However, if certain criteria are met, the initial transfer and repurchasefinancing are not evaluated as a linked transaction and are evaluatedseparately under SFAS 140.  FSP 140-3 was effective for the Company on January 1,2009.  The adoption of FSP 140-3 will have no impact on the Company’sfinancial position, results of operations or cash flows.

 

In April 2008, the FASBissued FASB Staff Position No. 142-3, “Determination of the Useful Life ofIntangible Assets,” (“FSP 142-3”).  ThisFSP amends the factors that should be considered in developing renewal orextension assumptions used to determine the useful life of a recognized intangibleasset under SFAS No. 142, “Goodwill and Other Intangible Assets,” (“SFAS142”).  The intent of this FSP is toimprove the consistency between the useful life of a recognized intangibleasset under SFAS 142 and the period of expected cash flows used to measure thefair 

 

F-11

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value of the asset under SFAS141(R) and other U.S. generally accepted accounting principles.  This FSP was effective for the Company on January 1,2009 and will have no material impact on the Company’s financial position,results of operations or cash flows.

 

In May, 2008, the FASB issuedSFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles,”(“SFAS 162”).  SFAS 162 identifies thesources of accounting principles and the framework for selecting the principlesused in the preparation of financial statements of nongovernmental entitiesthat are presented in conformity with generally accepted accounting principles(GAAP) in the United States (the GAAP hierarchy).  SFAS 162 is effective November 15,2008.  The FASB has stated that it doesnot expect SFAS 162 will result in a change in current practice. Theapplication of SFAS 162 had no effect on the Company’s financial position,results of operations or cash flows.

 

In June, 2008, the FASB issuedFASB Staff Position No. EITF 03-6-1, “Determining Whether InstrumentsGranted in Share-Based Payment Transactions are Participating Securities,” (“FSPEITF 03-6-1”).  The Staff Positionprovides that unvested share-based payment awards that contain nonforfeitablerights to dividends or dividend equivalents are participating securities andmust be included in the earnings per share computation.  FSP EITF 03-6-1 was effective January 1,2009 and will have no material effect on the Company’s financial position,results of operations or cash flows.

 

FSP SFAS 133-1 and FIN 45-4, “Disclosuresabout Credit Derivatives and Certain Guarantees: An Amendment of FASB StatementNo. 133 and FASB Interpretation No. 45; and Clarification of theEffective Date of FASB Statement No. 161,” (“FSP SFAS 133-1 and FIN 45-4”)was issued September 2008, effective for reporting periods (annual orinterim) ending after November 15, 2008. FSP SFAS 133-1 and FIN 45-4 amends SFAS 133 to require the seller ofcredit derivatives to disclose the nature of the credit derivative, the maximumpotential amount of future payments, fair value of the derivative, and thenature of any recourse provisions. Disclosures must be made for entire hybrid instruments that haveembedded credit derivatives.

 

The Staff Position also amendsFASB Interpretation No. (“FIN”) 45 to require disclosure of the currentstatus of the payment/performance risk of the credit derivative guarantee.  If an entity utilizes internal groupings as abasis for the risk, how the groupings are determined must be disclosed as wellas how the risk is managed.

 

The Staff Position encouragesthat the amendments be applied in periods earlier than the effective date tofacilitate comparisons at initial adoption. After initial adoption, comparative disclosures are required only forsubsequent periods.

 

FSP SFAS 133-1 and FIN 45-4clarifies the effective date of SFAS 161 such that required disclosures shouldbe provided for any reporting period (annual or quarterly interim) beginningafter November 15, 2008.  Theadoption of this Staff Position will have no material effect on the Company’sfinancial position, results of operations or cash flows.

 

The SEC’s Office of the ChiefAccountant and the staff of the FASB issued press release 2008-234 on September 30,2008 (“Press Release”) to provide clarifications on fair value accounting.  The Press Release includes guidance on theuse of management’s internal assumptions and the use of “market” quotes.  It also reiterates the factors in SEC StaffAccounting Bulletin (“SAB”) Topic 5M which should be considered whendetermining other-than-temporary impairment: the length of time and extent towhich the market value has been less than cost; financial condition and near-termprospects of the issuer; and the intent and ability of the holder to retain itsinvestment for a period of time sufficient to allow for any anticipatedrecovery in market value.

 

On October 10, 2008, theFASB issued FSP SFAS 157-3, “Determining the Fair Value of a Financial AssetWhen the Market for That Asset Is Not Active” (“FSP SFAS 157-3”). This FSPclarifies the application of SFAS No. 157, “Fair Value Measurements” (seeNote 24) in a market that is not active and provides an example to illustrate keyconsiderations in determining the fair value of a financial asset when themarket for that asset is not active.  TheFSP is effective upon issuance, including prior periods for which financialstatements have not been issued. For the Company, this FSP was effective forthe quarter ended September 30, 2008.

 

F-12

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The Company considered theguidance in the Press Release and in FSP SFAS 157-3 when conducting its reviewfor other-than-temporary impairment as of December 31, 2008 as discussedin Note 4.

 

FSP SFAS 140-4 and FIN 46(R)-8, “Disclosuresby Public Entities (Enterprises) about Transfers of Financial Assets andInterests in Variable Interest Entities,” (“FSP SFAS 140-4 and FIN 46(R)-8”)was issued in December 2008 to require public entities to discloseadditional information about transfers of financial assets and to requirepublic enterprises to provide additional disclosures about their involvementwith variable interest entities.  The FSPalso requires certain disclosures for public enterprises that are sponsors andservicers of qualifying special purpose entities.  The FSP is effective for the first reportingperiod ending after December 15, 2008. The Company does not transfer financial assets to variable interestentities and, therefore, this FSP will have no impact on the financial positionof the Company.

 

FSP SFAS 132(R)-1, “Employers’Disclosures about Postretirement Benefit Plan Assets,” (“FSP SFAS 132(R)-1”)issued in December 2008, provides guidance on an employer’s disclosuresabout plan assets of a defined benefit pension or other postretirement plan toprovide the users of financial statements with an understanding of: (a) howinvestment allocation decisions are made, including the factors that arepertinent to an understanding of investment policies and strategies; (b) themajor categories of plan assets; (c) the inputs and valuation techniquesused to measure the fair value of plan assets; (d) the effect of fairvalue measurements using significant unobservable inputs (Level 3) on changesin plan assets for the period; and (e) significant concentrations of riskwithin plan assets.

 

The Staff Position also requiresa nonpublic entity, as defined in SFAS 132, to disclose net periodic benefit costfor each period for which a statement of income is presented.  FSP SFAS 132(R)-1 is effective for fiscalyears ending after December 15, 2009. The Staff Position will require the Company to provide additionaldisclosures related it to its benefit plans.

 

FSP EITF 99-20-1, “Amendments tothe Impairment Guidance of EIFT Issue No. 99-20,” (“FSP EITF 99-20-1”) wasissued in January 2009.  Prior tothe Staff Position, other-than-temporary impairment was determined by usingeither EITF Issue No. 99-20, “Recognition of Interest Income andImpairment on Purchased Beneficial Interests and Beneficial Interests thatContinue to be Held by a Transferor in Securitized Financial Assets,” (“EITF99-20”) or SFAS No. 115, “Accounting for Certain Investments in Debt and EquitySecurities,” (“SFAS 115”) depending on the type of security.  EITF 99-20 required the use of marketparticipant assumptions regarding future cash flows regarding the probabilityof collecting all cash flows previously projected.  SFAS 115 determined impairment to be otherthan temporary if it was probable that the holder would be unable to collectall amounts due according to the contractual terms. To achieve a moreconsistent determination of other-than-temporary impairment, the Staff Positionamends EITF 99-20 to determine any other-than-temporary impairment based on theguidance in SFAS 115, allowing management to use more judgment in determiningany other-than-temporary impairment.  TheStaff Position is effective for interim and annual reporting periods endingafter December 15, 2008 and shall be applied prospectively.  Retroactive application is notpermitted.  Management has reviewed theCompany’s security portfolio and evaluated the portfolio for anyother-than-temporary impairments as discussed in Note 4.

 

Other accounting standards thathave been issued or proposed by the FASB or other standards-setting bodies arenot expected to have a material impact on the Company’s financial position,results of operations or cash flows.

 

**Risks and Uncertainties** - Inthe normal course of its business, the Company encounters two significant typesof risks: economic and regulatory.  Thereare three main components of economic risk: interest rate risk, credit risk and market risk.  The Company is subject to interest rate riskto the degree that its interest-bearing liabilities mature or reprice atdifferent speeds, or on different 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 to the regulations of various governmentalagencies.  These regulations can and dochange significantly 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.

 

F-13

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**Reclassifications** - Certaincaptions and amounts in the 2006 and 2007 financial statements werereclassified to conform to the 2008 presentation.

 

**NOTE 2 — OTHER COMPREHENSIVE INCOME**

** **

The change in the components of other comprehensive income and relatedtax effects are as follows:

 
| ** **                                                             | ** ** | **Year Ended December 31,** | ** **    |
|------------------------------------------------------------------------|------------|--------------------------------------------|---------------|
| ** **                                                             | ** ** | **2008**                                   | ** **    | **2007** | ** ** | **2006** | ** ** |
| Change in  unrealized gains (losses) on securities available-for-sale  |       | $                                          | (2,424,544    | ) | $ | 679,681 |   | $ | 288,022 |   |
| Reclassification  adjustment for (gains) losses realized in net income |       | (509,373                                   | )             | (37,637 | ) | 136,628 |   |
| Impairment on  securities available-for-sale                           |       | 4,596,200                                  |          | — |   | — |   |
| Net change in  unrealized gains on securities                          |       | 1,662,283                                  |          | 642,044 |   | 424,650 |   |
| Tax effect                                                             |       | (631,667                                   | )             | (236,295 | ) | (146,916 | ) |
| Net-of-tax  amount                                                     | ** ** | **$**                                      | **1,030,616** | ** ** | **$** | **405,749** | ** ** | **$** | **277,734** | ** ** |

** **

**NOTE 3 - CASH AND DUE FROM BANKS**

** **

The Company maintains cash balances with its correspondent banks tomeet reserve requirements determined by the Federal Reserve.  At December 31, 2008, the bank had $1.0million on deposit with the Federal Reserve Bank to meet thisrequirement. At December 31, 2007, the reserve requirement was met bythe cash balance in the vault.  At December 31,2008, the bank had $1.1 million in actual currency and cash on hand, $1.2million in due from non-interest bearing balances and $168,000 in due frominterest bearing balances.

 

**NOTE 4 - INVESTMENT SECURITIES**

 

The amortized cost and estimated fair values of securitiesavailable-for-sale were:

 
| ** **                        | ** ** | **Amortized** | ** **      | **Gross Unrealized** | ** ** | **Estimated** | ** ** |
|-----------------------------------|------------|---------------|-----------------|---------------------------|------------|---------------|------------|
| ** **                        | ** ** | **Cost**      | ** **      | **Gains**                 | ** ** | **Losses**    | ** ** | **Fair Value** | ** ** |
| **December 31,  2008**       |       |          |            |                      |       |          |       |   |   |
| U.S. government  agencies         |       | $             | —          |                      | $          | —        |       | $ | — |   | $ | — |   |
| Government-sponsored  enterprises |       | 61,105,520    |            | 1,109,228                 |       | —        |       | 62,214,748 |   |
| Mortgage-backed  securities       |       | 102,615,332   |            | 1,784,042                 |       | 232,486       |       | 104,166,888 |   |
| Municipals                        |       | 5,594,891     |            | 4,547                     |       | 211,223       |       | 5,388,215 |   |
| Preferred stocks                  |       | —        |            | —                    |       | —        |       | — |   |
| Total                             | ** ** | **$**         | **169,315,743** | ** **                | **$**      | **2,897,817** | ** ** | **$** | **443,709** | ** ** | **$** | **171,769,851** | ** ** |
| ** **                        | ** ** | ** **    | ** **      | ** **                | ** ** | ** **    | ** ** | ** ** | ** ** |
| **December 31,  2007**       | ** ** | ** **    | ** **      | ** **                | ** ** | ** **    | ** ** | ** ** | ** ** |
| U.S. government  agencies         |       | $             | —          |                      | $          | —        |       | $ | — |   | $ | — |   |
| Government-sponsored  enterprises |       | 47,271,695    |            | 646,562                   |       | 1,002         |       | 47,917,258 |   |
| 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 stocks                  |       | 3,553,000     |            | 71,914                    |       | 153,000       |       | 3,471,914 |   |
| Total                             | ** ** | **$**         | **87,244,285**  | ** **                | **$**      | **1,011,288** | ** ** | **$** | **219,464** | ** ** | **$** | **88,036,109** | ** ** |

 

The amortized cost and estimated fair values of investment securitiesat December 31, 2008, by contractual maturity dates, are shown in thefollowing chart.  Actual maturities maydiffer from contractual maturities because borrowers may have the right to callor prepay obligations with or without penalty. Mortgage-backed securities arepresented as a separate line item since pay downs are expected beforecontractual maturity dates.

 

F-14

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| ** **                              | ** ** | **Amortized Cost** | ** **      | **Fair Value** | ** ** |
|-----------------------------------------|------------|-------------------------|-----------------|---------------------|------------|
| Due within one  year                    |       | $                       | —          |                | $          | — |   |
| Due after one  year through five years  |       | —                  |            | —              |       |
| Due after five  years through ten years |       | 15,011,811              |            | 15,366,106          |       |
| Due after ten  years                    |       | 51,688,600              |            | 52,236,857          |       |
| Subtotal                                |       | 66,700,411              |            | 67,602,963          |       |
| Mortgage-backed  securities             |       | 102,615,332             |            | 104,166,888         |       |
| Total Securities                        | ** ** | **$**                   | **169,315,743** | ** **          | **$**      | **171,769,851** | ** ** |

 

At December 31, 2008 and 2007, investment securities with bookvalues of $62,762,434 and $52,472,339 and market values of $64,093,923 and$53,110,819, respectively, were pledged as collateral for securities sold underagreements to repurchase and Federal Home Loan Bank advances. Gross proceedsfrom the sale of investment securities totaled $55,037,945 and $12,514,016,resulting in gross realized gains of $509,373 and $37,637, net of taxes of$173,187 and $12,797, for the year ended 2008 and 2007, respectively. The saleof securities during the year ended December 31, 2006 resulted in grossrealized losses of $136,628 with gross proceeds from the sale totaling$11,428,559. The cost of investments sold is determined using the specificidentification method.

 

For investments where fair value is less thanamortized cost the following table shows gross unrealized losses and fairvalue, aggregated by investment category, and length of time that individualsecurities have been in a continuous unrealized loss position, at December 31,2008 and 2007.

 

Securities available-for-sale:

 
| ** **                        | ** ** | **Less than  Twelve months** | ** **     | **Twelve months or more** | ** ** | **Total**           | ** ** |
|-----------------------------------|------------|----------------------------------------|----------------|------------------------------------------|------------|---------------------|------------|
| ** **                        | ** ** | ** **                             | ** **     | **Unrealized**                           | ** ** | ** **          | ** ** | **Unrealized** | ** ** | ** ** | ** ** | **Unrealized** | ** ** |
| ** **                        | ** ** | **Fair value**                    | ** **     | **losses**                               | ** ** | **Fair value** | ** ** | **losses** | ** ** | **Fair value** | ** ** | **losses** | ** ** |
| **December 31,  2008**       |       |                                   |           |                                     |       |                |       |   |   |   |   |   |   |
| U.S. government  agencies         |       | $                                      | —         |                                     | $          | —              |       | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Government-sponsored  enterprises |       | —                                 |           | —                                   |       | —              |       | — |   | — |   | — |   |
| Mortgage-backed  securities       |       | 26,207,907                             |           | 232,486                                  |       | —              |       | — |   | 26,207,907 |   | 232,486 |   |
| Municipals                        |       | 4,781,488                              |           | 211,223                                  |       | —              |       | — |   | 4,781,488 |   | 211,223 |   |
| Preferred stock                   |       | —                                 |           | —                                   |       | —              |       | — |   | — |   | — |   |
| ** **                        | ** ** | **$**                                  | **30,989,395** | ** **                               | **$**      | **443,709**         | ** ** | **$** | **—** | ** ** | **$** | **—** | ** ** | **$** | **30,989,395** | ** ** | **$** | **443,709** |   |

 
| ** **                        | ** ** | **Less than  Twelve months** | ** **    | **Twelve months or more** | ** ** | **Total**           | ** ** |
|-----------------------------------|------------|----------------------------------------|---------------|------------------------------------------|------------|---------------------|------------|
| ** **                        | ** ** | ** **                             | ** **    | **Unrealized**                           | ** ** | ** **          | ** ** | **Unrealized** | ** ** | ** ** | ** ** | **Unrealized** | ** ** |
| ** **                        | ** ** | **Fair value**                    | ** **    | **losses**                               | ** ** | **Fair value** | ** ** | **losses** | ** ** | **Fair value** | ** ** | **losses** | ** ** |
| **December 31, 2007**        |       |                                   |          |                                     |       |                |       |   |   |   |   |   |   |
| 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 stocks                  |       | 300,000                                |          | 153,000                                  |       | —              |       | — |   | 300,000 |   | 153,000 |   |
| ** **                        | ** ** | **$**                                  | **8,640,242** | ** **                               | **$**      | **204,870**         | ** ** | **$** | **2,818,924** | ** ** | **$** | **14,594** | ** ** | **$** | **11,459,166** | ** ** | **$** | **219,464** |   |

 

Securities classified as available-for-sale are recorded at fair marketvalue.  Of the securities in anunrealized loss position, there were no securities in a continuous lossposition for 12 months or more at December 31, 2008. The Company has theability and intent to hold these securities until such time as the valuerecovers or the securities mature.  TheCompany believes, based on industry analyst reports and credit ratings, thatthe deterioration in value is attributable to changes in market interest ratesand is not in the credit quality of the issuer and therefore, these losses arenot considered other-than-temporary.

 

F-15

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Nonmarketable equitysecurities include the cost of the Company’s investment in the stock of theFederal Home Loan Bank and $151,640 of stock in community bank holdingcompanies for both periods ending December 31, 2008 and 2007,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, 2008 and 2007, the Company’s investment in FederalHome Loan Bank stock was $3,655,500 and $1,909,300, respectively.

 

The Company reviews itsinvestment securities portfolio at least quarterly and more frequently wheneconomic conditions warrant, assessing whether there is any indication ofother-than-temporary impairment (“OTTI”). This review is based on guidanceprovided in FASB Staff Position Nos. SFAS 115-1 and SFAS 124-1, “The Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments.”Factors considered in the review include estimated future cash flows, length oftime and extent to which market value has been less than cost, the financialcondition and near term prospects of the issuer, and our intent and ability toretain the security to allow for an anticipated recovery in market value.

 

If the review determinesthat there is OTTI, then an impairment loss is recognized in earnings equal tothe entire difference between the investment’s cost and its fair value at thebalance sheet date of the reporting period for which the assessment is made.The fair value of investments on which OTTI is recognized then becomes the newcost basis of the investment and this basis is not adjusted for subsequentrecoveries in fair value.

 

As a result of recentactions by the U.S. Treasury Department and the Federal Housing Finance Agency,effective in the third quarter of 2008, the Company recorded a pretax, non-cashimpairment charge of $4,596,200 for the OTTI of its investments in perpetual preferredsecurities issued by the Federal National Mortgage Association (Fannie Mae) andFederal National Mortgage Corporation (Freddie Mac).  The net-of-tax effect to earnings is$3,033,492.

 

### **NOTE5 - LOANS RECEIVABLE**

 

Major classifications of loans receivable are summarized as follows:

 
| ** **                      | ** ** | **December 31,** | ** **      |
|---------------------------------|------------|-----------------------|-----------------|
| ** **                      | ** ** | **2008**              | ** **      | **2007** | ** ** |
| Real estate -  construction     |       | $                     | 161,298,108     |   | $ | 159,814,556 |   |
| Real estate -  mortgage         |       | 268,499,717           |            | 204,068,162 |   |
| Commercial and  industrial      |       | 27,443,267            |            | 24,349,662 |   |
| Consumer and  other             |       | 4,935,890             |            | 3,466,949 |   |
| Deferred  origination fees, net |       | (209,765              | )               | (349,460 | ) |
| Total loans  receivable, gross  |       | 461,967,217           |            | 391,349,869 |   |
| Less allowance  for loan loss   |       | 7,635,173             |            | 4,158,324 |   |
| Total loans  receivable, net    | ** ** | **$**                 | **454,332,044** | ** ** | **$** | **387,191,545** | ** ** |

 

The composition ofgross loans by rate type is as follows:

 
| ** **           | ** ** | **December 31,** | ** **      |
|----------------------|------------|-----------------------|-----------------|
| ** **           | ** ** | **2008**              | ** **      | **2007** | ** ** |
| Variable rate  loans |       | $                     | 262,145,232     |   | $ | 221,524,585 |   |
| Fixed rate loans     |       | 199,821,985           |            | 169,825,284 |   |
| Total gross  loans   | ** ** | **$**                 | **461,967,217** | ** ** | **$** | **391,349,869** | ** ** |

 

Transactions in theallowance for loan losses during 2008, 2007 and 2006 are summarized below:

 
| ** **                              | ** ** | **2008**   | ** **      | **2007**   | ** ** | **2006**        | ** ** |
|-----------------------------------------|------------|------------|-----------------|------------|------------|-----------------|------------|
| Balance,  beginning of year             |       | $          | 4,158,324       |       | $          | 3,467,000       |       | $ | 2,245,000 |   |
| Provision  charged to operations        |       | 4,665,000  |            | 1,025,000  |       | 1,222,000       |       |
| Net loan charge  offs                   |       | (1,188,651 | )               | (334,426   | )          | —          |       |
| Net loan  recoveries                    |       | 500        |            | 750        |       | —          |       |
| Balance, end of  year                   | ** ** | **$**      | **7,635,173**   | ** ** | **$**      | **4,158,324**   | ** ** | **$** | **3,467,000** | ** ** |
| Gross loans  outstanding, end of period | ** ** | **$**      | **461,967,217** | ** ** | **$**      | **391,349,869** | ** ** | **$** | **273,210,128** | ** ** |

 

F-16

----

 

The following is a summary of information pertaining to impaired andnonaccrual loans at December 31:

 
| ** **                                                | ** ** | **2008**  | ** **     | **2007**   | ** ** | **2006**    | ** ** |
|-----------------------------------------------------------|------------|-----------|----------------|------------|------------|-------------|------------|
| Impaired loans  without a valuation allowance             |       | $         | 5,662,064      |       | $          | 389,095     |       | $ | 1,964,983 |   |
| Impaired loans  with a valuation allowance                |       | 5,819,495 |           | —     |       | —      |       |
| Total impaired  loans                                     | ** ** | **$**     | **11,481,559** | ** ** | **$**      | **389,095** | ** ** | **$** | **1,964,983** | ** ** |
|                                                      |       |      |           |       |       |        |       |
| Valuation  allowance related to impaired loans            |       | $         | 1,675,496      |       | $          | —      |       | $ | — |   |
| Average of  impaired loans during the year                |       | $         | 12,364,627     |       | $          | 606,480     |       | $ | 1,877,983 |   |
| Total nonaccrual  loans                                   |       | $         | 11,481,559     |       | $          | 389,095     |       | $ | 1,964,983 |   |
| Total loans past  due 90 days and still accruing interest |       | $         | —         |       | $          | —      |       | $ | — |   |

 

### **The allowance for loan losses, as apercent of gross loans outstanding, was 1.65%, 1.06% and 1.27% at December 31,2008, 2007 and 2006, respectively.  At December 31,2008, the Bank had twenty-five loans totaling $11,481,559, or 2.49% of grossloans, in nonaccrual status. At December 31, 2007, the Bank had threeloans totaling $389,095, or 0.10% of gross loans, in nonaccrual status.  There were no loans contractually past due 90days or more still accruing interest at December 31, 2008 or 2007. Inaddition, the Bank possessed $1,800,604 in other real estate owned during theperiod ending December 31, 2008. During the year ended December 31,2008, the bank transferred $1,890,605 into other real estate owned. For theperiod ending December 31, 2007 or 2006, the Bank did not possess anyother real estate owned. At December 31, 2008, the Bank had twenty-fiveimpaired loans totaling $11,481,559. Our analysis of SFAS No. 5, *Accounting for Contingencies*, and SFAS No. 114, *Accounting by Creditors for Impairment of a Loan* indicatesthat the level of the allowance for loan losses is appropriate to coverestimated credit losses on individually evaluated loans as well as estimatedcredit losses inherent in the remainder of the portfolio. We do not recognizeinterest income on loans that are impaired.**

 

At December 31,2008, loans totaling $31.4 million were pledged as collateral at the FederalHome Loan Bank.

 

**NOTE 6 - PREMISES, FURNITURE ANDEQUIPMENT**

 

Premises, furniture andequipment consist of the following:

 
| ** **                              | ** ** | **December 31,** | ** **     |
|-----------------------------------------|------------|-----------------------|----------------|
| ** **                              | ** ** | **2008**              | ** **     | **2007** | ** ** |
|                                    |       |                  |           |   |   |
| Land and land  improvements             |       | $                     | 3,265,318      |   | $ | 3,839,286 |   |
| Building and  leasehold improvements    |       | 13,289,774            |           | 10,667,697 |   |
| Furniture and  equipment                |       | 4,014,591             |           | 3,224,925 |   |
| Software                                |       | 568,953               |           | 495,633 |   |
| Construction in  progress               |       | 278,802               |           | 734,394 |   |
| Total                                   |       | 21,417,438            |           | 18,961,935 |   |
| Less,  accumulated depreciation         |       | 2,005,846             |           | 1,202,547 |   |
| Premises,  furniture and equipment, net | ** ** | **$**                 | **19,411,592** | ** ** | **$** | **17,759,388** | ** ** |

 

Depreciationexpense for the years ended December 31, 2008, 2007 and 2006 amounted to$883,785, $575,079 and $278,129, respectively. Construction in progress relates to the planned construction of anexecutive office building located at 830 Lowcountry Boulevard. For the yearended December 31, 2008 and 2007, the Bank capitalized $42,280 and$165,410, respectively, in interest related to the construction of our newbranch locations. There was no capitalized interest incurred during the yearended December 31, 2006.

 

F-17

----

 

### **NOTE7 - DEPOSITS**

### ** **

At December 31,2008, the scheduled maturities of certificates of deposit were as follows:

 

| **Maturing:** | ** ** | **Amount** | ** **      |
|---------------|------------|------------|-----------------|
| 2009          |       | $          | 257,644,670     |   |
| 2010          |       | 55,536,553 |            |
| 2011          |       | 4,584,497  |            |
| 2012          |       | 872,272    |            |
| 2013          |       | 502,891    |            |
| Thereafter    |       | 108,000    |            |
| Total         | ** ** | **$**      | **319,248,883** | ** ** |

 

At December 31, 2008and 2007, the Bank had customer relationships with seven deposit brokeragefirms, totaling $145.7 million and $104.5 million, respectively.

 

**NOTE 8 - SECURITIES SOLD UNDERAGREEMENTS TO REPURCHASE**

 

The Bank hasentered into sales of securities under agreements to repurchase.  These obligations to repurchase securitiessold are reflected as liabilities in the consolidated balance sheets andconsist of two obligations totaling $20.0 million at December 31, 2008. OnSeptember 21, 2007, the Bank borrowed $10.0 million under a five-yearrepurchase agreement at a fixed rate of 4.01%. On November 14, 2007, the Bank borrowed $10.0 million under anine-year repurchase agreement at a fixed rate of 3.50%.  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 $21,851,616 and $42,952,339 and fair values of $22,266,107 and $43,461,118at December 31, 2008 and 2007, respectively, are used as collateral forthe agreements.

 

Securities sold underrepurchase agreements are summarized as follows for the years ended December 31,2008 and 2007:

 
| ** **                                  | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|---------------------------------------------|------------|------------|------------|------------|------------|
| Amount  outstanding at year end             |       | $          | 20,000,000 |       | $          | 41,040,000 |   |
| Average amount  outstanding during year     |       | 35,187,060 |       | 14,828,329 |       |
| Maximum  outstanding at any month-end       |       | 50,000,000 |       | 41,040,000 |       |
| Weighted average  rate paid at year-end     |       | 3.76       | %          | 4.54       | %          |
| Weighted average  rate paid during the year |       | 3.58       | %          | 4.96       | %          |
|                                             |            |            |            |            |            |  |  |

 

**NOTE 9 -JUNIOR SUBORDINATED DEBENTURES**

 

On February 22, 2006, Tidelands Statutory Trust (the “Trust I”), a non-consolidated subsidiary of the Company, issued and sold floating rate capital securities of the trust (the “Trust I Securities”), generating proceeds of $8.0 million.  The Trust I 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 Trust I Securities in the transaction accrue and pay distributions quarterly at a rate per annum equal to the three-month LIBOR plus 1.38%, which was 5.14% during the period ending December 31, 2008.  The distribution rate payable on the Trust I 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 Trust I 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 Trust I Securities.

 

#### **TheTrust I Securities mature or are mandatorily redeemable upon maturity on March 30,2036 or upon earlier optional redemption as provided in the indenture.  The Company has the right to redeem the TrustI Securities in**

 

F-18

----

 

#### **wholeor in part, on or after March 30, 2011. The Company may also redeem the Trust I Securities prior to such datesupon occurrence of specified conditions and the payment of a redemptionpremium.**

#### ** **

On June 20, 2008, Tidelands Statutory Trust II (the “Trust II”), a non-consolidated subsidiary of the Company, issued and sold floating rate capital securities of the trust (the “Trust II Securities”), generating proceeds of $6.0 million.  The Trust II loaned these proceeds to the Company to use for general corporate purposes, primarily to provide capital to the Bank. The debentures qualify as Tier 1under Federal Reserve Board guidelines.

 

The Trust II Securities accrue and pay distributions quarterly at a rate equal to (i) 9.425% fixed for the first 5 years, and (ii) the three-month LIBOR rate plus 5.075% thereafter.  The distribution rate payable on the Trust II 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 Trust II Securities for a period not to exceed 20 consecutive quarterly periods, provided that no extension period may extend beyond the maturity date of June 30, 2038.  The Company has no current intention to exercise its right to defer payments of interest on the Trust II Securities.

 

#### **TheTrust II Securities mature or are mandatorily redeemable upon maturity on June 30,2038 or upon earlier optional redemption as provided in the indenture.  The Company has the right to redeem the TrustII Securities in whole or in part, on or after June 30, 2013.  The Company may also redeem the Trust II Securitiesprior to such dates upon occurrence of specified conditions and the payment ofa redemption premium.**

#### ** **

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

 

Other borrowingsare comprised of four advances totaling $60.8 million from the Federal Home LoanBank (“FHLB”).   On September 17,2007, the Bank borrowed $16.0 million under a five-year convertible advance ata fixed rate of 4.22%. On September 21, 2007, the Bank borrowed $9.0million under a 10-year convertible advance at a fixed rate of 3.96%.  On November 6, 2008, the Bank borrowed$20.9 million under a three-month fixed advance at a rate of 1.58%. On November 18,2008, the Bank borrowed $14.9 million under a four-month fixed advance at arate of 1.93%. All advances require interest only payments with principal andinterest due on maturity. The advances are collateralized by pledged FHLB stockand certain investment securities.  At December 31,2008, loans totaling $31.4 million were pledged as collateral at the FederalHome Loan Bank.

 

FHLB advances aresummarized as follows for the periods ended December 31, 2008 and 2007:

 
| ** **                                    | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|-----------------------------------------------|------------|------------|------------|------------|------------|
| Amount  outstanding at period end             |       | $          | 60,800,000 |       | $          | 29,000,000 |   |
| Average amount  outstanding during the period |       | 40,914,754 |       | 20,575,342 |       |
| Maximum  outstanding at any month-end         |       | 60,800,000 |       | 30,000,000 |       |
| Weighted average  rate at period-end          |       | 2.71       | %          | 4.20       | %          |
| Weighted average  rate during the period      |       | 3.51       | %          | 4.92       | %          |
|                                               |            |            |            |            |            |  |  |

 

**NOTE 11 -OTHER OPERATING EXPENSES**

 

Other operating expensesfor the years ended December 31, 2008, 2007 and 2006 are summarized below:

 
| ** **                                 | ** ** | **2008** | ** **    | **2007**   | ** ** | **2006**      | ** ** |
|--------------------------------------------|------------|----------|---------------|------------|------------|---------------|------------|
| Professional  fees                         |       | $        | 1,180,078     |       | $          | 1,107,653     |       | $ | 511,230 |   |
| Telephone  expenses                        |       | 162,106  |          | 153,174    |       | 74,666        |       |
| Office supplies,  stationery, and printing |       | 151,136  |          | 170,697    |       | 74,107        |       |
| Insurance                                  |       | 199,643  |          | 120,770    |       | 83,706        |       |
| Postage                                    |       | 22,965   |          | 26,001     |       | 24,152        |       |
| Data processing                            |       | 448,010  |          | 275,158    |       | 178,649       |       |
| Advertising and  marketing                 |       | 750,042  |          | 647,322    |       | 250,135       |       |
| FDIC Insurance                             |       | 484,000  |          | 238,885    |       | 24,366        |       |
| Other                                      |       | 749,975  |          | 661,223    |       | 535,222       |       |
| Total                                      | ** ** | **$**    | **4,147,955** | ** ** | **$**      | **3,400,883** | ** ** | **$** | **1,756,233** | ** ** |

 

F-19

----

 

### **NOTE12 - INCOME TAXES**

### ** **

For the years ended December 31,2008, 2007 and 2006 income tax expense consisted of the following:

 
| ** **                    | ** ** | **2008**   | ** **     | **2007** | ** ** | **2006**    | ** ** |
|-------------------------------|------------|------------|----------------|----------|------------|-------------|------------|
| Current portion:              |       |       |           |     |       |        |       |
| Federal                       |       | $          | 52,806         |     | $          | 459,977     |       | $ | 650,825 |   |
| State                         |       | —     |           | 26,419   |       | 87,407      |       |
| Total current                 |       | 52,806     |           | 486,396  |       | 738,232     |       |
| Deferred income  taxes        |       | (2,751,806 | )              | (211,396 | )          | 135,768     |       |
| Income tax  expense (benefit) | ** ** | **$**      | **(2,699,000** | **)**    | **$**      | **275,000** | ** ** | **$** | **874,000** | ** ** |

 

Deferred tax assetsrepresent the future tax benefit of deductible differences and, if it is morelikely than not that a tax asset will not be realized, a valuation allowance isrequired to reduce the recorded deferred tax assets to net realizablevalue.  As of December 31, 2008, theCompany has stated net operating losses for tax purposes of $2,506,498. Thisnet operating loss begins expiring in 2025. A valuation allowance is needed forthe South Carolina net operating loss deferred tax asset. Management believesit will fully realize all remaining tax deferred tax assets.

 

At December 31,2008, income tax returns from 2007, 2006 and 2005 remain subject to review bytax authorities.

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

 
| ** **                                        | ** ** | **December 31,** | ** **    |
|---------------------------------------------------|------------|-----------------------|---------------|
| ** **                                        | ** ** | **2008**              | ** **    | **2007** | ** ** | **2006** | ** ** |
| Deferred tax  assets:                             |       |                  |          |   |   |   |   |
| Allowance for  loan losses                        |       | $                     | 2,261,996     |   | $ | 984,449 |   | $ | 701,690 |   |
| Net operating  loss carry forward                 |       | 82,714                |          | 39,734 |   | 20,235 |   |
| Organization and  start-up costs                  |       | —                |          | 86,245 |   | 163,108 |   |
| Loan fees and  costs                              |       | 71,320                |          | 118,816 |   | 83,932 |   |
| Interest on  nonaccrual loans                     |       | 75,307                |          | 6,104 |   | 19,541 |   |
| Tax credit                                        |       | 95,753                |          | 18,038 |   | — |   |
| Stock option  expense                             |       | 34,997                |          | 21,879 |   | — |   |
| Deferred  compensation                            |       | 96,688                |          | — |   | — |   |
| Other than  temporary impairment (OTTI)           |       | 1,562,708             |          | — |   | — |   |
| Other                                             |       | 30,600                |          | 28,901 |   | 39,232 |   |
| Total deferred  tax assets                        |       | 4,312,083             |          | 1,304,166 |   | 1,027,738 |   |
| Valuation  allowance                              |       | 82,714                |          | — |   | — |   |
| Total net  deferred tax assets                    |       | 4,229,369             |          | 1,304,166 |   | 1,027,738 |   |
| Deferred tax  liabilities:                        | ** ** | ** **            | ** **    | ** ** | ** ** | ** ** | ** ** |
| Accumulated  depreciation                         |       | 342,381               |          | 166,891 |   | 129,093 |   |
| Prepaid expenses                                  |       | 61,424                |          | 63,517 |   | 36,284 |   |
| Unrealized gain  on securities available-for-sale |       | 921,424               |          | 289,757 |   | 53,462 |   |
| Total deferred  tax liabilities                   |       | 1,325,229             |          | 520,165 |   | 218,839 |   |
| Net deferred tax  asset                           | ** ** | **$**                 | **2,904,140** | ** ** | **$** | **784,001** | ** ** | **$** | **808,899** | ** ** |

 

F-20

----

 

A reconciliation betweenthe income tax expense and the amount computed by applying the federalstatutory rate of 34% for 2008, 2007 and 2006 to income before income taxesfollows:

 
| ** **                                          | ** ** | **2008**   | ** **     | **2007** | ** ** | **2006**   | ** ** |
|-----------------------------------------------------|------------|------------|----------------|----------|------------|------------|------------|
| ** **                                          | ** ** | **Amount** | ** **     | **Rate** | ** ** | **Amount** | ** ** | **Rate** | ** ** | **Amount** | ** ** | **Rate** | ** ** |
| Tax expense  (benefit) at statutory rate            |       | $          | (2,602,218     | )        | (34.0      | )%         | $          | 234,023 |   | 34.0 | % | $ | 803,354 |   | 34.0 | % |
| State income  tax, net of federal income tax effect |       | —     |           | —   | %          | 17,437     |       | 2.5 | % | 57,689 |   | 2.5 | % |
| Cash value of  life insurance                       |       | (164,680   | )              | (2.2     | )%         | —     |       | — | % | — |   | — | % |
| Stock based  compensation expense                   |       | 226,216    |           | 3.0      | %          | 210,250    |       | 30.6 | % | 57,113 |   | 2.4 | % |
| Tax exempt  interest                                |       | (97,527    | )              | (1.3     | )%         | (149,504   | )          | (21.7 | )% | — |   | — | % |
| Other                                               |       | (60,791    | )              | (0.8     | )%         | (37,206    | )          | (5.4 | )% | (44,156 | ) | (1.9 | )% |
| Income tax  expense (benefit)                       | ** ** | **$**      | **(2,699,000** | **)**    | **(35.3**  | )%         | **$**      | **275,000** | ** ** | **40.0** | % | **$** | **874,000** | ** ** | **37.0** | % |

 

**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 $198,956, $191,432 and $178,076 for the years ended December 31,2008, 2007 and 2006, 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.  The lease was terminated in April 2007.Rental expense under this operating lease agreement was $13,113 and $54,121 forthe years ended December 31, 2007 and 2006, 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 $3,000and was terminated in July 2007. In addition, the Bank leases a buildingfor the permanent Myrtle Beach branch location. The lease commenced on July 1,2007 and has a 20-year term at a monthly expense of $12,500.   The lease may be extended at the Bank’soption for two additional ten-year terms. Rental expense under these operatinglease agreements was $150,000, $104,000 and $23,604 for the years ended December 31,2008, 2007 and 2006. One of the Company’s directors is a 50% partner in OfficeDevelopers, LLC, which is the owner of an office building located at 1312Professional Drive in Myrtle Beach, SC in which Tidelands Bank is a tenant andis 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 $6,067 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. Rental expense under these operating lease agreements was $73,037,$53,783 and $12,155 for the years ended December 31, 2008, 2007 and 2006.

 

The Bank also leasedoffice 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 required minimum monthly paymentsof $3,000 and was terminated in March 2008. In addition, the Bank leasesoffice 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. The lease requires monthly payments of $13,203. Rental expenseunder these operating lease agreements was $167,440, $79,558 and $10,300 forthe years ended December 31, 2008, 2007 and 2006.

 

F-21

----

 

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 requires monthlypayments of $9,167 for the first five years, increased 71⁄2% every fifth yearthereafter.  Rental expense under thisoperating lease agreement was $110,000 and $67,072 for the years ended December 31,2008 and 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 may be extended at the Bank’s option for one additionalten-year term. The lease requires monthly payments of $10,000 that began on June 26,2008.  Rental expense under thisoperating lease agreement was $76,904 for the year ended December 31,2008.

 

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

 

| 2009       |   | $         | 816,165        |   |
|------------|--------|-----------|----------------|--------|
| 2010       |   | 822,312   |           |
| 2011       |   | 828,644   |           |
| 2012       |   | 842,558   |           |
| 2013       |   | 855,734   |           |
| Thereafter |   | 8,803,243 |           |
|       |   |      |           |
| ** ** |   | **$**     | **12,968,656** |   |

 

**NOTE 14 -RELATED PARTY TRANSACTIONS**

 

Certain parties(principally certain directors and executive officers of the Company, theirimmediate families and business interests) were loan customers of and had othertransactions 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.

 

Related party loantransactions for the years ended December 31, 2008 and 2007 are summarizedbelow:

 
| ** **                  | ** ** | **December 31,** | ** **     |
|-----------------------------|------------|-----------------------|----------------|
| ** **                  | ** ** | **2008**              | ** **     | **2007** | ** ** |
| Balance,  beginning of year |       | $                     | 15,886,034     |   | $ | 5,397,970 |   |
| New loans                   |       | 4,630,505             |           | 1,510,428 |   |
| Less loan  payments         |       | 3,947,008             |           | 1,024,064 |   |
| Other changes               |       | —                |           | 10,001,700 |   |
| Balance, end of  year       | ** ** | **$**                 | **16,569,531** | ** ** | **$** | **15,886,034** | ** ** |

 

Deposits from directorsand executive officers and their related interests totaled $1,479,175 and$801,800, at December 31, 2008 and 2007, respectively. As mentioned inNote 13, Director John Gandy is a 50% partner in Office Developers, LLC, whichis the owner of an office building in Myrtle Beach, SC in which Tidelands Bankis 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 (LOSS) PER SHARE**

 

Basic earnings (loss) pershare are computed by dividing net income by the weighted-average number ofcommon shares outstanding.  Dilutedearnings (loss) per share is computed by dividing net income by theweighted-average 

 

F-22

----

 

number of common sharesoutstanding and dilutive common share equivalents using the treasury stockmethod.  Dilutive common shareequivalents include common shares issuable upon the exercise of outstandingstock options.

 

Basic and dilutedearnings (loss) per share are computed below:

 
| ** **                                                  | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                  | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Basic  earnings (loss) per share computation:**           |       |                                       |       |   |   |   |   |
| Net income  (loss) available to common shareholders         |       | $                                          | (4,954,583 | ) | $ | 413,304 |   | $ | 1,488,806 |   |
| Average common  shares outstanding - basic                  |       | 4,050,301                                  |       | 4,214,910 |   | 3,327,103 |   |
| Basic net income  (loss) per share                          |       | $                                          | (1.22      | ) | $ | 0.10 |   | $ | 0.45 |   |
| **Diluted  earnings (loss) per share computation:**         |       |                                       |       |   |   |   |   |
| Net income  (loss) available to common shareholders         |       | $                                          | (4,954,583 | ) | $ | 413,304 |   | $ | 1,488,806 |   |
| Average common  shares outstanding - basic                  |       | 4,050,301                                  |       | 4,214,910 |   | 3,327,103 |   |
| Incremental  shares from assumed conversions: Stock options |       | —                                     |       | 55,095 |   | 45,402 |   |
| Average common  shares outstanding - diluted                |       | 4,050,301                                  |       | 4,270,005 |   | 3,372,505 |   |
| Diluted earnings  (loss) per share                          |       | $                                          | (1.22      | ) | $ | 0.10 |   | $ | 0.44 |   |

 

For the years ended December 31,2008, 2007 and 2006, there were 777,537, 247,590 and 8,165 options that wereanti-dilutive because the exercise price exceeded the average market price forthe period.

 

### **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.

 

Quantitative measuresestablished by regulation to ensure capital adequacy require the Company andBank to maintain minimum ratios of Tier 1 and total capital as a percentage ofassets and off-balance-sheet exposures, adjusted for risk weights ranging from0% to 100%.  Tier 1 capital consists ofcommon shareholders’ equity, excluding the unrealized gain or loss onsecurities 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.**

### ** **

As of December 31,2008 and 2007, management believes it is categorized as well-capitalized underthe regulatory framework for prompt corrective action.  There are no conditions or events thatmanagement believes have changed the Company’s and Bank’s category.

 

The following tablesummarizes the capital amounts and ratios of the Company and the regulatoryminimum 

 

F-23

----

 

requirements at December 31,2008 and 2007:

 
| ** **                                | ** ** | **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,  2008**               | ** ** | ** ** | ** ** | ** **                                   | ** ** | ** **                                                                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total capital  (to risk-weighted assets)  |       | $          | 68,338,000 |                                         | 14.20      | %                                                                                                 | $          | 38,495,760 |   | 8.00 | % | N/A |   | N/A |   |
| Tier 1 capital  (to risk-weighted assets) |       | 62,338,000 |       | 12.96                                        | %          | 19,247,880                                                                                        |       | 4.00 | % | N/A |   | N/A |   |
| Tier 1 capital  (to average assets)       |       | 62,338,000 |       | 9.03                                         | %          | 27,624,560                                                                                        |       | 4.00 | % | N/A |   | N/A |   |
| **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 |   |

 

The following tablesummarizes the capital amounts and ratios of the Bank and the regulatoryminimum requirements at December 31, 2008 and 2007:

 
| ** **                                | ** ** | **Actual** | ** ** | **For Capital  Adequacy Purposes** | ** ** | **To Be Well-  Capitalized Under  Prompt Corrective  Action Provisions** | ** ** |
|-------------------------------------------|------------|------------|------------|----------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|
| **Tidelands Bank**                   | ** ** | **Amount** | ** ** | **Ratio**                                    | ** ** | **Amount**                                                                                        | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| ** **                                | ** ** | ** ** | ** ** | ** **                                   | ** ** | ** **                                                                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **December 31,  2008**               | ** ** | ** ** | ** ** | ** **                                   | ** ** | ** **                                                                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total capital  (to risk-weighted assets)  |       | $          | 57,495,000 |                                         | 12.02      | %                                                                                                 | $          | 38,270,240 |   | 8.00 | % | $ | 47,837,800 |   | 10.00 | % |
| Tier 1 capital  (to risk-weighted assets) |       | 51,495,000 |       | 10.77                                        | %          | 19,135,120                                                                                        |       | 4.00 | % | 28,702,680 |   | 6.00 | % |
| Tier 1 capital  (to average assets)       |       | 51,495,000 |       | 7.49                                         | %          | 27,511,800                                                                                        |       | 4.00 | % | 34,389,750 |   | 5.00 | % |
| **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 | % |

 

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

### ** **

As of December 31,2008, the Company had unused lines of credit to purchase federal funds fromunrelated banks totaling $27.5 million. There were no balances outstandingrelated to any of these lines of credit as of December 31, 2008. Theselines of credit are available on a one to 14 day basis for general corporatepurposes.  In addition to these creditlines, unused credit availability at the Federal Home Loan Bank amounted to$39.0 million at December 31, 2008.

 

**NOTE 19 -SHAREHOLDERS’ EQUITY**

 

**PreferredStock** - In December 2008, in connection with theTARP Capital Purchase Program, established as part of the Emergency EconomicStabilization Act of 2008, the Company issued to the U.S. Treasury 14,448shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series T(the “Preferred Stock”), having a liquidation preference of $1,000 per share.The Preferred Stock has a dividend rate of 5% for the first five years and 9%thereafter. The Preferred Stock has a call feature after three years.

 

In connection with thesale of the Preferred Stock, the Company also issued to the U.S. Treasuryten-year warrants to purchase up to 571,821 shares of the Company’s commonstock (the “Warrants”), par value $0.01 per share at an initial exercise priceof $3.79 per share.

 

As required under theTARP Capital Purchase Program, dividend payments on and repurchase of theCompany’s common stock are subject to certain restrictions. For as long as thePreferred Stock is outstanding, no dividends may be declared or paid on theCompany’s common stock until all accrued and unpaid dividends on the PreferredStock are fully paid. In addition, the U.S. Treasury’s consent is required forany increase in dividends on common stock before the third anniversary ofissuance of the Preferred Stock and for any repurchase of any common stockexcept for repurchases of common shares in connection with benefit plans.

 

F-24

----

 

The Preferred Stock andWarrants were sold to the U.S. Treasury for an aggregate purchase price of$14,448,000 in cash. The purchase price was allocated between the PreferredStock and the Warrants based upon the relative fair values of each to arrive atthe amounts recorded by the Company. This resulted in the Preferred Stock beingissued at a discount which is being amortized on a level yield basis as acharge to retained earnings over an assumed life of five years.

 

**Restrictionson Dividends** - South Carolina banking regulationsrestrict the amount of dividends that can be paid to shareholders.  All of the Bank’s dividends to TidelandsBancshares, Inc. are payable only from the undivided profits of the Bank.  The Bank is authorized to pay cash dividendsup to 100% of net income in any calendar year without obtaining the priorapproval of the Commissioner of Banking provided that the Bank received acomposite rating of one or two at the last Federal or State regulatoryexamination.  Under Federal Reserve Boardregulations, the amounts of loans or advances from the Bank to the parentcompany are also restricted.

 

**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 to extendcredit 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 following table setsforth unused commitments to extend credit and standby letters of credit at December 31,2008 and 2007:

 
| ** **                    | ** ** | **2008** | ** **     | **2007**   | ** ** |
|-------------------------------|------------|----------|----------------|------------|------------|
| Commitments to  extend credit |       | $        | 31,750,422     |       | $          | 59,004,522 |   |
| Standby letters  of credit    |       | 761,765  |           | 1,397,360  |       |
| Total                         | ** ** | **$**    | **32,512,187** | ** ** | **$**      | **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.

 

F-25

----

 

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:

 
| ** **                | ** ** | **2008**  | ** ** | **2007**  | ** ** | **2006**  | ** ** |
|---------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
| Dividend yield            |       | 0.00      | %          | 0.00      | %          | 0.00      | %          |
| Expected  volatility      |       | 22.0-73.8 | %          | 19.5-24.6 | %          | 13.7-20.5 | %          |
| Risk-free  interest rate  |       | 1.79      | %          | 4.07      | %          | 4.64      | %          |
| Expected life  (in years) |       | 3.0 - 8.0 |       | 3.0 - 8.0 |       | 3.0 - 8.0 |       |

 

The weighted-average fairvalue of options granted during the years 2008, 2007 and 2006 is $2.11, $3.49and $5.05 respectively. The total intrinsic value of options exercised duringthe years ended December 31, 2007 and 2006 was $24,724 and $215,041,respectively. There were no options exercised during the year ending December 31,2008.

 

A summary of the statusof the Company’s Stock Plan as of December 31, 2008 and 2007 is presentedbelow:

 
| ** **                        | ** ** | **2008**    | ** ** | **2007**                               | ** ** |
|-----------------------------------|------------|-------------|------------|----------------------------------------|------------|
| ** **                        | ** ** | **Options** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Aggregate  Intrinsic  Value** | ** ** | **Options** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| Outstanding at  beginning of year |       | 708,320     |       | $                                      | 11.44      |   |   |   | 456,664 |   | $ | 12.17 |   |
| Granted                           |       | 122,452     |       | 4.36                                   |       |   |   | 273,160 |   | 10.38 |   |
| Exercised                         |       | —      |       | —                                 |       |   |   | (4,791 | ) | 9.02 |   |
| Forfeited                         |       | (53,235     | )          | 11.57                                  |       |   |   | (16,713 | ) | 14.77 |   |
| Outstanding at  end of year       | ** ** | **777,537** | ** ** | **$**                                  | **10.31**  | ** ** | **$** | **20,387** | ** ** | **708,320** | ** ** | **$** | **11.44** | ** ** |
| Options  exercisable at year-end  | ** ** | **360,408** | ** ** | ** **                             | ** ** | **$** | **285** | ** ** | **253,878** |   |   |   |
| Shares available  for grant (1)   | ** ** | **4,470**   | ** ** | ** **                             |       |   |   | **73,687** |   |   |   |

 

----

(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 of2008 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, 2008. This amount changes based on the fairvalue of the Company’s stock. For the years ended December 31, 2008, 2007and 2006, there was $700,509, $699,964 and $247,586 of total recognizedcompensation cost related to the share-based compensation arrangements grantedunder the Stock Plan.

 

A summary of the statusof the Company’s nonvested shares as of December 31, 2008 is presentedbelow:

 

| **Nonvested Shares**       | ** ** | **Shares**  | ** ** | **Weighted  Average  Grant-Date  Fair Value** | ** ** |
|---------------------------------|------------|-------------|------------|----------------------------------------------------|------------|
| Nonvested at  beginning of year |       | 454,442     |       | $                                                  | 4.04       |   |
| Granted                         |       | 122,452     |       | 2.11                                               |       |
| Vested                          |       | (119,662    | )          | 3.65                                               |       |
| Forfeited                       |       | (40,103     | )          | 4.25                                               |       |
| Nonvested at end  of year       | ** ** | **417,129** | ** ** | **$**                                              | **3.56**   | ** ** |

 

As of December 31,2008, there was $955,860 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 2.24years. The weighted average remaining term for exercisable options at December 31,2008 is 7.03 years. The total fair value of shares vested during the yearsended December 31, 2008, 2007 and 2006, was $436,949, $361,194 and$136,506, respectively.

 

F-26

----

 

The following tablesummarizes information about the stock options outstanding under the Company’sstock compensation plan at December 31, 2008:

 
| ** **                                  | ** ** | **Options Outstanding**              | ** ** | **Options Exercisable**                            | ** ** |
|---------------------------------------------|------------|-------------------------------------------|------------|---------------------------------------------------------|------------|
| **Range of Exercise Prices** | ** ** | **Number  Outstanding  at 12/31/08** | ** ** | **Weighted  Average  Remaining  Contractual Life** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number  Exercisable  at 12/31/08** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| $3.75 to $8.79                              |       | 111,914                                   |       | 9.98 years                                              |       | $ | 3.85 |   | 5,614 |   | $ | 5.56 |   |
| $8.80 to $9.00                              |       | 152,246                                   |       | 5.60 years                                              |       | $ | 8.80 |   | 149,517 |   | $ | 8.80 |   |
| $9.01 to $10.00                             |       | 239,863                                   |       | 8.63 years                                              |       | $ | 9.57 |   | 72,803 |   | $ | 9.66 |   |
| $10.01 to $15.00                            |       | 268,099                                   |       | 8.00 years                                              |       | $ | 14.41 |   | 128,259 |   | $ | 14.46 |   |
| $15.01 to $17.65                            |       | 5,415                                     |       | 7.55 years                                              |       | $ | 16.96 |   | 4,215 |   | $ | 17.17 |   |
|                                        |       | 777,537                                   |       | 8.01 years                                              |       | $ | 10.31 |   | 360,408 |   | $ | 11.04 |   |

 

**NOTE 22 - EMPLOYEE STOCKOWNERSHIP PLAN**

 

On May 17, 2007, theCompany 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 31,2008, the ESOP has purchased 241,916 outstanding shares. All employees of theCompany meeting certain tenure requirements are entitled to participate in theESOP. Compensation expense related to the ESOP was $252,220 for the year ended December 31,2008.  At December 31, 2008, theESOP has outstanding loans amounting to $2,600,000. Of the 241,916 shares theESOP has purchased, 38,608 shares have been released for allocation to planparticipants. The aggregate fair value of the 203,308 unallocated shares was$801,035 based on the $3.94 closing price of our common stock on December 31,2008.

 

**NOTE 23 — RETIREMENT PLAN**

 

The Company has a 401(k) profitsharing plan, which provides retirement benefits to a majority of officers andemployees 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 $60,075,$48,980 and $28,338, in 2008, 2007 and 2006, respectively.

 

The banking subsidiaryhas a Supplemental Executive Retirement Plan (Supplemental Plan).  This plan provides an annual post-retirementcash payment beginning after a chosen retirement date for certain officers ofthe Bank.  The officer will receive anannual payment from the Bank equal to the promised benefits.  In connection with this plan, life insurancecontracts were purchased on the officers. There was $284,375 expense related to the plan in 2008.

 

As of December 31,2008, total benefits expected to be paid in the next years equal $13,557,300,which commence payment in the year 2013 totaling $100,000. Total benefitsexpected to be paid between the years 2014 and 2018 equal $939,010 with$12,518,290 remaining in the years thereafter.

 

**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 

 

F-27

----

 

of significant financialinstruments:

 

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

 

***FederalFunds Sold*** - Federal funds sold are for a term of oneday, and the carrying amount approximates the fair value.

 

***Securities***- The fair values of securities available-for-sale equalthe carrying amounts, which are the quoted market prices. If quoted marketprices are not available, fair values are based on quoted market prices ofcomparable securities.  The carryingvalue of nonmarketable equity securities approximates the fair value since noready market exists for the stocks.

 

***MortgageLoans Held for Sale*** - The carrying value for mortgageloans held for sale is a reasonable estimate for fair value considering theshort time these loans are carried on the books.  Management determined that only minorfluctuations occurred in fixed rate mortgage loans available-for-sale;therefore the carrying amount approximates fair value.

 

# ***LoansReceivable***- For certaincategories of loans, such as variable rate loans which are repriced frequentlyand have no significant change in credit risk, fair values are based on thecarrying amounts.  The fair value ofother types of loans is estimated by discounting the future cash flows usingthe current rates at which similar loans would be made to borrowers withsimilar credit ratings and for the same remaining maturities.

# ** **

***Deposits*****- The fair value of demand deposits, savings, and moneymarket accounts is the amount payable on demand at the reporting date.  The fair values of certificates of depositare estimated using a discounted cash flow calculation that applies currentinterest rates to a schedule of aggregated expected maturities.

 

***OtherBorrowings*** - The carrying amounts of variable rate notesare reasonable estimates of fair value because they can be repriced frequently.

 

***SecuritiesSold Under Agreements to Repurchase*** - These repurchaseagreements have a fixed rate.  Due to theminor change in interest rates, management estimated the fair value using adiscounted cash flow calculation that applies the Company’s current borrowingrate for the securities sold under agreements to repurchase.

 

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

 

***Advancesfrom Federal Home Loan Bank***-******Thefair values 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 ofthese instruments is a reasonable estimate of fair value.

 

***EmployeeStock Ownership Plan Borrowings***- The carrying value ofthe ESOP borrowing is a reasonable estimate of fair value.

 

***Off-Balance-SheetFinancial Instruments*** - Fair values for off-balancesheet, credit-related financial instruments are based on fees currently chargedto enter into similar agreements, taking into account the remaining terms ofthe agreements and the counterparties’ credit standing.

 

F-28

----

 

The carrying values and estimated fair values of theCompany’s financial instruments are as follows:

 
| ** **                                                          | ** ** | **December 31,** | ** **  |
|---------------------------------------------------------------------|------------|-----------------------|-------------|
| ** **                                                          | ** ** | **2008**              | ** **  | **2007** | ** ** |
| ** **                                                          | ** ** | **Carrying  Amount**  | ** **  | **Estimated  Fair Value** | ** ** | **Carrying  Amount** | ** ** | **Estimated  Fair Value** | ** ** |
| **Financial  Assets:**                                              |       |                  |        |   |   |   |   |   |   |
| Cash and due  from banks                                            |       | $                     | 2,471,797   |   | $ | 2,471,797 |   | $ | 724,957 |   | $ | 724,957 |   |
| Federal funds  sold                                                 |       | 40,375,000            |        | 40,375,000 |   | 1,945,000 |   | 1,945,000 |   |
| Securities  available-for-sale                                      |       | 171,769,851           |        | 171,769,851 |   | 88,036,109 |   | 88,036,109 |   |
| Mortgage loans  held for sale                                       |       | 241,500               |        | 241,500 |   | 1,426,800 |   | 1,426,800 |   |
| Nonmarketable  equity securities                                    |       | 3,807,140             |        | 3,807,140 |   | 2,060,940 |   | 2,060,940 |   |
| Loans receivable                                                    |       | 461,967,217           |        | 472,328,217 |   | 391,349,869 |   | 402,265,869 |   |
| Accrued interest  receivable                                        |       | 3,337,660             |        | 3,337,660 |   | 3,164,124 |   | 3,164,124 |   |
| ** **                                                          | ** ** | ** **            | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Financial  Liabilities:**                                         |       |                  |        |   |   |   |   |   |   |
| Demand deposit,  interest-bearing transaction, and savings accounts |       | $                     | 241,976,593 |   | $ | 241,976,593 |   | $ | 218,485,153 |   | $ | 218,485,153 |   |
| Certificates of  deposit and other time deposits                    |       | 319,248,883           |        | 327,521,000 |   | 169,684,288 |   | 173,859,000 |   |
| Securities sold  under agreements to repurchase                     |       | 20,000,000            |        | 21,497,856 |   | 41,040,000 |   | 40,250,000 |   |
| Junior  subordinated debentures                                     |       | 14,434,000            |        | 14,434,000 |   | 8,248,000 |   | 8,248,000 |   |
| Advances from  Federal Home Loan Bank                               |       | 60,800,000            |        | 62,021,000 |   | 29,000,000 |   | 29,046,000 |   |
| Accrued interest  payable                                           |       | 2,841,473             |        | 2,841,473 |   | 1,341,161 |   | 1,341,161 |   |
| ESOP borrowings                                                     |       | 2,600,000             |        | 2,600,000 |   | 2,427,500 |   | 2,427,500 |   |
| Other borrowings                                                    |       | 615,837               |        | 615,837 |   | — |   | — |   |

 
| ** **                                    | ** ** | **Notional  Amount** | ** ** | **Estimated  Fair Value** | ** ** | **Notional  Amount** | ** ** | **Estimated  Fair Value** | ** ** |
|-----------------------------------------------|------------|----------------------|------------|--------------------------------|------------|----------------------|------------|--------------------------------|------------|
| **Off-Balance  Sheet Financial Instruments:** |       |                 |       |                           |       |                 |       |                           |       |
| Commitments to  extend credit                 |       | $                    | 31,750,422 |                           | $          | —               |       | $                              | 59,004,522 |   | $ | — |   |
| Letters of  credit                            |       | 761,765              |       | —                         |       | 1,397,360            |       | —                         |       |
|                                               |            |                      |            |                                |            |                      |            |                                |            |  |  |  |  |

 

Effective January 1,2008, the Company adopted SFAS No. 157, “Fair Value Measurements” (“SFAS157”) which provides a framework for measuring and disclosing fair value undergenerally accepted accounting principles. SFAS 157 requires disclosures aboutthe fair value of assets and liabilities recognized in the balance sheet inperiods subsequent to initial recognition.

 

SFAS 157 defines fairvalue as the exchange price that would be received for an asset or paid totransfer a liability (an exit price) in the principal or most advantageousmarket for the asset or liability in an orderly transaction between marketparticipants on the measurement date. SFAS 157 also establishes a fair valuehierarchy which requires an entity to maximize the use of observable inputs andminimize the use of unobservable inputs when measuring fair value. The standarddescribes three levels of inputs that may be used to measure fair value:

 
| Level 1 |   | Quoted prices in active  markets for identical assets or liabilities. Level 1 assets and liabilities  include debt and equity securities and derivative contracts that are traded  in an active exchange market, as well as U.S. Treasuries and money market  funds.                                                                                                                          |
|---------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                                                                                                                                                                          |
| Level 2 |   | Observable inputs other  than Level 1 prices such as quoted prices for similar assets or liabilities;  quoted prices in markets that are not active; or other inputs that are  observable or can be corroborated by observable market data for substantially  the full term of the assets or liabilities. Level 2 assets and liabilities  include debt securities with quoted prices that are |

 

F-29

----

 
|    |   | traded less frequently  than exchange-traded instruments, mortgage backed securities, municipal bonds  and corporate debt securities, and derivative contracts whose value is  determined using a pricing model with inputs that are observable in the  market or can be derived principally from or corroborated by observable  market data. This category generally includes certain derivative contracts  and impaired loans.                                                                                                                                                                                                                                                            |
|---------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| Level 3 |   | Unobservable inputs  that are supported by little or no market activity and that are significant  to the fair value of the assets or liabilities. Level 3 assets and  liabilities include financial instruments whose value is determined using  pricing models, discounted cash flow methodologies, or similar techniques, as  well as instruments for which the determination of fair value requires  significant management judgment or estimation. For example, this category  generally includes certain private equity investments, retained residual  interests in securitizations, residential mortgage servicing rights, and  highly-structured or long-term derivative contracts. |

 

Assets measured at fairvalue on a recurring basis are as follows as of December 31, 2008:

 
| ** **                                | ** ** | **Quoted market price  in active markets  (Level 1)** | ** ** | **Significant  other observable inputs  (Level 2)** | ** ** | **Significant  unobservable inputs  (Level 3)** | ** ** |
|-------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------------------|------------|
| Available-for-sale  investment securities |       | $                                                     | —     |                                                | $          | 171,769,851                                     |       | $ | — |   |
| Mortgage loans  held for sale             |       | —                                                |       | 241,500                                             |       | —                                          |       |
| **Total**                                 | ** ** | **$**                                                 | **—** | ** **                                          | **$**      | **172,011,351**                                 | ** ** | **$** | **—** | ** ** |

 

The Company predominantlylends with real estate serving as collateral on a substantial majority ofloans. Loans which are deemed to be impaired are primarily valued at the fairvalues of the underlying real estate collateral.

 

Assets measured at fairvalue on a nonrecurring basis are as follows as of December 31, 2008:

 
| ** **               | ** ** | **Quoted market  price in active markets  (Level 1)** | ** ** | **Significant other  observable inputs  (Level 2)** | ** ** | **Significant  unobservable inputs  (Level 3)** | ** ** |
|--------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------------------|------------|
| Impaired loans           |       | $                                                     | —     |                                                | $          | 11,481,559                                      |       | $ | — |   |
| Other real  estate owned |       | —                                                |       | 1,800,604                                           |       | —                                          |       |
| **Total**                | ** ** | **$**                                                 | **—** | ** **                                          | **$**      | **13,282,163**                                  | ** ** | **$** | **—** | ** ** |

 

The Company has no assetsor liabilities whose fair values are measured using level 3 inputs.

 

F-30

----

 

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

 

Presented below are thecondensed financial statements for Tidelands Bancshares, Inc. (ParentCompany Only).

 

**CondensedBalance Sheets**

** **
| ** **                                       | ** ** | **December 31,** | ** **     |
|--------------------------------------------------|------------|-----------------------|----------------|
| ** **                                       | ** ** | **2008**              | ** **     | **2007** | ** ** |
| **Assets:**                                      |       |                  |           |   |   |
| Cash                                             |       | $                     | 14,118,702     |   | $ | 203,334 |   |
| Other equity  securities                         |       | 151,640               |           | 151,640 |   |
| Investment in  banking subsidiary                |       | 53,027,410            |           | 49,940,976 |   |
| Other assets                                     |       | 2,317,112             |           | 1,334,720 |   |
| Total assets                                     | ** ** | **$**                 | **69,614,864** | ** ** | **$** | **51,630,670** | ** ** |
| ** **                                       | ** ** | ** **            | ** **     | ** ** | ** ** |
| **Liabilities  and shareholders’ equity:**  |       |                  |           |   |   |
| Junior  subordinated debentures                  |       | $                     | 14,434,000     |   | $ | 8,248,000 |   |
| ESOP borrowings                                  |       | 2,600,000             |           | 2,427,500 |   |
| Other borrowings                                 |       | 615,837               |           | — |   |
| Other  liabilities                               |       | 5,595                 |           | — |   |
| Shareholders’  equity                       |       | 51,959,432            |           | 40,955,170 |   |
| Total  liabilities and shareholders’ equity | ** ** | **$**                 | **69,614,864** | ** ** | **$** | **51,630,670** | ** ** |

 

**Condensed Statements of Operations**

 
| ** **                                                                                       | ** ** | **For the Years Ended December 31,** | ** **     |
|--------------------------------------------------------------------------------------------------|------------|-------------------------------------------|----------------|
| ** **                                                                                       | ** ** | **2008**                                  | ** **     | **2007** | ** ** | **2006** | ** ** |
| **Income:**                                                                                      |       |                                      |           |   |   |   |   |
| Income on trust  preferred securities                                                            |       | $                                         | 21,602         |   | $ | 16,862 |   | $ | 14,135 |   |
| Dividend paid  from subsidiary                                                                   |       | 396,575                                   |           | — |   | — |   |
| Total income                                                                                     |       | 418,177                                   |           | 16,862 |   | 14,135 |   |
| ** **                                                                                       | ** ** | ** **                                | ** **     | ** ** | ** ** | ** ** | ** ** |
| **Expense:**                                                                                     | ** ** | ** **                                | ** **     | ** ** | ** ** | ** ** | ** ** |
| Stock based  compensation                                                                        |       | 700,509                                   |           | 699,964 |   | 247,586 |   |
| Junior  subordinated debentures                                                                  |       | 724,023                                   |           | 560,806 |   | 470,118 |   |
| ESOP  compensation                                                                               |       | 252,220                                   |           | — |   | — |   |
| Other borrowings                                                                                 |       | 127,831                                   |           | — |   | — |   |
| Other                                                                                            |       | 89,990                                    |           | 24,000 |   | 16,000 |   |
| Total expense                                                                                    |       | 1,894,573                                 |           | 1,284,770 |   | 733,704 |   |
|                                                                                             |       |                                      |           |   |   |   |   |
| **Loss  before income taxes and equity in undistributed earnings (loss) of banking  subsidiary** |       | (1,476,396                                | )              | (1,267,908 | ) | (719,569 | ) |
| Income tax  benefit                                                                              |       | (466,000                                  | )              | (507,000 | ) | (266,000 | ) |
| Equity in  undistributed earnings of banking subsidiary                                          |       | (3,944,187                                | )              | 1,174,212 |   | 1,942,375 |   |
| **Net  income (loss)**                                                                           | ** ** | **$**                                     | **(4,954,583** | **)** | **$** | **413,304** | ** ** | **$** | **1,488,806** | ** ** |

 

F-31

----

 

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

 

**Condensed Statements of CashFlows**

** **
| ** **                                                                            | ** ** | **For the Years Ended December 31,** | ** **     |
|---------------------------------------------------------------------------------------|------------|-------------------------------------------|----------------|
| ** **                                                                            | ** ** | **2008**                                  | ** **     | **2007** | ** ** | **2006** | ** ** |
| **Cash  flows from operating activities:**                                            |       |                                      |           |   |   |   |   |
| Net income  (loss)                                                                    |       | $                                         | (4,954,583     | ) | $ | 413,304 |   | $ | 1,488,806 |   |
| Adjustments to  reconcile net income (loss) to net cash used by operating activities: |       |                                      |           |   |   |   |   |
| Increase in  other assets                                                             |       | (516,392                                  | )              | — |   | (248,000 | ) |
| Increase in  other liabilities                                                        |       | 5,595                                     |           | — |   | — |   |
| Equity in  undistributed (income) loss of subsidiary                                  |       | 3,944,187                                 |           | (1,174,212 | ) | (1,942,375 | ) |
| Increase in  deferred income taxes                                                    |       | (466,000                                  | )              | (507,000 | ) | (280,987 | ) |
| Stock based  compensation expense                                                     |       | 700,509                                   |           | 699,964 |   | 247,586 |   |
|                                                                                  |       |                                      |           |   |   |   |   |
| Net cash used by  operating activities                                                |       | (1,286,684                                | )              | (567,944 | ) | (734,970 | ) |
|                                                                                  |       |                                      |           |   |   |   |   |
| **Cash  flows from investing activities:**                                            |       |                                      |           |   |   |   |   |
| Purchase of  Tidelands Bank stock                                                     |       | (6,000,005                                | )              | — |   | (23,650,000 | ) |
| Purchase of  equity securities                                                        |       | —                                    |           | (101,640 | ) | (50,000 | ) |
|                                                                                  |       |                                      |           |   |   |   |   |
| Net cash used by  investing activities                                                |       | (6,000,005                                | )              | (101,640 | ) | (23,700,000 | ) |
|                                                                                  |       |                                      |           |   |   |   |   |
| **Cash  flows from financing activities:**                                            |       |                                      |           |   |   |   |   |
| Proceeds from  other borrowings                                                       |       | 615,837                                   |           | — |   | — |   |
| Proceeds from  junior subordinated debentures                                         |       | 6,186,000                                 |           | — |   | 8,248,000 |   |
| Proceeds from  common stock                                                           |       | —                                    |           | — |   | 18,000,000 |   |
| Proceeds from  preferred stock , net                                                  |       | 13,335,752                                |           | — |   | — |   |
| Proceeds from  issuance of common stock-warrants                                      |       | 1,112,248                                 |           | — |   | — |   |
| Stock issuance  costs                                                                 |       | —                                    |           | — |   | (1,545,955 | ) |
| Proceeds from  ESOP borrowings                                                        |       | 472,500                                   |           | 2,527,500 |   | — |   |
| Repayment of  ESOP borrowings                                                         |       | (300,000                                  | )              | (100,000 | ) | — |   |
| Increase in  unearned ESOP shares                                                     |       | (220,280                                  | )              | (2,427,500 | ) | — |   |
| Proceeds from  exercise of stock options                                              |       | —                                    |           | 43,199 |   | 257,625 |   |
| Net cash  provided by financing activities                                            |       | 21,202,057                                |           | 43,199 |   | 24,959,670 |   |
|                                                                                  |       |                                      |           |   |   |   |   |
| **Net  increase (decrease) in cash**                                                  |       | 13,915,368                                |           | (626,385 | ) | 524,700 |   |
|                                                                                  |       |                                      |           |   |   |   |   |
| **Cash,  beginning of period**                                                        |       | 203,334                                   |           | 829,719 |   | 305,019 |   |
|                                                                                  |       |                                      |           |   |   |   |   |
| **Cash,  end of period**                                                              | ** ** | **$**                                     | **14,118,702** | ** ** | **$** | **203,334** | ** ** | **$** | **829,719** | ** ** |

 

F-32

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#### ** **

#### **NOTE 26 —QUARTERLY DATA (UNAUDITED)**

 
| ** **                                           | ** **   | **For the Year Ended December 31, 2007** | ** **   | **For the Year Ended December 31, 2008** | ** ** |
|------------------------------------------------------|--------------|-----------------------------------------------|--------------|-----------------------------------------------|------------|
| *** ***                                         | *** *** | **(dollars in thousands)**                    | *** *** |
| ** **                                           | ** **   | **First Quarter**                             | ** **   | **Second Quarter**                            | ** ** | **Third Quarter** | ** ** | **Fourth Quarter** | ** ** | **First Quarter** | ** ** | **Second Quarter** | ** ** | **Third Quarter** | ** ** | **Fourth Quarter** | ** ** |
| Interest Income                                      |         | $                                             | 6,838        |                                          | $          | 7,709 |   | $ | 8,243 |   | $ | 8,636 |   | $ | 8,415 |   | $ | 8,189 |   | $ | 9,106 |   | $ | 9,047 |   |
| Interest Expense                                     |         | 3,997                                         |         | 4,717                                         |       | 5,161 |   | 5,358 |   | 5,179 |   | 4,804 |   | 5,184 |   | 5,176 |   |
| Net interest  income                                 |         | 2,841                                         |         | 2,992                                         |       | 3,082 |   | 3,278 |   | 3,236 |   | 3,385 |   | 3,922 |   | 3,871 |   |
| Provision for  loan losses                           |         | 515                                           |         | 510                                           |       | — |   | — |   | 463 |   | 314 |   | 696 |   | 3,192 |   |
| Net interest  income after provision for loan losses |         | 2,326                                         |         | 2,482                                         |       | 3,082 |   | 3,278 |   | 2,773 |   | 3,071 |   | 3,226 |   | 679 |   |
| Gain on sale of  securities                          |         | 3                                             |         | —                                        |       | 3 |   | 32 |   | 32 |   | — |   | 473 |   | 4 |   |
| Noninterest  income (loss)                           |         | 365                                           |         | 332                                           |       | 364 |   | 255 |   | 336 |   | 377 |   | (4,254 | ) | 256 |   |
| Noninterest  expense                                 |         | 2,411                                         |         | 2,890                                         |       | 3,374 |   | 3,159 |   | 3,529 |   | 3,875 |   | 3,336 |   | 3,886 |   |
| Income (loss)  before taxes                          |         | 283                                           |         | (76                                           | )          | 75 |   | 406 |   | (388 | ) | (427 | ) | (3,891 | ) | (2,947 | ) |
| Income tax  expense (benefit)                        |         | 107                                           |         | (28                                           | )          | 28 |   | 168 |   | (155 | ) | (196 | ) | (1,453 | ) | (895 | ) |
| **Net  Income (loss)**                               | ** **   | **$**                                         | **176**      | ** **                                    | **$**      | **(48** | **)** | **$** | **47** | ** ** | **$** | **238** | ** ** | **$** | **(233** | **)** | **$** | **(231** | **)** | **$** | **(2,438** | **)** | **$** | **(2,052** | **)** |
|                                                 |         |                                          |         |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Earnings (loss)  per share:                          |         |                                          |         |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                |         | $                                             | 0.04         |                                          | $          | (0.01 | ) | $ | 0.01 |   | $ | 0.06 |   | $ | (0.06 | ) | $ | (0.06 | ) | $ | (0.60 | ) | $ | (0.50 | ) |
| Diluted                                              |         | $                                             | 0.04         |                                          | $          | (0.01 | ) | $ | 0.01 |   | $ | 0.06 |   | $ | (0.06 | ) | $ | (0.06 | ) | $ | (0.60 | ) | $ | (0.50 | ) |

 

F-33

----

 

**Item 9.  Changes in and Disagreements with Accountantson Accounting and Financial Disclosure.**

 

None.

 

**Item 9A(T).  Controls and Procedures.**

 

**Evaluation of Disclosure Controlsand Procedures**

 

As of the end ofthe period covered by this report, we carried out an evaluation, under thesupervision and with the participation of our management, including our ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of ourdisclosure controls and procedures as defined in Exchange Act Rule 13a-15(e).  Based upon that evaluation, our ChiefExecutive Officer and Chief Financial Officer have concluded that our currentdisclosure controls and procedures are effective as of December 31,2008.  There have been no significantchanges in our internal controls over financial reporting during the fourthfiscal quarter ended December 31, 2008 that have materially affected, orare reasonably likely to materially affect, our internal controls overfinancial 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’s Report on InternalControl Over Financial Reporting**

 

Management isresponsible for establishing and maintaining adequate internal control overfinancial reporting, as such term is defined 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 accountingprinciples.

 

Under thesupervision and with the participation of management, including the principalexecutive officer and the principal financial officer, our management hasevaluated the effectiveness of our internal control over financial reporting asof December 31, 2008 based on the criteria established in a reportentitled “Internal Control — Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission” and the interpretiveguidance 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, 2008.

 

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.

 

**Item9B.  Other Information.**

 

None.

 

91

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**PART III**

 

**Item 10. Directors, Executive Officers, and Corporate Governance.**

 

Information required by Item 10 is hereby incorporatedby reference from our proxy statement for our 2008 annual meeting ofshareholders to be held on May 18, 2009.

 

**Item 11.  Executive Compensation.**

 

Information required byItem 11 is hereby incorporated by reference from our proxy statement for our2008 annual meeting of shareholders to be held on May 18, 2009.

 

**Item12.  Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters.**

 

Information required byItem 12 is hereby incorporated by reference from our proxy statement for our2008 annual meeting of shareholders to be held on May 18, 2009.

 

**Item 13. Certain Relationships and Related Transactions and DirectorIndependence.**

 

Information required by Item 13 is hereby incorporatedby reference from our proxy statement for our 2008 annual meeting ofshareholders to be held on May 18, 2009.

 

**Item 14. Principal Accounting Fees and Services.**

 

The information required by Item 14 is hereby incorporated by reference from our proxy statement for our 2008 annual meeting of shareholders to be held on May 18, 2009.

 

92

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**PART IV**

 

**Item 15. Exhibits.**

 

3.1.                            RestatedArticles of Incorporation (incorporated by reference as Exhibit 3.1 to theCompany’s Form SB-2 filed with the SEC, File No. 333-97035).

 

3.2                               Articles of Amendment to the Company’sRestated Articles of Incorporation establishing  theterms of the Series T Preferred Stock (incorporated by reference as Exhibit 3.1to the Company’s Form 8-K filed on December 19, 2008).

 

3.3.                            Amendedand Restated Bylaws (incorporated by reference as Exhibit 3.1 to theCompany’s Form 8-K filed on September 19, 2007).

 

4.1.                            SeeExhibits 3.1 and 3.2 for provisions in Tidelands Bancshares, Inc.’sArticles of Incorporation and Bylaws defining the rights of holders of thecommon stock.

 

4.2.                              Form ofcertificate of common stock (incorporated by reference as Exhibit 4.2 tothe Company’s Form SB-2 filed with the SEC, File No. 333-97035).

 

4.3                               Warrant to Purchase up to 571,821 shares of Common Stock (incorporated byreference as Exhibit 4.1 to the Company’s Form 8-K filed on December 19,2008).

 

4.4                               Form of certificate of Series TPreferred Stock Certificate (incorporated by reference as Exhibit 4.2 tothe Company’s Form 8-K filed on December 19, 2008) .

 

10.1        LeaseAgreement between Savings Associates and Tidelands Bank (incorporated byreference as Exhibit 10.1 to the Company’s Form 10-KSB filed with theSEC for the period ended December 31, 2004, File No. 000-50707).

 

10.2                         Amendedand Restated Employment Agreement between Tidelands Bancshares, Inc. andRobert H. Mathewes (incorporated by reference as Exhibit 10.9 to thePost-Effective Amendment filed February 28, 2003 to the Company’s Form SB-2filed with the SEC, File No. 333-97035).

 

10.3                         EmploymentAgreement between Tidelands Bancshares, Inc. and Robert E. Coffee, Jr.(incorporated by reference as Exhibit 10.10 the Post-Effective Amendmentfiled February 28, 2003 to the Company’s Form SB-2 filed with theSEC, File No. 333-97035).

 

10.4                         EmploymentAgreement between Tidelands Bancshares, Inc. and Alan W. Jackson(incorporated by reference as Exhibit 10.2 to the Company’s Form 10-QSBfor the quarter ended September 30, 2003).

 

10.5                         TidelandsBancshares, Inc. 2004 Stock Incentive Plan and Form of Stock OptionAgreement (incorporated by reference as Exhibit 10.1 to the Company’s Form 10-QSBfor the quarter ended September 30, 2007).

 

10.6                         InterceptMaster 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-QSBfor the quarter ended September 30, 2003).

 

10.7                         Amendedand Restated Trust Agreement among Tidelands Bancshares, Inc., asdepositor, Wilmington Trust Company, as property trustee, Wilmington TrustCompany, as Delaware trustee, and the administrative trustees named therein,including exhibits containing the related forms of the Tidelands StatutoryTrust I Common Securities Certificate and the Preferred Securities Certificate(incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filedon February 28, 2006).

 

10.8                         GuaranteeAgreement between Tidelands Bancshares, Inc., as guarantor, and WilmingtonTrust Company, as guarantee trustee (incorporated by reference to Exhibit 10.2to the Company’s Form 8-K filed on February 28, 2006).

 

10.9                         Agreementfor Purchase and Sale between Park West Development, Inc. and TidelandsBank (incorporated by reference to Exhibit 10.1 to the Company’s Form 10-QSBfor the quarter ended June 30, 2005).

 

93

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10.10                   Agreement to Buy and Sell RealEstate between Tidelands Bank and Frank W. Brumley, Patrick W. McKinney,Michael C. Robinson and Milton E. Morgan (incorporated by reference to Exhibit 10.2to the Company’s Form 10-QSB for the quarter ended June 30, 2005).

 

10.11                   Addendum I to Agreement to Buy andSell between Tidelands Bank and Frank W. Brumley, Patrick W. McKinney, MichaelC. Robinson and Milton E. Morgan (incorporated by reference to Exhibit 10.3to the Company’s Form 10-QSB for the quarter ended June 30, 2005).

 

10.12                   Letter Agreement, dated December 19,2008, including Securities Purchase Agreement — Standard Terms incorporated byreference therein, between the Company and the United States Department of theTreasury (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-Kfiled on December 19, 2008).

 

10.13                   Form of Waiver, executed by each of Messrs. RobertE. Coffee, Jr., Alan W. Jackson, Thomas H. Lyles, Milon C. Smith, andRobert H. Mathewes, Jr (incorporated by reference to Exhibit 10.2 to theCompany’s Form 8-K filed on December 19, 2008).

 

10.14                   Form of Letter Agreement, executed byeach of Messrs. Robert E. Coffee, Jr., Alan W. Jackson, Thomas H.Lyles, Milon C. Smith, and Robert H. Mathewes, Jr. with the Company(incorporated by reference to Exhibit 10.3 to the Company’s Form 8-Kfiled on December 19, 2008).

 

10.15                   Amendment No. 1to the 2004 Stock Incentive Plan for Tidelands Bancshares, Inc. as adoptedby the Board   November 20, 2006(incorporated by reference to Exhibit 10.1 of the Company’s Form 10-Qfor the period ended September 30, 2007).

 

10.16                   Amendment No. 2to the 2004 Stock Incentive Plan for Tidelands Bancshares, Inc. as adoptedby the Board   of Directors October 20,2008.

 

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) Certificationof the Chief Executive Officer.

 

31.2                         Rule 13a-14(a) Certificationof the Chief Financial Officer.

 

32           Section 1350 Certifications.

 

----

*                                        Managementcontract or compensatory plan or arrangement required to be filed as an Exhibit tothis Annual Report on Form 10-K.

 

94

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**SIGNATURES**

 

In accordance with Section 13 or 15(d) of the SecuritiesExchange Act of 1934 (the “Exchange Act”), the registrant caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.

 
| ** ** | ** **          | ** ** | **TIDELANDS BANCSHARES, INC**. |
|------------|---------------------|------------|--------------------------------|
| ** ** | ** **          | ** ** | ** **                     |   |
|       |                |       |                           |   |
| Date:      | March 16, 2009 |       | By:                            | /s/ Robert E.  Coffee, Jr. |
|       |                |       |                           | Robert E.  Coffee, Jr. |
|       |                |       |                           | President and Chief  Executive Officer |

 

KNOW ALL MEN BYTHESE PRESENTS, that each person whose signature appears below constitutes andappoints Robert E. Coffee, Jr., his true and lawful attorney-in-fact andagent, with full power of substitution and resubstitution, for him and in hisname, place and stead, in any and all capacities, to sign any and allamendments to this Form 10-KSB, and to file the same, with all exhibitsthereto, and other documents in connection therewith, with the Securities andExchange Commission, granting unto attorney-in-fact and agent full power andauthority to do and perform each and every act and thing requisite or necessaryto be done in and about the premises, as fully to all intents and purposes ashe might or could do in person, hereby ratifying and confirming all thatattorney-in-fact and agent, or his substitute or substitutes, may lawfully door cause to be done by virtue hereof.

 

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

 
| **Signature**                     | ** ** | **Title**                    | ** ** | **Date**             |
|-----------------------------------|------------|------------------------------|------------|----------------------|
|                              |       |                         |       |                 |
|                              |       |                         |       |                 |
| /s/ Michael W. Burrell            |       | Director                     |       | March 16, 2009  |
| Michael W. Burrell                |       |                         |       |                 |
|                              |       |                         |       |                 |
|                              |       |                         |       |                 |
| /s/ John N.  Cagle, III, DMD |       | Director                     |       | March 16, 2009  |
| John N.  Cagle, III, DMD     |       |                         |       |                 |
|                              |       |                         |       |                 |
|                              |       |                         |       |                 |
| /s/ Alan D. Clemmons              |       | Director                     |       | March 16, 2009  |
| Alan D. Clemmons                  |       |                         |       |                 |
|                              |       |                         |       |                 |
|                              |       |                         |       |                 |
| /s/ Robert E.  Coffee, Jr.   |       | Director, President,         |       | March 16, 2009  |
| Robert E.  Coffee, Jr.       |       | and Chief Executive  Officer |       |                 |
|                              |       |                         |       |                 |
|                              |       |                         |       |                 |
| /s/ John W.  Gandy                |       | Director                     |       | March 16,  2009 |
| John W. Gandy                     |       |                         |       |                 |
|                              |       |                         |       |                 |
|                              |       |                         |       |                 |
| /s/ Richard L. Granger            |       | Director                     |       | March 16, 2009  |
| Richard L. Granger                |       |                         |       |                 |
|                              |       |                         |       |                 |
|                              |       |                         |       |                 |
| /s/ J. Louis Grant                |       | Director                     |       | March 16, 2009  |
| J. Louis Grant                    |       |                         |       |                 |

 

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| /s/ Alan W. Jackson           |   | Principal Accounting  and |   | March 16, 2009  |
|-------------------------------|--------|---------------------------|--------|----------------------|
| Alan W. Jackson               |   | Chief Financial Officer   |   |                 |
|                          |   |                      |   |                 |
|                          |   |                      |   |                 |
| /s/ Barry I. Kalinsky         |   | Director, Chairman        |   | March 16, 2009  |
| Barry I. Kalinsky             |   |                      |   |                 |
|                          |   |                      |   |                 |
|                          |   |                      |   |                 |
| /s/ Morris Kalinsky           |   | Director                  |   | March 16, 2009  |
| Morris Kalinsky               |   |                      |   |                 |
|                          |   |                      |   |                 |
|                          |   |                      |   |                 |
| /s/ Paul J. Kerwin, DVM       |   | Director                  |   | March 16, 2009  |
| Paul J. Kerwin, DVM           |   |                      |   |                 |
|                          |   |                      |   |                 |
|                          |   |                      |   |                 |
| /s/ John T.  Parker, Jr. |   | Director                  |   | March 16,  2009 |
| John T.  Parker, Jr.     |   |                      |   |                 |
|                          |   |                      |   |                 |
|                          |   |                      |   |                 |
| /s/ Mary V. Propes            |   | Director                  |   | March 16, 2009  |
| Mary V. Propes                |   |                      |   |                 |
|                          |   |                      |   |                 |
|                          |   |                      |   |                 |
| /s/ Tanya D. Robinson         |   | Director                  |   | March 16, 2009  |
| Tanya D. Robinson             |   |                      |   |                 |
|                          |   |                      |   |                 |
|                          |   |                      |   |                 |
| /s/ Larry W. Tarleton         |   | Director                  |   | March 16, 2009  |
| Larry W. Tarleton             |   |                      |   |                 |

 

96

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**TIDELANDSBANCSHARES, INC.**

 

**Exhibit List**

 

3.1.                            RestatedArticles of Incorporation (incorporated by reference as Exhibit 3.1 to theCompany’s Form SB-2 filed with the SEC, File No. 333-97035).

 

3.2                               Articles of Amendment to the Company’sRestated Articles of Incorporation establishing  theterms of the Series T Preferred Stock (incorporated by reference as Exhibit 3.1to the Company’s Form 8-K filed on December 19, 2008).

 

3.3.                            Amendedand Restated Bylaws (incorporated by reference as Exhibit 3.1 to theCompany’s Form 8-K filed on September 19, 2007).

 

4.1.                            SeeExhibits 3.1 and 3.2 for provisions in Tidelands Bancshares, Inc.’sArticles of Incorporation and Bylaws defining the rights of holders of thecommon stock.

 

4.2.                            Form ofcertificate of common stock (incorporated by reference as Exhibit 4.2 tothe Company’s Form SB-2 filed with the SEC, File No. 333-97035).

 

4.3                               Warrant to Purchase up to 571,821 shares of Common Stock (incorporated byreference as Exhibit 4.1 to the Company’s Form 8-K filed on December 19,2008).

 

4.4                               Form of certificate of Series TPreferred Stock Certificate (incorporated by reference as Exhibit 4.2 tothe Company’s Form 8-K filed on December 19, 2008).

 

10.1                         LeaseAgreement between Savings Associates and Tidelands Bank (incorporated byreference as Exhibit 10.1 to the Company’s Form 10-KSB filed with the SECfor the period ended December 31, 2004, File No. 000-50707).

 

10.2                         Amendedand Restated Employment Agreement between Tidelands Bancshares, Inc. andRobert H. Mathewes (incorporated by reference as Exhibit 10.9 to thePost-Effective Amendment filed February 28, 2003 to the Company’s Form SB-2filed with the SEC, File No. 333-97035).

 

10.3                         EmploymentAgreement between Tidelands Bancshares, Inc. and Robert E. Coffee, Jr.(incorporated by reference as Exhibit 10.10 the Post-Effective Amendmentfiled February 28, 2003 to the Company’s Form SB-2 filed with theSEC, File No. 333-97035).

 

10.4                         EmploymentAgreement between Tidelands Bancshares, Inc. and Alan W. Jackson(incorporated by reference as Exhibit 10.2 to the Company’s Form 10-QSBfor the quarter ended September 30, 2003).

 

10.5                         TidelandsBancshares, Inc. 2004 Stock Incentive Plan and Form of Stock OptionAgreement (incorporated by reference as Exhibit 10.1 to the Company’s Form 10-QSBfor the quarter ended September 30, 2007).

 

10.6                         InterceptMaster 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-QSBfor the quarter ended September 30, 2003).

 

10.7                         Amendedand Restated Trust Agreement among Tidelands Bancshares, Inc., asdepositor, Wilmington Trust Company, as property trustee, Wilmington TrustCompany, as Delaware trustee, and the administrative trustees named therein,including exhibits containing the related forms of the Tidelands StatutoryTrust I Common Securities Certificate and the Preferred Securities Certificate(incorporated by reference to Exhibit 10.1 to the Company’s Form 8-Kfiled on February 28, 2006).

 

10.8                         GuaranteeAgreement between Tidelands Bancshares, Inc., as guarantor, and WilmingtonTrust Company, as guarantee trustee (incorporated by reference to Exhibit 10.2to the Company’s Form 8-K filed on February 28, 2006).

 

10.9                         Agreementfor Purchase and Sale between Park West Development, Inc. and TidelandsBank (incorporated by reference to Exhibit 10.1 to the Company’s Form 10-QSBfor the quarter ended June 30, 2005).

 

10.10                   Agreement to Buy and Sell RealEstate between Tidelands Bank and Frank W. Brumley, Patrick W. McKinney,Michael C. Robinson and Milton E. Morgan (incorporated by reference to Exhibit 10.2to the Company’s Form 10-QSB for the quarter ended June 30, 2005).

 

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10.11                   Addendum I to Agreement to Buy andSell between Tidelands Bank and Frank W. Brumley, Patrick W. McKinney, MichaelC. Robinson and Milton E. Morgan (incorporated by reference to Exhibit 10.3to the Company’s Form 10-QSB for the quarter ended June 30, 2005).

 

10.12                   Letter Agreement, dated December 19,2008, including Securities Purchase Agreement — Standard Terms incorporated byreference therein, between the Company and the United States Department of theTreasury (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-Kfiled on December 19, 2008).

 

10.13                   Form of Waiver, executed by each of Messrs. RobertE. Coffee, Jr., Alan W. Jackson, Thomas H. Lyles, Milon C. Smith, andRobert H. Mathewes, Jr (incorporated by reference to Exhibit 10.2 to theCompany’s Form 8-K filed on December 19, 2008).

 

10.14                   Form of Letter Agreement, executed byeach of Messrs. Robert E. Coffee, Jr., Alan W. Jackson, Thomas H.Lyles, Milon C. Smith, and Robert H. Mathewes, Jr. with the Company(incorporated by reference to Exhibit 10.3 to the Company’s Form 8-Kfiled on December 19, 2008).

 

10.15                   Amendment No. 1to the 2004 Stock Incentive Plan for Tidelands Bancshares, Inc. as adopedby the Board     November 20, 2006(incorporated by reference to Exhibit 10.1 of the Company’s Form 10-Qfor the period ended September 30, 2007).

 

10.16                   Amendment No. 2to the 2004 Stock Incentive Plan for Tidelands Bancshares, Inc. as adoptedby the Board   of Directors October 20,2008.

 

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) Certificationof the Chief Executive Officer.

 

31.2                         Rule 13a-14(a) Certificationof the Chief Financial Officer.

 

32           Section 1350 Certifications.

 

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