UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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

For the ~~fiscal~~ fiscal year ended December 31, ~~2009~~2010

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

For the transition period from _______ to _______.

COMMISSION FILE NUMBER 001-33046

WACCAMAW BANKSHARES, INC.

(Exact name of registrant as specified in its charter)

NORTH CAROLINA	~~52-2329563~~	52-2329563
(State or Other Jurisdiction of	~~(I.R.S. Employer~~	(I.R.S. Employer
Incorporation or Organization)	~~Identification No.)~~	Identification No.)
110 NORTH J. K. POWELL BOULEVARD
WHITEVILLE, NORTH CAROLINA	28472
(Address of Principal Executive Offices)	(Zip Code)

110 nORTH j. k. pOWELL bOULEVARD
WHITEVILLE, North Carolina		28472
(Address of Principal Executive Offices)		(Zip Code)

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

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

~~Title of each class Name of each exchange on which registered Warrants to purchase shares of common stock The NASDAQ Global Market~~None

Securities registered pursuant to Section 12(g) of the Act:

COMMON STOCK, NO PAR VALUE

WARRANTS TO PURCHASE SHARES OF COMMON STOCK

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes x No

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

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

¨ Yes x No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

¨ Yes ¨ £ No

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

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

Large accelerated filer ¨

Accelerated filer ¨

Non-accelerated filer (Do not check if

a smaller reporting company) ¨

Smaller reporting company x

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

¨ Yes x No

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, based on the closing sales price of the Registrant’s Common Stock reported on the NASDAQ Global ~~Select~~ Market on June 30, ~~2009~~2010 was $187,~~119~~721,~~696~~205. Solely for purposes of this calculation, the ~~term~~ term “affiliate” includes all directors and executive officers of the Registrant and all beneficial owners of more than 5% of the Registrant’s voting securities.

As of ~~March~~ 19February 27, ~~2010~~2012, the Registrant had outstanding 57,~~551~~466,~~183~~224 shares of Common Stock.

Documents incorporated by reference		Where incorporated
Annual report to stockholders for the fiscal year ended December 31, 2009		Part II
Proxy statement for the 2010 annual meeting of stockholders		Part III

Documents incorporated by reference:

~~FORM 10-K CROSS-REFERENCE INDEX~~None

	FORM 10-K	PROXY STATEMENT	ANNUAL REPORT
PART I
Item 1 – Business	1
Item 1A – Risk Factors	8
Item 1B – Unresolved Staff Comments	8
Item 2 – Properties	8
Item 3 – Legal Proceedings	9
Item 4 –Reserved	9
PART II
Item 5–Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	10
Item 6 – Selected Financial Data	11
Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operation			11
Item 7A – Quantitative and Qualitative Disclosures About Market Risk			11
Item 8 – Financial Statements and Supplementary Data			11
Item 9 – Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	11
Item 9A(T) – Controls and Procedures	11
Item 9B – Other Information	12
PART III
Item 10 – Directors, Executive Officers and Corporate Governance	12	12
Item 11 – Executive Compensation		12
Item 12 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		13
Item 13 – Certain Relationships and Related Transactions, and Director Independence		13
Item 14 – Principal Accounting Fees and Services		13
PART IV
Item 15 – Exhibits and Financial Statement Schedules	14

PART I

ITEM 1 – BUSINESS

Note Regarding Forward-Looking Statements

Statements contained in this report, which are not historical facts, are forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995. Actual results could vary as a result of market and other factors. Such forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, factors discussed in documents filed by the Company with the U.S. Securities and Exchange Commission from time to time. Such forward-looking statements may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “might,” “planned,” “estimated,” and “potential.” Examples of forward-looking statements include, but are not limited to, estimates with respect to the financial condition, expected or anticipated revenue, results of operations and business of the Company that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include, but are not limited to:

the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs;

changes in general economic conditions, either nationally or in our market areas;

changes in the levels of general interest rates, deposit interest rates, our net interest margin and funding sources;

fluctuations in the demand for loans, the number of unsold homes and other properties and fluctuations in real estate values in our market areas;

· results of examinations of us by the Federal Reserve Bank and the ~~North~~Office ~~Carolina~~of ~~Banking~~the ~~Commission~~Commissioner of Banks or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our reserve for loan losses or to write down assets;

· recent and future ~~bail~~economic ~~out~~stimulus and recovery actions by the government;

our ability to control operating costs and expenses;

governmental action as a result of our inability to comply with regulatory orders and agreements;

Asset/liability matching risks and liquidity risks;

our ability to manage loan delinquency rates;

our ability to retain key members of our senior management team;

costs and effects of litigation;

increased competitive pressures in the banking industry;

changes in consumer spending, borrowing and savings habits;

legislative or regulatory changes that adversely affect our business;

adverse changes in the securities markets;

inability of key third-party providers to perform their obligations to us;

· changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board;

changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board;

changes in our borrowers’ performance on loans;

Changes in critical accounting policies and judgments;

Changes in the equity and debt securities markets;

Fluctuations of our stock price;

Success and timing of our business strategies;

Political developments, wars or other hostilities that may disrupt or increase volatility in securities markets or otherwise affect economic conditions;

Additionally, the timing and occurrence or non-occurrence of events may be subject to circumstances beyond our control.

You should not place undue reliance on these forward-looking statements, which reflect our expectations only as of the date of this annual report. We do not assume any obligation to revise forward-looking statements except as may be required by law.

General

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

Waccamaw Bank was organized and incorporated under the laws of the State of North Carolina on August 28, 1997 and commenced operations on September 2, 1997. The Bank currently serves Columbus County, North Carolina and surrounding areas through three banking offices, Brunswick County through seven banking offices, New Hanover County through one banking office, Bladen County through one banking office, and Lancaster County, South Carolina through one banking office and Horry County through four banking offices. As a state-chartered bank which is a member of the Federal Reserve, the Bank is subject to regulation by the North Carolina Office of the Commissioner of Banks and the Federal Reserve.

Regulatory Actions

WeEffective ~~expect to~~June ~~enter~~14, ~~into~~2010, ~~a written agreement with~~ the ~~Federal~~Company and ~~Reserve by~~ the ~~end~~Bank ofentered ~~the second~~into ~~quarter~~a ofWritten ~~2010,~~Agreement ~~but do not know~~ (the ~~exact~~“Agreement”) ~~contents~~with of the ~~written agreement~~Federal atReserve ~~this~~Bank ~~time. This is a type~~ of ~~formal~~Richmond ~~supervisory~~(the ~~agreement with our~~“Reserve ~~primary~~Bank”) ~~federal~~and ~~banking regulator. We expect that we will be required by~~ the ~~written~~ ~~agreement~~North toCarolina ~~establish~~Commissioner ~~and~~of ~~submit~~Banks (the ~~following to the Federal Reserve:~~“Commissioner”).

•The Agreement is a ~~written~~formal ~~program~~corrective action pursuant to ~~reevaluate~~which ~~allowance~~the ~~for~~Bank ~~loan~~has ~~loss~~agreed ~~methodologies~~to ~~and~~address ~~calculations~~specific ~~and~~issues toset ~~improve~~forth ~~our~~below, ~~methodology~~through ~~for~~the ~~identifying,~~adoption ~~rating,~~and ~~assigning,~~implementation of ~~monitoring~~procedures, plans and ~~reviewing~~policies ~~credit~~designed ~~risks;~~to enhance the safety and soundness of the Bank.

•Among aother ~~written plan to strengthen our credit risk management practices~~things, ~~particularly~~the inAgreement ~~our~~requires ~~commercial~~the ~~real~~Bank ~~estate, construction and development and home equity line of credit portfolio;~~to:

• aRetain ~~written~~an ~~plan~~independent consultant acceptable to ~~strengthen~~the ~~our~~Reserve ~~management~~Bank and the Commissioner to conduct a review of ~~commercial~~the ~~real~~effectiveness ~~estate~~of ~~concentrations~~the Bank’s corporate governance, ~~including~~board ~~steps~~and management structure, to ~~reduce~~assess orstaffing ~~mitigate~~needs ~~the~~and ~~risk~~to ofprepare ~~concentrations~~a inwritten ~~light~~report of ~~current~~findings ~~market~~and ~~conditions~~recommendations;

• anFormulate ~~independent~~a ~~audit~~plan ofto ~~certain~~strengthen ~~credit~~board ~~relationships;~~oversight of the management and operations of the Bank;

• a written plan to ensure the adequacy of reports provided to the board of directors and to improve oversight of our risks and risk management practices.

Any written plans, programs, or assessments required by the written agreement with the Federal Reserve will require approval by the Federal Reserve and prompt implementation by us upon receiving such approval. The written agreement may also restrict us from taking certain actions without the prior approval of the Federal Reserve, including:

• ~~declaring~~Formulate orand ~~paying~~implement ~~dividends~~a plan to strengthen credit risk management practices;

• ~~taking~~Formulate ~~dividends~~a plan for the ongoing review and grading of the Bank’s loan portfolio by a qualified independent party or ~~other~~by ~~payments~~qualified ~~from~~staff ~~Waccamaw~~that is independent of the Bank’s lending function;

• ~~making~~Develop ~~distributions~~a ofplan ~~interest,~~to ~~principal,~~maintain orsufficient ~~other~~capital ~~sums~~at the Company, on ~~trust~~a ~~preferred~~consolidated ~~securities.~~basis;

•

Not pay cash dividends without the prior written consent of the Reserve Bank and the Commissioner; and

•

Not renew or accept any new brokered deposits.

The Company must furnish periodic progress reports to the Reserve Bank and the Commissioner regarding its compliance with the Agreement. The Agreement will remain in effect until modified or terminated by the Reserve Bank and the Commissioner.

Effective November 29, 2011, the Company and the Bank entered into a Prompt Corrective Action Directive (the “Directive”) with the Board of Governors of the Federal Reserve System (the “Board of Governors”).

The Directive is a formal corrective action in which the Board of Governors has determined that, as of October 30, 2011, Waccamaw Bank is critically undercapitalized, as defined in section 208.43(b)(5) of Regulation H of the Board of Governors.

Among other things, the Directive requires the Bank no later than January 6, 2012 to:

•

Increase the Bank’s equity through the sale of shares or contributions to surplus in an amount sufficient to make the Bank adequately capitalized as defined in section 208.43(b)(2) of Regulation H of the Board of Governors;

•

Enter into and close a contract to be acquired by a depository institution holding company or combine with another insured depository institution, closing under which contract is conditioned only on the receipt of necessary regulatory approvals, the continued accuracy of customary representations and warranties and the performance of customary pre-closing covenants;

•

Take other necessary measures to make the Bank adequately capitalized;

•

Restrict the making of any capital distributions, including, but not limited to, the payment of dividends;

•

Restrict the payment of bonuses to senior executive officers and increases in compensation of such officers; and

•

Restrict certain activities, including, but not limited to, making any material change in accounting methods and engaging in any covered transaction, as defined in section 23A of the Federal Reserve Act, without the prior written approval of the FDIC.

Due to the recent favorable ruling by the Federal Reserve Board of Governors allowing a portion of the preferred stock to be regulatory capital, the Bank’s capital status at September 30, 2011, changed from critically undercapitalized to significantly undercapitalized. Although the Directive has not been terminated, the Company continues to take measures to make the Bank adequately capitalized through the sale of branches and selling stock through a private stock offering.

Market Area

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

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

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

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

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

Lancaster County is a rural county located near the ~~middle~~central region of ~~the~~South ~~state~~Carolina near the North Carolina border and approximately 40 miles south of Charlotte, North Carolina and fifty miles north of Columbia. These cities all have national or regional airports.

Horry County is located in the northeastern portion of South Carolina near the North Carolina border. Myrtle Beach, the largest city in the county, has a diversified economy which includes tourism, manufacturing, medical and retail industries.

The principal components of the economy in our market area are manufacturing, agriculture and tourism. The coastal markets are real estate driven, as demand for property along the coastal regions will continue to grow as the economy improves. Manufacturing employment is concentrated in the wood products and textile industries. The primary agriculture products are tobacco and hogs.

Competition

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

Banking is a highly competitive industry. The principal areas and methods of competition in the banking industry are the services that are offered, the pricing of those services, the convenience and availability of the services and the degree of expertise and personal manner with which those services are offered. The Bank encounters strong competition from other commercial banks, including the largest North Carolina banks, operating in the Bank’s market area. At June 30, 2009 (the most current data provided by the FDIC Deposit Market Share Report), there were 15 offices of 6 other commercial banks operating in Columbus County, 45 offices of 12 other commercial banks operating in Brunswick County, 78 offices of 19 other commercial banks operating in New Hanover County, 7 offices of 5 other commercial banks operating in Bladen County, 10 offices of 5 other commercial banks operating in Lancaster County and 134 offices of 26 other commercial banks operating in Horry County. In the conduct of certain aspects of its business, the Bank also competes with credit unions, money market mutual funds, and other non-bank financial institutions, some of which are not subject to the same degree of regulation as the Bank. Many of these competitors have substantially greater resources and lending abilities than the Company and offer certain services, such as investment banking, trust and international banking services, that the Company cannot or will not provide.4

3Banking is a highly competitive industry. The principal areas and methods of competition in the banking industry are the services that are offered, the pricing of those services, the convenience and availability of the services and the degree of expertise and personal manner with which those services are offered. The Bank encounters strong competition from other commercial banks operating in the Bank’s market area, including several of the largest North Carolina banks. At June 30, 2010 (the most current data provided by the FDIC Deposit Market Share Report prior to December 31, 2010), there were 14 offices of 6 other commercial banks operating in Columbus County, 44 offices of 12 other commercial banks operating in Brunswick County, 78 offices of 20 other commercial banks operating in New Hanover County, 7 offices of 5 other commercial banks operating in Bladen County, 11 offices of 6 other commercial banks operating in Lancaster County and 130 offices of 25 other commercial banks operating in Horry County.

In the conduct of certain aspects of its business, the Bank also competes with credit unions, money market mutual funds, and other non-bank financial institutions, some of which are not subject to the same degree of regulation as the Bank. Many of these competitors have substantially greater resources and lending abilities than the Company and offer certain services, such as investment banking, trust and international banking services that the Company cannot or will not provide.

Supervision and Regulation

The Company and the Bank are subject to state and federal banking laws and regulations. These impose specific requirements and restrictions and provide for general regulatory oversight with respect to virtually all aspects of operations. These laws and regulations are generally intended to protect depositors, not stockholders. To the extent that the following summary describes ~~statutory~~ statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. Any change in applicable laws or regulations may have a material effect on the business and prospects of ~~the~~ the Company. Beginning with the enactment of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") and following with the Federal Deposit Insurance Corporation Improvement Act ("FDICIA") in 1991, ~~and~~ the Gramm-Leach-Bliley Act in 1999, and the Dodd-Frank Act in 2010, numerous additional regulatory requirements have been placed on the banking industry in the past several years, and additional changes have been proposed. The operations of the Company and the Bank may be affected by legislative changes and the policies of various regulatory authorities. The Company is unable to predict the nature or the extent of the effect on its business and ~~earnings~~results of operations that fiscal or monetary policies, economic control, or new federal or state legislation may have in the future.

In addition, we expect to enter into a written agreement with the Federal Reserve in the near future. Although we do not know the exact contents of the written agreement at this time, it will impose additional requirements and restrictions on our operations. These restrictions may have an adverse effect on our business and earnings.

Federal Bank Holding Company Regulation (Financial Holding Company Regulations)

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

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

Under the GLB Act, the Federal Reserve serves as the primary "umbrella" regulator of financial holding companies, with supervisory authority over each parent ~~company~~ company and limited authority over its subsidiaries. Expanded financial activities of financial holding companies generally will be regulated according to the type of such financial activity, banking activities by banking regulators, securities ~~activities~~ activities by securities regulators and insurance activities by insurance regulators. The GLB Act also imposes additional restrictions and ~~heightened~~ heightened disclosure requirements regarding information collected by financial institutions. The Company is not a financial holding company.

The Company is also still subject to the Bank Holding Company Act (the "BHCA"). Under the BHCA, the Company is subject to periodic examination by the Federal Reserve and is required to file periodic reports of its operations and such other information as the Federal Reserve may require.5

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

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

4In addition, and subject to certain exceptions, the BHCA and the Change in Bank Control Act, together with regulations thereunder, require Federal Reserve approval (or, depending on the circumstances, no notice of disapproval) prior to any person or company acquiring "control" of a holding company, such as the Company. Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of the holding company. In the case of the Company, under Federal Reserve regulations there will be a rebuttable presumption of control if a person acquires at least 10% of the outstanding shares of any class of voting securities.

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

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

The Bank

The Company is the holding company for the Bank, which is a North Carolina banking corporation. ~~Substantially~~ ~~all Company revenues are earned through the operations of the Bank.~~ The Bank is subject to examination and supervision by the Federal Reserve and the North Carolina Commissioner of Banks (the “Commissioner”). The Federal Reserve monitors the Bank’s compliance with ~~several~~ federal statutes, including ~~such as~~ the Community Reinvestment Act of 1977 and the Depository Institution Management Interlocks Act. The Federal Reserve has broad enforcement authority to prevent the continuance or development of unsafe and unsound banking practices, including the issuance of cease and desist orders and the removal of officers and directors. The Federal Reserve must approve the establishment of branch offices, conversions, and mergers, assumptions of deposit liabilities between insured and uninsured institutions, and the acquisition or establishment of of certain subsidiary corporations. The Federal Reserve can prevent capital or surplus diminution in such transactions where the deposit accounts of the resulting, continuing or assuring bank are federally insured.

The Bank is subject to capital requirements and limits on activities established by the Federal Reserve. Under the capital regulations, the Bank generally is required to maintain Tier 1 risk-based capital, in such terms as defined therein, of 4.0% and total risk-based capital of 8.0%. In addition, the Bank is required to provide a minimum leverage ratio of Tier 1 capital to adjusted average quarterly assets (leverage ratio) equal to 3.0%, plus an additional cushion of one to two percent if the Bank has less than the highest regulatory rating. The Bank is not permitted to engage in any activity not permitted for a national bank unless (i) it is in compliance with its capital requirements and (ii) the FDIC determines that the activity would not pose a risk to the deposit insurance fund. With certain exceptions, the Bank also is not permitted to acquire equity investments of a type, or in an amount, not permitted for a national bank.

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

Insurance of Deposit Accounts. The Bank’s deposits are insured up to limits set by the Deposit Insurance Fund of the FDIC. On October 3, 2008, the Emergency Economic Stabilization Act of 2008 temporarily raised the standard minimum deposit insurance amount (the “SMDIA”) from $100,000 to $250,000 per depositor until December 31, 2009. On May 20, 2009, the Helping Families Save Their Homes Act extended the temporary increase in the SMDIA to $250,000 per depositor through December 31, 2013. On January 1, 2014, the SMDIA will return to $100,000 per depositor for all account categories except IRAs and certain other retirement accounts, which will remain at $250,000 per depositor, unless a new law is enacted before then to extend the increased deposit insurance limits.

The FDIC has amended its risk-based assessment system to implement authority granted by the Federal Deposit Insurance Reform Act of 2005 (“Reform Act”). Under the revised system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other factors. An institution’s assessment rate depends upon the category to which it is assigned. Risk Category I contains well-capitalized banks with only a few minor weaknesses. Unlike the other categories, Risk Category I contains further risk differentiation based on the FDIC’s analysis of financial ratios, examination component ratings and other information.

The Reform Act provided the FDIC with authority to adjust the Deposit Insurance Fund ratio to insured deposits within a range of 1.15% and 1.50%, in contrast to the prior statutorily fixed ratio of 1.25%. Assessment rates are determined by the FDIC and currently range from 5 to 7 basis points annually of assessable deposits for the healthiest institutions (Risk Category I) to 43 basis points for the riskiest (Risk Category IV). The FDIC may adjust assessment rates from one quarter to the next, except that no single adjustment can exceed 3 basis points. The Bank’s quarterly Deposit Insurance Fund assessments during the year ended December 31, 2009 ranged from 8 to 23 basis points of assessable deposits.

The Reform Act also provided for a one-time credit for eligible insured institutions based on their assessment base as of December 31, 1996. Subject to certain limitations with respect to institutions that are exhibiting weaknesses, one-time credits are used to offset quarterly assessments until exhausted. The Bank did not qualify for this credit because it commenced operations after December 31, 1996. The Reform Act also provided that the FDIC may pay dividends to insured institutions once the Deposit Insurance Fund reserve ratio equals or exceeds 1.35% of estimated insured deposits.

On May 22, 2009, the FDIC announced that it would levy a special assessment on insured institutions as part of its effort to rebuild the Deposit Insurance Fund. The special assessment equaled five basis points on each FDIC-insured depository institution’s assets, minus its Tier 1 capital, as of June 30, 2009. The amount of the Bank’s special assessment was $265,697.

On November 12, 2009, the FDIC voted to require all FDIC insured depository institutions to prepay risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The prepaid assessments are designed to provide the FDIC with additional liquid assets for the Deposit Insurance Fund, which have been used to protect depositors of failed institutions and have been exchanged for less liquid claims against the assets of failed institutions. The FDIC projected that if no action is taken, its liquidity needs to resolve failures could exceed its liquid assets beginning in the first quarter of 2010. The prepaid assessment for all insured institutions was collected on December 30, 2009. For the fourth quarter of 2009 and all of 2010, the prepaid assessment was based on an institution’s total base assessment rate in effect on September 30, 2009. That rate will be increased by 3 basis points for the 2011 and 2012 prepayments and a quarterly five percent deposit growth rate is also built into the calculation.

~~On December~~Federal ~~30,~~banking ~~2009,~~law requires the ~~Bank~~federal banking ~~paid~~agencies ato $4take “prompt corrective action” in respect of insured depository institutions that do not meet minimum capital requirements.25 ~~million~~There ~~prepaid~~are ~~assessment~~five ~~and~~tiers: it“well ~~will~~capitalized,” “adequately capitalized,” “undercapitalized,” be“significantly ~~accounted~~undercapitalized” ~~for~~and “critically undercapitalized,” as adefined ~~prepaid~~by ~~expense~~regulations ~~with~~promulgated by athe ~~zero~~FDIC ~~risk-weighting~~and ~~for~~the ~~risk-based regulatory~~other ~~capital~~federal ~~purposes~~depository institution regulatory agencies. On aA ~~quarterly~~depository ~~basis~~institution ~~after~~is ~~December~~well ~~31,~~capitalized if it ~~2009,~~significantly exceeds the ~~Bank~~minimum ~~will~~level ~~expense~~required ~~its~~by ~~regular~~regulation ~~quarterly~~for ~~assessment~~each ~~and~~relevant ~~record~~capital anmeasure, adequately capitalized if it ~~offsetting~~meets ~~credit~~each such measure, undercapitalized if it fails to ~~the~~meet ~~prepaid~~any ~~assessment~~such ~~asset~~measure, ~~until~~significantly ~~the~~undercapitalized ~~asset~~if it is below such ~~exhausted. If~~measures, and critically undercapitalized if it fails to meet any critical capital level set forth in the ~~prepaid~~regulations. ~~assessment~~A depository institution may be deemed to be in a capitalization category that is ~~not~~lower ~~exhausted~~than byis ~~June~~indicated ~~30,~~by its ~~2013,~~actual ~~any~~capital ~~remaining~~position ~~amount~~if ~~will~~it bereceives ~~returned~~an tounsatisfactory ~~the~~examination ~~Bank~~rating.

~~The~~Dodd-Frank FDIC has authority to further increase deposit insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Company and the Bank. Management cannot predict what deposit insurance assessment rates will be in the future.Act

~~Insurance~~On July 21, 2010, the Dodd-Frank ofWall ~~deposits~~Street ~~may~~Reform beand ~~terminated~~Consumer byProtection Act (the ~~FDIC~~“Dodd-Frank ~~upon~~Act”) awas ~~finding~~signed ~~that~~into ~~an insured~~law. The ~~institution~~Dodd-Frank Act has ~~engaged~~resulted in ~~unsafe~~dramatic orchanges ~~unsound~~across ~~practices~~the financial regulatory system, issome inof anwhich ~~unsafe~~become oreffective ~~unsound~~immediately ~~condition~~and tosome ~~continue~~of ~~operations~~which orwill ~~has~~not ~~violated~~become ~~any~~effective ~~applicable~~until ~~law,~~various future dates. Implementation of the ~~regulation,~~Dodd-Frank ~~rule,~~Act ~~order~~will orrequire ~~condition~~many ~~imposed~~new rules to be made by various federal regulatory agencies over the ~~FDIC~~next several years. ~~Management of~~Uncertainty ~~the~~remains ~~Bank~~until final rulemaking is ~~not~~complete ~~aware~~as to the ultimate impact of ~~any~~the ~~practice~~Dodd-Frank Act, which ~~condition~~could have a material adverse impact either on the financial services industry as a whole or ~~violation~~on Waccamaw Bank’s business, results of operations, and financial condition. Provisions in the legislation that ~~might~~affect ~~lead~~deposit toinsurance ~~termination~~assessments, payment of ~~its~~interest ~~FDIC~~on ~~deposit~~demand ~~insurance~~deposits, and interchange fees could increase the costs associated with deposits and place limitations on certain revenues those deposits may generate. The Dodd-Frank Act includes provisions that, among other things, will:

~~The earnings~~· ofCentralize ~~the~~responsibility ~~Bank~~for ~~are~~consumer ~~affected~~financial ~~significantly~~protection by ~~the~~creating ~~policies of the Federal Reserve Board,~~ a ~~federal~~new agency which regulates the money supply in order to mitigate recessionary and inflationary pressures. Among the techniques used to implement these objectives are open market transactions in United States government securities, ~~changes in~~ the ~~rate~~Bureau ~~paid~~of byConsumer ~~banks~~Financial ~~on bank borrowings~~Protection, ~~and~~responsible ~~changes~~for ~~in the reserve requirement against bank deposits. These techniques are used in varying combinations to influence overall growth and distribution of bank loans~~implementing, ~~investments~~examining, and ~~deposits,~~ ~~and~~enforcing ~~their~~compliance ~~use~~with ~~may~~federal ~~also~~consumer ~~affect~~financial ~~interest rates charged on loans or paid on deposits~~laws.

Create the Financial Stability Oversight Council that will recommend to the Federal Reserve increasingly strict rules for capital, leverage, liquidity, risk management and other requirements as companies grow in size and complexity.

Provide mortgage reform provisions regarding a customer’s ability to repay, restricting variable-rate lending by requiring that the ability to repay variable-rate loans be determined by using the maximum rate that will apply during the first five years of a variable-rate loan term, and making more loans subject to provisions for higher cost loans, new disclosures, and certain other revisions.

Change the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible capital, eliminate the ceiling on the size of the Deposit Insurance Fund (“DIF”), and increase the floor on the size of the DIF, which generally will require an increase in the level of assessments for institutions with assets in excess of $10 billion.

Make permanent the $250,000 limit for federal deposit insurance and provide unlimited federal deposit insurance until January 1, 2013 for noninterest-bearing demand transaction accounts at all insured depository institutions.

Implement corporate governance revisions, including with regard to executive compensation, which apply to all public companies, not just financial institutions.

Repeal the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transactional and other accounts.

Amend the Electronic Fund Transfer Act (“EFTA”) to, among other things, give the Federal Reserve the authority to establish rules regarding interchange fees charged for electronic debit transactions by payment card issuers having assets over $10 billion and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer.

Transfer regulatory and rulemaking authority over federal savings banks from the Office of Thrift Supervision (“OTS”) to the Office of the Comptroller of the Currency effective July 21, 2011, and abolish the OTS effective October 19, 2011. In addition, the Board of Governors of the Federal Reserve System will supervise and regulate all savings and loan holding companies that were formerly regulated by the OTS.

Insurance of Deposit Accounts. The Bank’s deposits are insured up to limits set by the Deposit Insurance Fund (the “DIF”) of the FDIC. The DIF was formed on March 31, 2006, upon the merger of the Bank Insurance Fund and the Savings Insurance Fund in accordance with the Federal Deposit Insurance Reform Act of 2005 (the “Reform Act”). The Reform Act established a range of 1.15% to 1.50% within which the FDIC may set the Designated Reserve Ratio (the “reserve ratio”). The Dodd-Frank Act gave the FDIC greater discretion to manage the DIF, raised the minimum DIF reserve ratio to 1.35%, and removed the upper limit of 1.50%. In October 2010, the FDIC adopted a restoration plan to ensure that the DIF reserve ratio reaches 1.35% by September 30, 2020, as required by the Dodd-Frank Act. The FDIC also proposed a comprehensive, long-range plan for management of the DIF. As part of this comprehensive plan, the FDIC has adopted a final rule to set the reserve ratio at 2.0%.

On October 3, 2008, the Emergency Economic Stabilization Act of 2008 was enacted and temporarily raised the standard limit of FDIC deposit insurance coverage from $100,000 to $250,000 per depositor. On May 20, 2009, the Helping Families Save Their Homes Act extended the temporary increase in the standard maximum deposit insurance amount (SMDIA) to per depositor through December 31, 2013. On July 21, 2010, the Dodd-Frank Act permanently increased FDIC insurance coverage to $250,000 per depositor.

The FDIC imposes a risk-based deposit insurance premium assessment on member institutions in order to maintain the DIF. This assessment system was amended by the Reform Act and further amended by the Dodd-Frank Act. Under this system, as amended, the assessment rates for an insured depository institution vary according to the level of risk incurred in its activities. To arrive at an assessment rate for a banking institution, the FDIC places it in one of four risk categories determined by reference to its capital levels and supervisory ratings. In addition, in the case of those institutions in the lowest risk category, the FDIC further determines its assessment rate based on certain specified financial ratios or, if applicable, its long-term debt ratings. The assessment rate schedule can change from time to time, at the discretion of the FDIC, subject to certain limits. The Dodd-Frank Act changed the methodology for calculating deposit insurance assessments from the amount of an insured institution’s domestic deposits to its total assets minus tangible capital. On February 7, 2011, the FDIC issued a new regulation implementing these revisions to the assessment system. The regulation became effective on April 1, 2011.

On October 14, 2008, the FDIC announced the Temporary Liquidity Guarantee Program (the “TLGP”) to strengthen confidence and encourage liquidity in the banking system. The TLGP consists of two components: a temporary guarantee of newly-issued senior unsecured debt named the Debt Guarantee Program, and a temporary unlimited guarantee of funds in noninterest-bearing transaction accounts at FDIC insured institutions named the Transaction Account Guarantee Program (“TAG”). All newly-issued senior unsecured debt will be charged an annual assessment of up to 100 basis points (depending on term) multiplied by the amount of debt issued and calculated through the date of that debt or June 30, 2012, whichever is earlier. The Bank elected to opt out of the Debt Guarantee Program and elected to participate in the TAG Program. On August 26, 2009, the FDIC adopted a final rule extending the TAG portion of the TLGP for six months through June 30, 2010 and it was extended again through December 31, 2010. The Bank elected to continue to participate in the TAG Program through December 31, 2010. On July 21, 2010, the Dodd-Frank Act extended unlimited FDIC insurance coverage to noninterest-bearing transaction deposit accounts through December 31, 2012. It does not apply to accounts earning any level of interest with the exception of Interest on Lawyers’ Trust Accounts (“IOLTA”) accounts. This unlimited FDIC insurance coverage is applicable to all applicable deposits at any FDIC-insured financial institution. Therefore, there is no additional FDIC insurance surcharge related to this coverage after December 31, 2010.

During 2009, the FDIC took several measures aimed at replenishing the DIF. On May 22, 2009, the FDIC imposed a 5 basis point special assessment on each insured institution’s assets minus Tier 1 capital as of June 30, 2009. On November 17, 2009, the FDIC voted to require insured institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009, as well as all of 2010, 2011, and 2012. For purposes of determining the prepayment, the FDIC used an institution’s assessment rate in effect on September 30, 2009.

The FDIC has authority to increase insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Bank. Management cannot predict what insurance assessment rates will be in the future.

Insurance of deposits may be terminated by the FDIC upon a finding that an insured institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.

Incentive Compensation Policies and Restrictions. In July 2010, the federal banking agencies issued guidance which applies to all banking organizations supervised by the agencies. Pursuant to the guidance, to be consistent with safety and soundness principles, a banking organization’s incentive compensation arrangements should: (1) provide employees with incentives that appropriately balance risk and reward; (2) be compatible with effective controls and risk management; and (3) be supported by strong corporate governance including active and effective oversight by the banking organization’s board of directors. Monitoring methods and processes used by a banking organization should be commensurate with the size and complexity of the organization and its use of incentive compensation.

Federal Reserve Policies. The earnings of the Bank are affected significantly by the policies of the Federal Reserve Board, a federal agency which regulates the money supply in order to mitigate recessionary and inflationary pressures. Among the techniques used to implement these objectives are open market transactions in United States government securities, changes in the rate paid by banks on bank borrowings, and changes in the reserve requirement against bank deposits. These techniques are used in varying combinations to influence overall growth and distribution of bank loans, investments, and deposits, and their use may also affect interest rates charged on loans or paid on deposits.

The monetary policies of the Federal Reserve Board have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. In view of changing conditions in the national economy and money markets, as well as the effect of actions by monetary and fiscal authorities, no prediction can be made as to possible future changes in interest rates, deposit levels, loan demand or the business and earnings of the Bank.

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

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

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

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

InInterstate ~~1994,~~Banking. Federal law ~~Congress~~allows ~~adopted~~the ~~new~~Federal ~~legislation~~Reserve ~~which~~Board ~~generally~~to ~~permits~~approve an application of an adequately capitalized and adequately managed bank holding company to acquire control of, or acquire all or substantially all of the assets of, a bank located in ~~any~~a state other than the holding company’s home state, ~~subject~~without regard to ~~certain~~whether ~~state~~the ~~law~~transaction ~~requirements.~~is ~~North~~prohibited ~~Carolina~~by ~~banking~~the ~~law~~laws ~~has~~of any state. The Federal Reserve Board ~~been~~may ~~amended~~not toapprove ~~authorize~~the ~~banking~~acquisition ~~organizations~~of a bank that has not been in ~~any~~existence ~~state~~for toa ~~acquire~~minimum ~~North Carolina~~of ~~banking~~five ~~institutions~~years onwithout regard for a ~~reciprocal~~longer minimum ~~basis.~~period ~~North~~specified ~~Carolina~~by ~~banking~~the law ~~authorizes~~ ~~North~~of ~~Carolina~~the ~~banks~~host tostate. The ~~establish~~Federal ~~branches~~Reserve inBoard ~~other~~is prohibited from approving an application ~~states~~if the applicant (and ~~permits~~its ~~out-of-state~~depository ~~banks~~institution toaffiliates) ~~establish~~controls ~~branches~~or inwould ~~North~~control ~~Carolina~~(i) ~~on a~~more ~~reciprocal~~than ~~basis. The~~10% ~~overall~~of the insured deposits ~~effect~~in ofthe ~~this~~United ~~legislation~~States, ~~will~~or ~~increase~~(ii) ~~competition~~30% or more of the deposits in the ~~banking~~target ~~industry~~bank’s home state or in ~~North~~ ~~Carolina,~~any ~~however,~~state in which the ~~State~~target bank ofmaintains ~~South~~a ~~Carolina~~branch. Federal law does not ~~allow~~limit ~~North Carolina~~a ~~chartered~~state’s ~~banks~~authority to ~~establish~~restrict ~~branches~~the inpercentage ~~South~~of ~~Carolina. As~~total insured adeposits ~~result,~~in ~~North~~the ~~Carolina~~state ~~chartered~~which ~~banks~~ may ~~only~~be ~~establish~~held ~~offices~~or ~~within~~controlled by a bank or bank holding company to the ~~State~~ ofextent ~~South~~such ~~Carolina~~limitation ~~through~~does ~~acquisitions~~not discriminate against out-of-state ~~existing~~banks ~~South~~or ~~Carolina institutions~~bank ~~effected~~holding incompanies. Individual ~~compliance~~states ~~with~~may ~~South~~also ~~Carolina~~waive ~~banking~~the 30% state-wide ~~law~~concentration limit.

The federal banking agencies are also authorized to approve interstate merger transactions without regard to whether such transaction is prohibited by the law of any state, unless the home state of one of the banks has adopted a law opting out of the interstate mergers. Interstate acquisitions of branches are permitted only if the law of the state in which the branch is located permits such acquisitions. Interstate mergers and branch acquisitions are subject to the nationwide and statewide insured deposit concentration amounts described above. North Carolina has enacted legislation permitting interstate banking acquisitions.

The Dodd-Frank Act allows national and state banks to establish branches in any state if that state would permit the establishment of the branch by a state bank chartered in that state.

Material Customers

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

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

Rights

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

Environmental Laws

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

Employees

The ~~Company~~ ~~had no compensated employees. The~~ Bank presently has ~~137~~ 131 full-time equivalent employees consisting of ~~129~~121 full-time employees and 16 19 part-time employees.

ITEM 1A – RISK FACTORS

Smaller reporting companies such as the Company are not required to provide the information required by this item.

ITEM 1B – UNRESOLVED STAFF COMMENTS

Smaller reporting companies such as the Company are not required to provide the information required by this item.

ITEM 2 - PROPERTIES

The Bank has three branches in Columbus County, North Carolina, including one in Whiteville, one in Tabor City, and one in Chadbourn. The Whiteville branch is ~~located~~ located at 110 North J.K. Powell Boulevard, Whiteville, North Carolina, in a 12,000 square foot building that includes three drive-up lanes and an ATM. The Company purchased the land on which this facility is located for $233,318 from a former Company director. This transaction was effected at arm’s length and management believes the purchase price was at or below fair market value. Construction was completed in April 2001 at a cost of $1.8 million.

The Bank has two additional branches in Columbus County located at 105 Hickman Road, Tabor City, North Carolina and 111 Strawberry Boulevard, Chadbourn, North Carolina. The Tabor City Branch is located in a 3,800 square foot building that includes two drive-up lanes and an ATM. The property is ~~leased~~ leased for $33,474 per year. The lease was assumed from the prior tenant and expires in ~~2011~~2013. The Bank has the option to extend the lease for four additional five year terms.

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

The Bank has seven branches located in Brunswick County, two in Shallotte, North Carolina, one in Holden Beach, North Carolina, two in Southport, North Carolina, ~~one~~ one in Ocean Isle, North Carolina and one in Oak Island, North Carolina. The Shallotte Main Street branch is housed in a 2,521 ~~square~~ square foot facility that includes ~~two~~three drive-up lanes and an ATM. The building is leased for a term of five years beginning on February 1, 2010. The Bank has the option to renew the lease for two additional terms of five years.

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

The Holden Beach branch is housed in a 1,200 square foot facility that includes one drive-up lane and an ATM. The building is leased for a term of five years beginning on October 10, 2005. The Bank has renewed the first option at five additional years and The Bank has the option to renew the lease for ~~four~~three additional terms of five years.

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

The Southport Howe Street branch is housed in a 1,860 square foot facility. The land and building are leased for a term of five years beginning on March 1, 2010. The Bank has the option to renew the lease for four additional terms of five years.

The Southport Supply Road branch is housed in a 3,858 square foot facility. The construction was completed in December 2006 at a cost of $1.2 million. The land is leased for a term of five years beginning on March 1, 2010. The Bank has the option to renew the lease for four additional terms of five years.

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

The Elizabethtown branch is housed in a 2,016 square foot facility. The land is leased for a term of five years beginning on November 7, 2005. The Bank has extended the lease for another 5 years beginning on November 14, 2010.

The Kerr Avenue branch in Wilmington is housed in a 3,000 square foot facility that includes two drive-up lanes and an ATM. The building is leased for a term of five years beginning on August 1, 2009. The Bank has a five year lease with the option to renew for four additional terms of five years.

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

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

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

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

The Myrtle Beach branch is housed in a 2,400 square foot facility and has ~~one~~ three drive-up ~~lane~~lanes and an ATM. The lease was assumed from BB&T and expires in 2010 with the option to renew the lease for an additional term of five years. The Bank chose not to renew this lease and closed this branch effective July 31, 2011.

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

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

ITEM 3 – LEGAL PROCEEDINGS

OnNo ~~the normal~~legal ~~course~~proceedings ofare ~~business,~~required to ~~Waccamaw~~be ~~Bankshares’~~disclosed ~~subsidiary,~~pursuant ~~Waccamaw~~to ~~Bank,~~this ~~may be~~item ~~named~~ as aof ~~party~~December in31, ~~legal disputes~~2010.

ITEM 4 –RESERVED

912

PART II

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

The Company’s articles of incorporation authorize it to issue up to 2550,000,000 shares of common stock, no par value, of which 57,~~551~~466,~~183~~224 shares were issued and outstanding as of ~~March~~February 1927, ~~2010~~2012 and up to 1,000,000 shares of preferred stock. The approximate number of holders of the Company’s shares of common stock as of February 27, 2012 is ~~listed~~2,800. onThere ~~the~~were ~~NASDAQ~~550 shares issued and ~~Global~~outstanding ~~Market~~of ~~under~~the Company’s Series A convertible preferred stock as of February 27, 2012 and 546,375 shares issued and outstanding of the ~~symbol~~Company’s ~~“WBNK”~~Series B convertible preferred stock as of February 27, 2012.

The ~~approximate~~ ~~number~~payment of ~~holders~~future cash ofdividends ~~the~~will ~~Company’s~~be ~~shares~~determined ofby ~~common~~the ~~stock~~Board as of ~~March~~ ~~19,~~Directors ~~2010~~and is ~~2,800. There~~dependent ~~were~~upon ~~550~~the ~~shares~~receipt ~~issued~~of ~~and~~dividends ~~outstanding~~from the Bank. To ofdate, the Company’s ~~Series~~has Anot ~~convertible~~paid ~~preferred~~any ~~stock~~cash asdividends. ofThe ~~March~~Company ~~19,~~does not intend to declare or pay dividends to ~~2010~~shareholders at any time in the foreseeable future.

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

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

~~Set~~Under ~~forth below~~the ~~are~~written agreement with the Federal ~~approximate~~Reserve ~~high~~Bank of Richmond and ~~low~~the ~~(bid~~North ~~quotations/sales~~Carolina ~~price),~~Commissioner ~~known~~of to Banks, the ~~management~~Company ofand the Bank, ~~for~~are ~~each~~currently ~~quarter~~prohibited from indeclaring ~~the~~or ~~last~~paying ~~two~~any ~~fiscal years. These~~dividends ~~quotations~~without ~~reflect~~the ~~inter-dealer~~prior ~~prices,~~written ~~without~~approval ~~retail mark-up,~~of ~~mark-down,~~the orReserve ~~commissions~~Bank and ~~may~~the ~~not represent actual transactions~~Commissioner.

	2009				2008
	High		Low		High		Low
First Quarter	$	6.74	$	2.22	$	11.00	$	9.25
Second Quarter		4.67		2.50		9.99		8.70
Third Quarter		4.40		2.85		9.94		6.11
Fourth Quarter		4.97		2.85		9.08		5.00

Set forth below are the approximate high and low (bid quotations/sales price), known to the management of the Bank, for each quarter during the fiscal years ended 2009 and 2010. These quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commissions and may not represent actual transactions.

	2010				2009
	High		Low		High		Low

First Quarter	$	3.40	$	2.08	$	6.74	$	2.22
Second Quarter		5.00		1.30		4.67		2.50
Third Quarter		2.25		0.75		4.40		2.85
Fourth Quarter		2.10		1.00		4.97		2.85

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

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

The shares of Series A Preferred Stock, issued in connection with the unit placement, are convertible to shares of common stock of the Company at the election of the holder of the Series A Preferred Stock on a date which is not before one year and one day after the units were first issued or at the election of the Company if the holders of the Preferred Stock would be afforded any voting rights under North Carolina law. The warrants may be converted into shares of common stock upon the payment by the holder of the exercise price of $21.82 per share (adjusted for 11 for 10 stock split in 2007). The warrants may be exercised at any time before 5:00 p.m., Eastern Standard Time, September 30, 2009. On September 25, 2009, an amendment to the warrant agreement extended the exercise period of the warrants until September 30, 2014. All other provisions of the warrant agreement are unchanged and remain in full force and effect.

ITEM 6 – SELECTED FINANCIAL DATA

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

The information required by this item is incorporated by reference to the Company’s 2009 annual report to stockholders, pages 43 - 63.

ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following financial statements of the Company and the Report of independent registered public accounting firm set forth on pages 7 through 42 of the Company’s 2009 Annual Report to Stockholders are incorporated herein by reference:

1. Consolidated Balance Sheets as of December 31, 2009 and 2008

2. Consolidated Statements of Operations for the years ended December 31, 2009 and 2008

3. Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2009 and 2008

4. Consolidated Statements of Cash Flows for the years ended December 31, 2009 and 2008

5. Notes to Consolidated Financial Statements

6. Report of Independent Registered Public Accounting Firm

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

None.

Item 9A(T).Controls and Procedures

Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures in accordance with Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”). Our management, including our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2009, our disclosure controls and procedures were effective in ensuring that the information we are required to disclose in the reports we file or submit under the Act is (i) accumulated and communicated to our management (including the Chief Executive Officer and Chief Financial Officer) to allow timely decisions regarding required disclosure, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

In connection with the above evaluation of our disclosure controls and procedures, no change in our internal control over financial reporting was identified that occurred during our fourth quarter of 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ANNUAL REPORT

ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Waccamaw Bankshares, Inc. and Subsidiary (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a – 15(f) of the Exchange Act. The Company’s internal control system was designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of published financial statements in accordance with generally accepted accounting principles.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may be inadequate due to changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2009. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. Based on this assessment, the Company’s management has concluded that, as of December 31, 2009, the Company’s internal control over financial reporting was effective based on that framework.

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

ITEM 9B – OTHER INFORMATION

There was no information required to be disclosed by the Company in a report on form 8-K during the fourth quarter of 2009 that was not so disclosed.

PART III

ITEM 10 – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this item is incorporated by reference to the Company’s proxy statement for the 2010 Annual Meeting of Stockholders, pages 3-4 and 14-27.

Code of Ethics

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

ITEM 11 – EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference to the Company’s proxy statement for the 2010 Annual Meeting of Stockholders, pages 18-27.

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

Certain information required by this item is incorporated by reference to the Company’s proxy statement for the 2010 Annual Meeting of Stockholders, pages 3-4.

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

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants, and rights (a)		Weighted-average exercise price of outstanding options, warrants, and rights (b)		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)
Equity compensation plans approved by security holders		611,188	$	18.15		680,973
Equity compensation plans not approved by security holders	None		None		None
Total		611,188	$	18.15		680,973

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

The information required by this item is incorporated by reference to the Company’s proxy statement for the 2010 Annual Meeting of Stockholders, pages 17 and 20.

ITEM 14 – PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is incorporated by reference to the Company’s proxy statement for the 2010 Annual Meeting of Stockholders, page 28

~~PART~~On March 31, 2011, the Company IVissued 546,375 shares of its fixed rate noncumulative perpetual preferred stock, series B (the “Series B Preferred Stock”), to Monterey I Holdings, LLC. The Series B Preferred Stock was issued in exchange for 546,375 outstanding shares of the fixed rate noncumulative perpetual preferred stock, series A, of the Company’s subsidiary, Waccamaw Bank (the “Bank”). The shares of the Bank’s series A preferred stock were held by Monterey Holdings prior to the exchange and were originally issued to Monterey Holdings by the Bank pursuant to a subscription offer agreement dated December 23, 2010, whereby Monterey Holdings purchased 546,375 shares of the Bank’s series A preferred stock and a warrant covering 300,000 shares of the Company’s common stock for an aggregate contract price of $16,392,266.

~~ITEM~~The warrants and the rights, privileges 15and –preferences ~~EXHIBITS~~of ~~AND~~the ~~FINANCIAL~~Series ~~STATEMENT~~B ~~SCHEDULES~~Preferred Stock are described in more detail below.

~~(a)List~~Preferred Stock. As described in the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on March 17, 2011, the shares of ~~Documents~~the ~~Filed~~Company’s asSeries B Preferred Stock are convertible by the holders thereof into shares of the Company’s ~~Part~~common stock on the basis of 1.5 shares of common stock for each share of Series B Preferred Stock so converted. Shares of the Series B Preferred Stock are also convertible by the Company in the event that the holders of the Series B Preferred Stock are afforded any voting powers provided by law that are not granted by the Company’s articles of incorporation. In this ~~Report~~instance, the Company may convert each share of Series B Preferred Stock into a share of the Company’s common stock on a one-for-one basis. A form of the Company’s Series B Preferred Stock certificate is attached as exhibit 4.1 hereto and is incorporated herein by reference.

Warrant. On May 17, 2011, the Company issued a warrant to Monterey I Holdings, LLC. The warrant gives Monterey Holdings the right to purchase 300,000 shares of the Company’s common stock at an exercise price equal to fifty percent of the “market price” (1as defined in the warrant) ~~Financial~~of the Company’s common stock on May 17, 2011, or ~~Statements~~approximately $0.429 ~~The~~per ~~following~~share. ~~financial~~The ~~statements~~warrant ~~are~~was ~~filed~~issued as part of a ~~part~~transaction whereby Monterey Holdings purchased 546,375 shares of the fixed rate noncumulative perpetual preferred stock, series A, of the Bank for an aggregate contract price of ~~this~~$16,392,266. ~~report:~~The warrant may be exercised, in whole or in part, from May 17, 2012, until May 17, 2021.

Consolidated balance sheets at December 31, 2009 and 2008

Consolidated statements of operations for the years ended December 31, 2009 and 2008

Consolidated statements of changes in stockholders’ equity for the years ended December 31, 2009 and 2008

Consolidated statements of cash flows for the years ended December 31, 2009 and 2008

Notes to consolidated financial statements

Reports of independent registered public accounting firms

(2) Financial Statement Schedules. All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are omitted because of the absence of conditions under which they are required or because the required information is included in the financial statements and related notes thereto.

(3) Exhibits. The following exhibits are filed as part of this report:

3.1 Articles of Incorporation of Registrant (incorporated by reference from Exhibit 3.1 of Registrant’s Registration Statement on Form S-1, Registration No. 333-160435, as filed with the Commission on July 2, 2009)

3.2 Bylaws of Registrant (filed herewith)

4 Form of Common Stock Certificate (incorporated by reference from Exhibit 4 to Registrant’s Annual Report on Form 10-KSB for the year ended December 31, 2001, as filed with the Commission on March 29, 2002)

10.1 Employment Agreement with James G. Graham (incorporated by reference from Exhibit 10.3 to Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2008, as filed with the Commission on August 14, 2008)*

10.2 Change of Control Agreement (incorporated by reference from Exhibit 10.4 to Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2008, as filed with the Commission on August 14, 2008)*

~~10.3 Change of Control Agreement with J. Daniel Hardy (incorporated by reference from Exhibit 10.3 of Registrant~~Management’s ~~Form~~Discussion ~~S-1,~~and Registration No. 333-160435, filed with the Commission on July 2, 2009)*Analysis

~~10.4~~ITEM ~~Executive~~6 ~~Supplemental~~– ~~Retirement~~SELECTED Plan Agreement (incorporated by reference from Exhibit 10.5 to Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2008, as filed with the Commission on August 14, 2008)*FINANCIAL DATA

~~10.5~~Smaller ~~Director~~reporting ~~Supplemental~~companies ~~Retirement~~such ~~Plan~~as ~~(incorporated~~the byCompany ~~reference~~are ~~from~~not ~~Exhibit 10.6~~ required to ~~Registrant’s~~provide ~~Quarterly Report on Form 10-Q for~~ the ~~quarterly~~information ~~period~~required ~~ended~~by ~~June~~this 30, 2008, as filed with the Commission on August 14, 2008)*item.

~~10.6~~ITEM ~~Director Supplemental Retirement Plan Agreement (incorporated by reference from Exhibit 10.~~7 to– ~~Registrant’s~~MANAGEMENT'S ~~Quarterly~~DISCUSSION AND ~~Report~~ANALYSIS onOF ~~Form~~FINANCIAL ~~10-Q~~CONDITION ~~for~~AND ~~the~~RESULTS ~~quarterly~~OF period ended June 30, 2008, as filed with the Commission on August 14, 2008)*OPERATIONS

10.7 2008 Omnibus Stock Ownership and Long Term Incentive Plan (incorporated by reference from Exhibit 99.1 to Registrant’s Registration Statement on Form S-8, Registration No. 333-153327, as filed with the Commission on September 4, 2008)

10.8 Amended and Restated Trust Agreement of Waccamaw Statutory Trust II (incorporated by reference from Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2008, as filed with the Commission on August 14, 2008)

10.9 Guarantee Agreement (incorporated by reference from Exhibit 10.2 to Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2008, as filed with the Commission on August 14, 2008)

10.10 Indenture (incorporated by reference from Exhibit 4.1 to Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2008, as filed with the Commission on August 14, 2008)

13 Annual Report to Stockholders (filed herewith)

21 Subsidiaries of Registrant (filed herewith)

23.1 Consent of Elliott Davis, PLLC (filed herewith)

23.2 Consent of Dixon Hughes PLLC (filed herewith)

31.1 Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes- Oxley Act (filed herewith)

31.2 Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes- Oxley Act (filed herewith)

32 Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act (filed herewith)

99 Definitive Proxy Statement for the 2010 Annual Meeting of Shareholders (to be filed with the Commission pursuant to Rule 14a-6)

* Management contract or compensatory plan or arrangement

~~(b)~~Management’s ~~Exhibits.~~Discussion ~~The~~and ~~exhibits required by Item 601 of Regulation S-K are either filed as part of this report or incorporated by reference herein.~~Analysis

~~(c)~~MANAGEMENT’S ~~Financial Statements~~DISCUSSION ~~and Schedules Excluded from Annual Report. There are no other financial~~AND ~~statements~~ANALYSIS ~~and financial statement schedules which were excluded from the annual report to shareholders pursuant to Rule 14a-3(b) which are required to be included herein.~~OF

FINANCIAL CONDITION AND RESULTS OF OPERATION

The following presents management’s discussion and analysis of the financial condition and results of operation of the Company as of December 31, 2010 and 2009 and the years then ended. This discussion should be read in conjunction with the Company’s Financial Statements and the Notes thereto.

Significant Transaction

On September 30, 2010, the Bank entered into an agreement whereby the Bank would sell and Augusta Holdings, LLC (“Augusta”) would buy nonperforming real estate loans for the contractual pay-off amount (par value) of $11.2 million. The carrying value of these loans was $7.3 million as the carrying amounts had been reduced to reflect the fair value of the underlying collateral in measuring the impairment under the requirements of ASC 310-10-35. During the negotiations of this transaction, the Bank agreed to purchase from Augusta a home equity line of credit (HELOC) loan pool. The price of the pool was the amount of the aggregate principal balances (par value) of the loans in the pool, $110.1 million. The pool met the Bank’s credit quality and performance criteria. Under the terms of the HELOC pool purchase agreement, the Bank was able to exclude loans that did not meet the following criteria:

A current FICO score of a least 660 as of the date of the transaction.

Loans have not been past due more than 30 days in the twelve months preceding the closing of the transaction.

The weighted average loan to value would not exceed 90 percent as of the time the loan was originated.

Management performed detailed due diligence procedures on approximately 20 percent of the pool and removed from the pool any loans that did not meet the criteria above. In addition, as part of the transaction, as a credit enhancement, Augusta indemnified the Bank against credit losses in the pool for a period of five years from the transaction date, up to a maximum amount of 10% of the pool or approximately $11.0 million. The sale of the nonperforming assets and the purchase of the HELOC pool closed on December 22, 2010.

On December 23, 2010, the Bank entered into an agreement to sell to Monterey I Holdings, LLC (Monterey) 546,375 shares of preferred stock for $16.4 million with a dividend yield of 9%. The noncumulative perpetual preferred stock was issued at the bank level and was required to be converted to preferred stock of the Company. The preferred stock may be converted to 819,564 shares of the Company’s common stock at the option of the buyer. In addition, the Company issued warrants to allow Monterey to purchase up to 300,000 shares of the Company’s common stock at 50% of the market value of the common stock on the date of exercise. The preferred stock contract settled on December 23, 2010.

Augusta and Monterey have elements of common ownership and are considered related parties. They are not related parties with respect to the Company or the Bank. Based on the relationship of the counterparties, timing, and other facts and circumstances surrounding the transactions, management has concluded that the transactions should be considered one transaction for financial reporting purposes.

Management determined that since there was significant noncash consideration transferred, the transactions should be properly recorded at fair value under the guidance at ASC 845-10. Also in accordance with ASC 845-10, the fair value of the assets received shall be used to measure the cost if that value is more clearly evident than the fair value of the asset surrendered. Management determined the fair value of a homogenous HELOC pool meeting specific credit quality criteria prepared by a qualified valuation professional with prior experience valuing similar loan pools is more clearly evident than the fair values of coastal residential real estate developments and other highly volatile real estate that secures the non-performing loans and preferred shares in a market with very few comparable equity transactions.

Accordingly, the Bank retained an outside valuation consulting firm to provide a valuation of the HELOC pool within the guidance at ASC 820-10. The Bank received the valuation on October 5, 2011. The report indicated the fair value of the $110.1 million HELOC pool to be approximately $100.0 million. The valuation was primarily based on discounted cash flows as projected based on the location of the underlying collateral and the current FICO score of the borrower. Based on the valuation report, credit losses on the pool are projected to be $3.1 million over the life of the pool.

~~SIGNATURES~~Management’s Discussion and Analysis

~~In accordance~~A ~~with~~summary ~~Section 13 or 15(d)~~ of ~~the~~assets ~~Securities~~received ~~Exchange~~and ~~Act of 1934, the~~consideration ~~registrant~~transferred ~~has~~at ~~duly~~fair ~~caused~~value ~~this~~and ~~report~~a todescription beof ~~signed~~how onthe ~~its~~item ~~behalf~~was byvalued ~~the undersigned,~~is ~~thereunto~~presented ~~duly~~below ~~authorized~~(in thousands):

	WACCAMAW BANKSHARES, INC.
Fair Value received
April 15, 2010	/s/ James G. Graham
HELOC pool, net of discount	$	100,002
Date	James G. Graham
Credit enhancement		-
	President and Chief Executive Officer
Interest receivable		386
Total FV received	$	100,388
Fair Value of consideration paid
Non-performing loans	$	(7,309	)
Cash		(82,833	)
Warrants		(300	)
Preferred stock, net of discount		(9,604	)
Total FV received	$	(100,046	)
Back interest on non-performing loans recorded in operations	$	342

~~Pursuant~~ Due to ~~the~~uncertainty ~~requirements~~related ofto ~~the~~this ~~Securities Exchange Act of 1934~~transaction, ~~this~~the ~~report~~company has been ~~signed~~ ~~below~~unable byto ~~the~~finalize ~~following persons on behalf of~~ the ~~registrant~~financial ~~and~~statements infor ~~the capacities~~2010 ~~and~~until ~~on the dates indicated~~now.

Signature	Title	Date
/s/ James G. Graham	President, Director and	April 15, 2010
James G. Graham	Chief Executive Officer
/s/ Neil C. Bender, II	Director	April 15, 2010
Neil C. Bender
/s/ M. B. “Bo” Biggs	Director	April 15, 2010
M. B. “Bo” Biggs
/s/ Dr. Maudie M. Davis	Director	April 15, 2010
Dr. Maudie M. Davis
/s/ Monroe Enzor, III	Director	April 15, 2010
Monroe Enzor, III
/s/ James E. Hill, Jr.	Director	April 15, 2010
James E. Hill, Jr.
/s/ Alan W. Thompson	Director, Chairman	April 15, 2010
Alan W. Thompson	of the Board
/s/ Dale Ward	Director	April 15, 2010
Dale Ward
/s/ J. Densil Worthington	Director	April 15, 2010
J. Densil Worthington
/s/ Brian Campbell	Director	April 15, 2010
Brian Campbell
/s/ David A. Godwin	Chief Financial and Principal	April 15, 2010
David A. Godwin	Accounting Officer

Also, the Company has been unable to complete the filing of the 2010 Form 10-K or the March 31, June 30, or September 30, 2011, Forms 10-Q pending the resolution of this transaction. On June 24, 2011, the Company received notice of delisting by Nasdaq as a result of failure to timely file the 2010 Form 10-K.

Regulatory Actions

Effective June 14, 2010, the Company and the Bank entered into a Written Agreement (the “Agreement”) with the Federal Reserve Bank of Richmond (the “Reserve Bank”) and the North Carolina Commissioner of Banks (the “Commissioner”).

The Agreement is a formal corrective action pursuant to which the Bank has agreed to address specific issues set forth below, through the adoption and implementation of procedures, plans and policies designed to enhance the safety and soundness of the Bank.

Among other things, the Agreement requires the Bank to:

•

Retain an independent consultant acceptable to the Reserve Bank and the Commissioner to conduct a review of the effectiveness of the Bank’s corporate governance, board and management structure, to assess staffing needs and to prepare a written report of findings and recommendations;

•

Formulate a plan to strengthen board oversight of the management and operations of the Bank;

•

Formulate and implement a plan to strengthen credit risk management practices;

•

Formulate a plan for the ongoing review and grading of the Bank’s loan portfolio by a qualified independent party or by qualified staff that is independent of the Bank’s lending function;

•

Develop a plan to maintain sufficient capital at the Company, on a consolidated basis;

•

Not pay cash dividends without the prior written consent of the Reserve Bank and the Commissioner; and

•

Not accept any new brokered deposits (contractual renewals or rollovers of existing brokered deposits are permitted).

This is a type of formal supervisory agreement with our primary federal banking regulator. The written agreement could, among other things, inhibit our ability to grow and pay dividends. In addition, we expect that this written agreement will require us to implement plans to improve our risk management and compliance systems, oversight functions, operating and financial management and capital plans. While subject to the written agreement, our management and board of directors has been required to focus considerable time and attention on taking corrective actions to comply with its terms. We anticipate that this will remain the case going forward, as long as the Written Agreement remains in effect. We may also be required to hire third-party consultants and advisers to assist us in complying with the written agreement. This could increase our non-interest expense and reduce our earnings. If we do not comply with the written agreement, we could be subject to the assessment of civil money penalties, further regulatory sanctions, or other regulatory enforcement actions.

~~EXHIBIT INDEX~~Management’s Discussion and Analysis

EXHIBIT NUMBER		DESCRIPTION OF EXHIBIT
3.1		Articles of Incorporation of Registrant*
3.2		Bylaws of Registrant
4		Form of Common Stock Certificate*
10.1		Employment Agreement with James G. Graham*
10.2		Change of Control Agreement*
10.3		Change of Control Agreement with J. Daniel Hardy*
10.4		Executive Supplemental Retirement Plan Agreement*
10.5		Director Supplemental Retirement Plan*
10.6		Director Supplemental Retirement Plan Agreement*
10.7		2008 Omnibus Stock Ownership and Long Term Incentive Plan*
10.8		Amended and Restated Trust Agreement of Waccamaw Statutory Trust II*
10.9		Guarantee Agreement*
10.10		Indenture*
13		Annual Report to Stockholders
21		Subsidiaries of Registrant
23.1		Consent of Elliott Davis, PLLC
23.2		Consent of Dixon Hughes PLLC
31.2		Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
31.2		Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
32		Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act
99		Definitive Proxy Statement for the 2010 Annual Meeting of Shareholders**

*IncorporatedThe Directive is a formal corrective action byin ~~reference~~which the Board of Governors has determined that, as of October 30, 2011, Waccamaw Bank is critically undercapitalized, as defined in section 208.43(b)(5) of Regulation H of the Board of Governors.

**Among Toother ~~be filed~~things, ~~with~~the Directive requires the ~~Commission~~Bank ~~pursuant~~no tolater ~~Rule~~than January ~~14a-~~6, 2012 to:

•

Take other necessary measures to make the Bank adequately capitalized;

•

Restrict the making of any capital distributions, including, but not limited to, the payment of dividends;

•

Restrict the payment of bonuses to senior executive officers and increases in compensation of such officers; and

•

Based on unaudited financial information, as of December 31, 2011, the resulting bank regulatory capital ratios of total capital to risk weighted assets, Tier 1 capital to risk weighted assets and Tier 1 capital to average assets are 4.96%, 3.08% and 2.08%, respectively. Based on these levels, the Bank is considered significantly undercapitalized.

Generally accepted accounting principles require that in the event of changes about the likelihood of realization of a deferred tax asset that results in the establishment of a deferred tax asset valuation allowance related to unrealized losses on available for sale investment securities, that valuation allowance be established through operation even thought the original deferred tax asset was established through other comprehensive income. The guidance on how to address this inconsistent treatment with respect to the calculation of regulatory capital is not well defined. Accordingly, the capital amounts and ratios in the table above include an adjustment related to establishment of such a deferred tax asset valuation. After this adjustment, regulatory capital as presented is the same amount as would be reported had the related deferred tax asset has not been recorded. Management has discussed this treatment with applicable bank regulators and management has not been informed that this treatment is incorrect. However, due to the lack of clear guidance, it is possible the regulators could conclude this adjustment is not appropriate. If that were the case, Tier 1 and total regulatory capital for December 31, 2011 would be reduced by $898,000 and the bank capital ratios would approximate the following:

	2011

Total capital to risk weighted assets	1.93	%
Tier 1 capital to risk weighted assets	2.85	%
Tier 1 capital to average assets	4.73	%

~~INTRODUCTION~~Management’s Discussion and Analysis

~~Table of~~Going ~~Contents~~Concern Consideration

Introduction		1
Statement of Mission		2
Significant Trends		3
Financial Highlights Summary		4
Shareholder Letter		5
Consolidated Balance Sheets		7
Consolidated Statements of Operations		8
Consolidated Statements of Changes in Stockholders' Equity		9
Consolidated Statements of Cash Flows		10
Notes to Consolidated Financial Statements		11
Report of Independent Registered Public Accounting Firms		42
Management’s Discussion and Analysis		44
Stockholder Information		67

The consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future. These consolidated financial statements do not include any adjustments relating to the recoverability or classification of assets or the amounts and classification of liabilities that may be necessary should we be unable to continue as a going concern.

1The substantial uncertainties throughout the economy and U.S. banking industry coupled with current market conditions have adversely affected the Company’s 2010 results and capital levels. The significant losses in 2010 and 2009, primarily related to credit losses and the valuation allowance on deferred tax assets, reduced the Company’s capital levels. In order to become well capitalized under federal banking agencies’ guidelines, management believes that the Company will need to raise additional capital to recapitalize the organization and to absorb the potential future credit losses associated with the disposition of its nonperforming assets. Accordingly, management is in the process of evaluating various alternatives to increase tangible common equity and regulatory capital through the issuance of additional equity in public or private offerings. Management is actively evaluating a number of capital sources, asset reductions, and other balance sheet management strategies to ensure that the projected level of regulatory capital can support its balance sheet long-term. Management is currently reducing and otherwise restructuring its balance sheet to improve capital ratios.

~~STATEMENT~~Current market conditions for banking institutions, OFthe ~~MISSION~~overall uncertainty in financial markets, and depressed stock price are significant barriers to the success of any plan to issue additional equity in public or private offerings. An equity financing transaction would result in substantial dilution to the Company's current shareholders and could adversely affect the market price of the Company's common stock. There can be no assurance as to whether these efforts will be successful, either on a short-term or long-term basis. Should these efforts be unsuccessful, due to existing regulatory restrictions on cash payments between the Bank and the holding company, the Company may be unable to discharge its liabilities in the normal course of business. There can be no assurance that the Company will be successful in any efforts to raise additional capital during 2012.

~~Waccamaw~~Both the parent company and the banking subsidiary ~~Bank~~actively ~~serves~~manage aliquidity ~~principled~~and ~~mission:~~cash flow needs. The Company has suspended all dividends to shareholders indefinitely. At December 31, 2010, the Company had $35 million of cash and cash equivalents. The Company has no long-term debt maturing in 2011 and $15 million maturing in 2012.

•Liquidity at the bank level is dependent upon the deposit franchise which funds 81% of the Company’s assets (or 57% excluding brokered CDs). The FDIC’s temporary changes to beincrease the amount of deposit insurance to $250,000 per deposit relationship and to provide unlimited deposit insurance for certain transaction accounts have contributed to the ~~strongest~~stable ~~independent~~deposit ~~bank~~base. All banks that have elected to participate in the Transaction ~~coastal~~Account ~~Carolina~~Guarantee ~~region;~~Program (“TAGP”) have the same FDIC insurance coverage. Potential loss of deposits would be a primary funding need in a liquidity crisis. Deposit balances which are not covered by FDIC insurance total approximately $16.0 million currently, and would increase to approximately $22.5 million without the benefit of the FDIC’s TAGP, currently scheduled to expire at December 31, 2013. Thus, the primary deposit-related liquidity risk relates to balances which are not insured. As of December 31, 2011, the Company has liquid assets of approximately $128 million to address liquidity needs in a crisis scenario. If a liquidity issue presents itself, deposit promotions would be expected to yield significant in-flows of cash, but could be limited based on maximum interest rates that may be offered by banks that are not well capitalized.

•In ~~to offer~~addition, ~~fairly~~certain ~~priced~~borrowings, ~~products~~such as brokered CDs and ~~services~~FHLB ~~that~~advances, ~~meet~~are dependent on various credit eligibility criteria which may be impacted by changes in the Company’s financial ~~needs~~position and/or results of ~~our~~operations. Given the weakened economy and current market conditions, there is no assurance ~~community;~~that the Company will be able to obtain new borrowings or issue additional equity on terms that are satisfactory.

•During 2011, the Company continued to experience losses from operations primarily due to loan losses. Based on unaudited financial information, as of December 31, ~~operate~~2011 inconsolidated antotal ~~efficient~~assets ~~manner~~are ~~designed~~$561,120,907, equity is $(3,625,647), and net loss from operations is $18,725,248 for ~~customer~~the ~~convenience;~~year ended December 31, 2011. The resulting bank regulatory capital ratios of total capital to risk weighted assets, Tier 1 capital to risk weighted assets and Tier 1 capital to average assets are 4.96%, 3.08% and 2.08%, respectively. Based on these levels, the Bank is considered significantly undercapitalized.

•Generally accepted accounting principles require that in the event of changes about the likelihood of realization of a deferred tax asset that results in the establishment of a deferred tax asset valuation allowance related to unrealized losses on available for sale investment securities, that valuation allowance be established through operation even thought the original deferred tax asset was established through other comprehensive income. The guidance on how to address this inconsistent treatment with respect to the calculation of regulatory capital is not well defined. Accordingly, the capital amounts and ratios in the table above include an adjustment related to establishment of such a deferred tax asset valuation. After this adjustment, regulatory capital as presented ~~good~~is ~~corporate~~the ~~neighbor~~same ~~within~~amount ~~our~~as ~~communities;~~would be reported had the related deferred tax asset has not been recorded. Management has discussed this treatment with applicable bank regulators and management has not been informed that this treatment is incorrect. However, due to the lack of clear guidance, it is possible the regulators could conclude this adjustment is not appropriate. If that were the case, Tier 1 and total regulatory capital for December 31, 2011 would be reduced by $898,000 and the bank capital ratios would approximate the following:

• to maintain safety, soundness and profitability;

	2011

Total capital to risk weighted assets	1.93	%
Tier 1 capital to risk weighted assets	2.85	%
Tier 1 capital to average assets	4.73	%

•Based on current capital levels and continued operating losses into 2012, management believes the Company will require additional capital to ~~care~~be able to remain viable at least ~~for~~through December 31, 2012. Management has implemented various strategies including a ~~quality~~private ~~staff~~stock ~~that~~offering ~~supports~~and selling branches to provide this ~~mission~~needed capital. In spite of management’s best efforts, there is no guarantee management will be successful in raising the additional capital. Accordingly, there is substantial doubt about the Company’s ability to continue as a going concern.

219

~~Significant Trends~~Management’s Discussion and Analysis

3Overview

~~Financial~~Waccamaw Bank ~~Highlights~~(the ~~Summary1~~“Bank”) began operations on September 2, 1997. The Bank operates by attracting deposits from the general public and using such deposit funds and other sources of funding, including borrowings, to make commercial and consumer loans as well as residential construction loans and permanent mortgage real estate loans and to make other permissible investments. Revenues are derived principally from interest on loans and investments. Changes in the volume and mix of these assets and liabilities, as well as changes in the yields earned and rates paid, determine changes in net interest income. Waccamaw Bankshares, Inc. (the “Company”) was formed during 2001 and acquired all the outstanding shares of the Bank on July 1, 2001.

	2009			2008			2007			2006			2005
Summary of Operations
Interest income	$	25,889		$	30,485		$	31,637		$	25,379		$	18,228
Interest expense		(12,536	)		(16,934	)		(16,296	)		(11,226	)		(7,536	)
Net interest income		13,353			13,551			15,341			14,153			10,692
Provision for loan losses		(16,580	)		(2,990	)		(386	)		(1,450	)		(1,370	)
Other income		3,908			966			3,443			2,581			2,269
Other expense		(18,515	)		(15,397	)		(12,440	)		(9,422	)		(6,967	)
Income tax (expense) benefit		3,628			1,827			(2,049	)		(2,210	)		(1,589	)
Net income (loss)	$	(14,206	)	$	(2,043	)	$	3,909		$	3,652		$	3,035
Per Share Data2
Basic income (loss) per share	$	(2.57	)	$	(.37	)	$	.73		$	.71		$	.61
Diluted income (loss) per share		(2.57	)		(.37	)		.72			.69			.58
Book value		3.09			5.04			6.44			5.77			4.48
Average Balance Sheet Summary
Loans, net	$	368,458		$	376,747		$	332,451		$	279,625		$	238,579
Securities		92,344			105,819			65,454			46,561			31,257
Total assets		558,618			539,468			438,579			356,675			302,381
Deposits		442,959			415,711			354,512			298,324			252,994
Stockholders’ equity		28,886			33,460			33,501			25,945			20,254
Selected Ratios
Average equity to average assets		5.17	%		6.20	%		7.64	%		7.27	%		6.70	%
Return on average assets		(2.54	%)		(.38	%)		.89	%		1.02	%		1.00	%
Return on average equity		(49.18	%)		(6.11	%)		11.67	%		14.07	%		14.98	%

The Company’s total assets were $548.2 million at December 31, 2010 as compared to $533.2 million at December 31, 2009. Total deposits at December 31, 2010 increased 4.9% from December 31, 2009, to $454.9 million. Total deposits were $433.5 million at December 31, 2009. The Bank’s net loans increased to $389.5 million at the end of 2010, an increase of $49.5 million over the 2009 amount of $340.0 million. The $49.5 million increase in loans was in part due to the purchase of a pool of residential mortgage home equity loans with a par value of $110 million, less discount of $10.1 million, or a fair value of $99.9 million. Investment securities were $67.5 million and $87.8 million at December 31, 2010 and 2009, respectively.

~~1 In~~The Bank’s nonperforming ~~thousands~~loans increased significantly on a consecutive quarter basis in 2010 through lack of ~~dollars~~performance and the degradation of the portfolio has continued into 2011 and 2012. Unless the economy improves significantly, ~~except~~these ~~per~~asset ~~share~~quality ~~data~~issues and related costs are likely to continue to depress the Bank’s operating performance in 2011 and 2012. Continuing negative asset quality issues in 2010, 2011 and into 2012, could erode regulatory capital further.

~~2 Adjusted for~~Critical ~~the~~Accounting ~~effect of 11 for 10 stock split in 2007.~~Policies

4The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The notes to the audited consolidated financial statements included in this Annual Report on Form 10-K for the year ended December 31, 2010 contain a summary of significant accounting policies. Management believes the Company’s policies with respect to the methodology for the determination of the allowance for loan losses, investment impairment charges, goodwill impairment and asset impairment judgments, such as the recoverability of intangible assets, each involve a higher degree of complexity and require management to make difficult and subjective judgments that often require assumptions or estimates about highly uncertain matters. Accordingly, the Company considers the policies related to those areas to be critical. The allowance for loan losses is an estimate of the losses that may be sustained in the Company’s loan portfolio. The allowance is based on two basic principles of accounting: (i) Statement of Financial Accounting Standards ASC 420, Accounting for Contingencies, which requires that losses be accrued when they are probable of occurring and estimable, and (ii) ASC 310-10, Accounting by Creditors for Impairment of a Loan, which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market, and the loan balance.

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

~~Dear Shareholders, Clients and Friends:~~20

~~Enduring. Tenacious.~~Management’s ~~Sustaining.~~Discussion ~~Determined.~~and ~~Resourceful, Dedicated.~~Analysis

~~These~~The ~~are some~~Company ofaccounts ~~the~~for ~~words~~recognized intangible ~~you~~assets ~~will~~based ~~find~~on ~~printed~~their ~~throughout~~estimated ~~the~~useful ~~2009 report~~lives. ~~Indeed,~~ ~~our~~Intangible ~~Nation’s~~assets ~~economy~~with ~~has~~finite ~~suffered~~useful ~~through~~lives ~~the~~are ~~worse economic~~amortized ~~downturn~~while ~~since~~intangible assets ~~the~~with ~~Great~~an ~~Depression.~~indefinite ~~Despite~~useful ~~the~~life ~~traumatic~~are ~~year~~not ~~our company~~amortized. ~~experienced~~Currently, ~~Waccamaw~~the ~~Bank~~Company’s ~~remains~~recognized ~~well~~intangible ~~capitalized,~~assets ~~the~~consist ~~highest capital~~primarily ~~rating~~of ~~assigned~~purchased bycore ~~bank~~deposit ~~regulatory~~intangible ~~authorities~~assets, ~~and~~having ~~has~~estimated ~~endured~~useful ~~the~~lives ~~effects~~ of ~~the~~ ~~turmoil~~10 inyears, ~~our~~which ~~country’s~~are ~~economy~~being amortized. ~~Likewise,~~The ~~our~~useful ~~bank suffered severely~~life ~~during~~is ~~2009~~the ~~and~~period isover ~~reporting~~which athe ~~net~~assets ~~loss~~are ofexpected ~~$14,205,532~~to ~~for~~contribute ~~the~~directly ~~year.~~or ~~Through~~indirectly ~~the enduring,~~to ~~tenacious~~future ~~and~~cash ~~determined~~flows. ~~resources~~Estimated useful lives of ~~our~~intangible ~~dedicated~~assets ~~staff,~~are ~~our~~based ~~bank~~on ~~is making~~an ~~strong~~analysis ~~improvements~~of inpertinent ~~our~~factors, ~~company’s~~including ~~future.~~(as applicable):

~~Without question,~~· ~~2009 was~~ the ~~most~~expected ~~challenging~~use ~~period~~of ~~in our Company’s history with~~ the ~~previous~~ eighteen months being an extremely stressful economic time. Despite these turbulent times, we again reiterate the Bank has maintained capital ratios above the standards established for a bank to be classified as a “well capitalized” bankasset; the highest capital rating achievable. Our bank is very proud to say we did so without any Federal assisted capital from the Trouble Assets Relief Program (TARP); which was a significant distinction from many of our market’s major competitors.

~~Waccamaw’s financial~~· ~~performance~~the ~~was~~expected ~~overshadowed~~useful bylife ~~several~~of ~~factors~~another ~~that~~asset ~~are~~or ~~explained below. We~~group ~~are~~of ~~pleased,~~assets ~~however,~~to ~~with~~which the ~~core~~useful ~~performance~~life of ~~our banking~~the ~~operations~~intangible asasset wemay ~~have increased our market share and our customer base substantially while improving our critical funding sources during 2009.~~relate;

~~Below~~· ~~is the~~any ~~consolidated statement of operations of December 31~~legal, ~~2009 compared to the year ended December 31~~regulatory, ~~2008. This~~or ~~should~~contractual ~~put~~provisions inthat ~~very~~may ~~clear~~limit ~~numbers what happened to our bank in 2009. Following this is a detailed explanation for each following~~ the ~~breakdown.~~useful life;

· ~~$14~~any legal,~~205~~ regulatory,~~532~~ ~~net~~or ~~loss~~contractual ofprovisions ~~for~~that ~~2009~~enable ~~versus~~renewal ~~net~~and ~~loss~~extension of ~~$2,043,030~~the inasset’s ~~2008~~legal or contractual life without substantial cost;

· ~~Interest~~the ~~expense~~effects ~~decreased~~of ~~26.0%~~obsolescence, todemand, ~~$12.5million~~competition, ~~from~~and ~~$16.9~~other ~~million~~economic factors; and

· ~~Interest~~the ~~income~~level ~~decreased~~of ~~15.1%~~maintenance expenditures required to ~~$25.9~~obtain ~~million~~the expected future cash flows from ~~$30.5~~the ~~million~~asset.

·Straight-line amortization ~~Net~~is ~~interest~~used ~~income~~to ~~decreased~~expense ~~1.5%~~recognized toamortizable ~~$13.4~~intangible ~~million~~assets ~~from~~since ~~$13~~a method that more closely reflects the pattern in which the economic benefits of the intangible assets are consumed cannot readily be determined.6 ~~million~~Intangible assets are not written off in the period of acquisition unless they become impaired during that period.

·The ~~Provision~~Company ~~for~~evaluates ~~loan~~the ~~losses~~remaining useful ~~increased~~life ~~454%~~of each intangible asset that is being amortized each reporting period to ~~$16.6~~determine ~~million~~whether ~~from~~events $3and circumstances warrant a revision to the remaining period of amortization.0 ~~million~~If the estimate of the intangible asset’s remaining useful life is changed, the remaining carrying amount of the intangible asset is amortized prospectively over that revised remaining useful life.

·If ~~Deferred~~an ~~tax~~intangible asset ~~valuation~~that ~~allowance~~is $3being amortized is subsequently determined to have an indefinite useful life,~~652,441~~ the asset will be tested for impairment. That intangible asset will no longer be amortized and will be accounted for in the same manner as intangible assets that are not subject to amortization.

·FASB ~~Goodwill~~Accounting ~~impairment~~Standards ~~charge~~Codification Topic of820, $2Fair Value Measurements and Disclosures (ASC Topic 820) discusses non-monetary exchanges in relation to the swap for the Company made for the sale non-performing loans and acquiring HELOC loans.7 ~~million~~Refer to Note 8 for additional accounting policies regarding this transaction.

·Net ~~Allowance~~Interest ~~for loan losses increased 41%. Increase as percentage of loans to 2.90% from 1.86%~~Income

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

The goodwill impairment charge was the company’s goodwill associated with the acquisition of a South Carolina financial institution in 2006. This charge is a non-cash accounting transaction that will not effect cash flows, liquidity, tangible capital ratios, or the Company’s ability to conduct business. The charge is primarily due to the current state of the financial markets and Waccamaw Bankshares stock price performance in 2009. The Company’s market capitalization has been less than its recorded book value and as a result, assumptions used in testing this intangible asset determined the impairment was appropriate.21

~~In a similar manner, the charge down of the Company~~Management’s ~~tax~~Discussion deferred asset, is a non-cash charge, that does not affect cash flows or liquidity. A tax deferred asset is primarily comprised of future tax benefits associated with the allowance for loan losses, actual loan losses, and other items. After analysis, it was determined that the non-cash valuation allowance was appropriate. In future profitable periods, this charge may be reversed should testing prove it to be reasonable.Analysis

~~Because of~~Purchase the prolonged economic downturn and asset quality trend, the Company has undertaken extensive loan portfolio review resulting in a significant increase in the reserve for provisional loan losses. It is our belief that increased non-performing assets, net charge-offs, and the significant increase in provision for loan loses is the proper response to the economic environment in our market. The Bank has recognized loan losses and impairments in an appropriate manner that will serve to improve portfolio performance in future periods. A tax refund of approximately $5 million has been included in our other assets and will be converted to earning assets upon receipt.Accounting

Loans

Preferred stock

Fair Value of the Transaction

A summary of assets received and consideration transferred at fair value and a description of how the item was valued is presented below (in thousands):

Fair Value received
HELOC pool, net of discount	$	100,002
Credit enhancement		-
Interest receivable		386
Total FV received	$	100,388

Fair Value of consideration paid
Non-performing loans	$	(7,309	)
Cash		(82,833	)
Warrants		(300	)
Preferred stock, net of discount		(9,604	)
Total FV received	$	(100,046	)

Back interest on non-performing loans recorded in operations	$	342

Management’s Discussion and Analysis

HELOC Pool - Fair value as determined by a valuation report prepared by an independent third party.

Credit Enhancement – The credit enhancement is unsecured and contractually not due to be settled until two years after the close of the transaction and then annually thereafter for the remaining three years. Due to concerns about the counterparty’s ability to honor the obligation of the credit enhancement, management has determined there is not sufficient evidence to support any value related to the credit enhancement. Accordingly, the credit enhancement has been determined to have no fair value. The Company also believes that the credit enhancement may be considered continuing involvement in the loans sold and may raise questions about whether or not a sale of these assets may recorded under generally accepted accounting principles. We will address this issue in the future by obtaining a legal opinion that addresses the isolation of the assets sold if we determine in the future that there is sufficient evidence to support a value related to the credit enhancement.

Interest Receivable – This is the interest receivable from the HELOC pool borrowers at the time if the transfer, valued at the actual amount of the accrual as of the date of closing.

Non-performing Loans – Fair value determined based on the value of the collateral underlying the individual loans as determined by recent outside appraisals.

Cash – This is the actual amount of net cash paid by the Bank for the pool.

Warrants – Valued based on management’s estimate.

Preferred stock – Fair value is based on the excess of the fair value of the assets received over the fair value of the assets and other instruments transferred to Augusta as part of the transaction.

HELOC Pool Discount

The HELOC pool value as determined by the valuation report resulted as discount to par of approximately $10.1 million. Based on the valuation report, management expects to have credit losses on the portfolio of $3.1 million. Accordingly, that amount of the discount will be used as a credit reserve to cover those losses. The reminder of the discount ($7 million) will be accreted into income over the expected life of the pool using the level yield method. Because the last transaction closed on December 23, 2010, no accretion was recorded during 2010. Management began accreting the discount during 2011.

Management’s Discussion and Analysis

	Net Interest Income and Average Balances (dollars in thousands)

	Periods Ended December 31,
	2010							2009							2008
			Interest							Interest							Interest
	Average		Income/		Yield/			Average		Income/		Yield/			Average		Income/		Yield/
	Balance		Expenses		Cost			Balance		Expenses		Cost			Balances		Expenses		Cost

Interest-earning assets:
Investment securities	$	93,619	$	3,424		3.66	%	$	92,344	$	4,698		5.09	%	$	105,819	$	6,327		5.98	%
Federal funds sold		22,388		57		.26	%		12,784		30		.24	%		6,318		70		1.11	%
Deposits with banks		62,236		124		.20	%		8,323		47		.57	%		1,999		32		1.60	%
Loans, net^1,2		322,255		17,076		5.30	%		368,458		21,114		5.73	%		376,747		24,056		6.39	%
Total interest-earning assets		500,498		20,681					481,909		25,889					490,883		30,485

Yield on average interest-earning assets						4.13	%						5.37	%						6.21	%

Noninterest-earning assets:
Cash		4,837							25,450							8,181
Premises and equipment		16,737							17,346							17,093
Interest receivable and other		42,494							33,913							23,311
Total noninterest-earning assets		64,068							76,709							48,585
Total assets	$	564,566						$	558,618						$	539,468

Interest-bearing liabilities:
Demand deposits	$	42,293		219		.52	%	$	35,775		175		.49	%	$	29,399		179		.61	%
Savings deposits		113,244		1,216		1.07	%		101,623		1,361		1.34	%		76,580		1,843		2.41	%
Time deposits		273,453		5,315		1.94	%		270,669		7,726		2.85	%		275,956		11,481		4.16	%
Other short-term borrowings		6,739		128		1.89	%		8,970		208		2.32	%		22,644		764		3.37	%
Long-term debt		70,714		2,881		4.07	%		75,521		3,066		4.06	%		65,250		2,667		4.09	%
Total interest-bearing liabilities		506,443		9,759					492,558		12,536					469,829		16,934
Cost of average interest-bearing liabilities						1.93	%						2.55	%						3.60	%

Noninterest-bearing liabilities:
Demand deposits		35,646							34,892							33,775
Interest payable and other		2,850							2,282							2,404
Total noninterest-bearing liabilities		38,496							37,174							36,179
Total liabilities		544,939							529,732							506,008

Stockholders' equity		19,627							28,886							33,460
Total liabilities and stockholders' equity	$	564,566						$	558,618						$	539,468

Net interest income			$	10,922						$	13,353						$	13,551

Net yield on interest-earning assets						2.18	%						2.77	%						2.76	%

¹ Average loan balances include nonaccrual loans.

² Deferred loan fees are included in interest income.

Management’s Discussion and Analysis

Interest income during 2010 was $20.7 million, a decrease of 20.1% from the 2009 total of $25.9 million. Interest income for 2008 was $30.5 million. The decrease in net interest income can primarily be attributed to the decrease in loans and investments and the increase in interest bearings deposits with banks in 2010. Average earning assets were $500.5 million during 2010, a decrease of 3.9% from 2009. Average earning assets decreased 1.8% to $481.9 million during 2009 over the 2008 balance of $490.9 million. Yields on interest-earning assets during 2010, 2009, and 2008 were 4.1%, 5.4%, and 6.2%, respectively.

Interest rates charged on loans vary with the degree of risk, maturity and amount of the loan. Competitive pressures, money market rates, availability of funds, and government regulation also influence interest rates. On average, loans yielded 5.3%, 5.7% and 6.4% during 2010, 2009, and 2008, respectively. Yields on loans decreased in 2010 primarily as a result of increases in non-accrual loans.

Interest expense was $9.8 million during 2010, a decrease of 22.0% over 2009. Interest expense in 2009 was $12.5 million, a decrease of 26.0% over 2008. The decrease in 2010 is a result of our deposits re-pricing in 2010 as average cost of funds decreased approximately 62 basis points from 2009. The decrease in 2009 over 2008 is due to average cost of funds decreasing approximately 100 basis points from 2008. The average rate paid on interest-bearing liabilities during 2010, 2009, and 2008 was 1.9%, 2.6%, and 3.6%, respectively.

Net interest income was $10.9 million during 2010, a decrease of 18.2% from 2009. During 2009 net interest income decreased to $13.4 million. Net interest income was $13.6 million in 2008. The decreases in net interest income in 2010 and 2009 can primarily be attributed to the decrease in loans and investments and the increase in interest bearing deposits with banks in 2010. Net interest margin during 2010, 2009, and 2008 was 2.2%, 2.8%, and 2.8%, respectively.

The effects of changes in volumes and rates on net interest income for 2010, 2009 and 2008 are shown in the table below.

Rate/Volume Variance Analysis (thousands)

	2010 Compared to 2009									2009 Compared to 2008
	Interest									Interest
	Income/			Variance						Income/			Variance
	Expense			Attributable to						Expense			Attributable to
	Variance			Rate			Volume			Variance			Rate			Volume
Interest-earning assets:
Loans	$	(4,038	)	$	(1,516	)	$	(2,522	)	$	(2,942	)	$	(2,424	)	$	(518	)
Investment securities		(1,274	)		(1,340	)		66			(1,629	)		(879	)		(750	)
Deposits with banks		77			(8	)		85			15			(4	)		19
Federal funds sold		27			2			25			(40	)		129			(169	)
Total		(5,208	)		(2,862	)		(2,346	)		(4,596	)		(3,178	)		(1,418	)

Interest-bearing liabilities:
Demand deposits		44			-			44			(4	)		-			(4	)
Savings deposits		(145	)		4			(149	)		(482	)		16			(498	)
Time deposits		(2,411	)		(2,490	)		79			(3,755	)		(1,521	)		(2,234	)
Short-term borrowings		(80	)		(1	)		(79	)		(556	)		(10	)		(546	)
Long-term debt		(185	)		-			(185	)		399			(1	)		400
Total		(2,777	)		(2,487	)		(290	)		(4,398	)		(1,516	)		(2,882	)
Net interest income	$	(2,431	)	$	(375	)	$	(2,056	)	$	(198	)	$	(1,662	)	$	1,464

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

Balances of nonaccrual loans have been included for computational purposes.

Management’s Discussion and Analysis

Provision for Loan Losses

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

The provision for loan loss expense was $12,205,554, $16,579,908, and $2,990,096 during 2010, 2009, and 2008 respectively. The Bank's allowance for loan losses as a percentage of gross loans was 3.84%, 2.90% and 1.86% at the end of 2010, 2009, and 2008, respectively. Additional information regarding loan loss provisions is discussed below under the heading “Nonperforming and Problem Assets.”

Noninterest Income

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

Noninterest income totaled $6.7 million, $3.9 million, and $966,000 for the years ended December 31, 2010, 2009, and 2008, respectively. Noninterest income increased in 2010 primarily due to increases in gains on sales of investment securities, an increase of $123,000 of ATM and check cashing fees and an increase of $25,000 in mortgage origination income. Service charges on deposit accounts were 41.3% of total noninterest income. Service charges tend to increase as the number of deposit accounts increases. The Bank's fee structure is reviewed annually to determine if adjustments to fees are warranted.

The Bank purchased life insurance for certain key employees in December 2004, March 2007, December 2007, June 2008, December 2008 and December 2010, providing $648,000, $741,000 and $548,000 of noninterest income for the years ended December 31, 2010, 2009 and 2008, respectively.

Management’s Discussion and Analysis

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

Sources of Noninterest Income (thousands)

	2010		2009			2008

Service charges on deposit accounts	$	2,778	$	3,023		$	2,115
ATM and check cashing fees		998		875			755
Gain (loss) on sale of investment securities		1,593		(887	)		98
Mortgage origination		378		380			353
Insurance commission		9		13			15
Income from financial services		102		139			264
Earnings on bank owned life insurance		648		741			548
Impairment of investment securities		-		(419	)		(3,348	)
Other		218		44			166
Total noninterest income	$	6,724	$	3,909		$	966

Noninterest Expense

Noninterest expense for 2010, 2009, and 2008 was $17.0 million, $18.5 million and $15.4 million, respectively. The majority of the increase in noninterest expense for 2010 can be attributed primarily to write-downs or losses on foreclosed assets of $1.7 million in 2010, $776,000 in 2009 and with no expense in 2008 and regulatory agency expense of $1.8 million in 2010, $1.3 million in 2009 and $389,000 in 2008.

Total personnel expenses, the largest component of noninterest expense, were $6.3 million, $7.1 million and $8.2 million during 2010, 2009 and 2008, respectively. Personnel expenses decreased 11.7% during 2010 and decreased 13.0% during 2009. Substantially all of the decrease in 2010 resulted from cost cutting initiatives in salaries and employee benefits.

Combined occupancy and furniture and equipment expense was $2.1 million, $2.1 million and $2.0 million, or 12.0%, 11.3% and 13.1% of noninterest expense during 2010, 2009 and 2008, respectively. Professional services expense, including fees paid to attorneys, independent auditors and consultants was $1.2 million, $853,000, and $490,000 in 2010, 2009 and 2008, respectively. The increase in 2010 can be mostly attributed to legal fees related to efforts to collect principal and interest from borrowers and guarantors on various outstanding loans.

Advertising and public relations expense decreased to $261,000 in 2010 from $311,000 in 2009 as these expenses were reduced as the result of cost cutting initiatives to marketing expenses in 2010. Data processing and credit card processing fees totaled $1.1 million, $1.2 million and $1.3 million during 2010, 2009 and 2008, respectively. These fees relate directly to the number of accounts serviced and transactions processed.

In 2010 and 2009, losses on other real estate owned were written down to fair value. There were no expenses in 2008 related to fair value write-downs of other real estate owned.

Total regulatory expense from FDIC deposit insurance assessments increased to $1.8 million in 2010 from $1.3 million in 2009 and $389,000 in 2008.

The overhead ratio of noninterest expense to adjusted total revenues (net interest income plus noninterest income excluding securities transactions) was 107%, 107% and 111% in 2010, 2009, and 2008, respectively. The primary elements of noninterest expense for the fiscal years ended December 31, 2010, 2009, and 2008 are summarized in the following table.

Management’s Discussion and Analysis

Sources of Noninterest Expense (thousands)

	2010		2009		2008

Salaries and wages	$	5,722	$	6,328	$	6,838
Employee benefits		570		802		1,359
Total personnel expense		6,292		7,130		8,197

Occupancy expense		1,473		1,513		1,435
Furniture and equipment		585		584		577
Printing and supplies		96		96		157
Professional services		1,158		853		490
Postage and office supplies		147		155		153
Telephone		175		178		180
Dues and subscriptions		87		77		61
Education and seminars		34		32		92
Franchise and local taxes		88		94		117
Foreclosed assets, net		2,504		776		-
Advertising and public relations		261		311		705
Regulatory agency expense		1,643		1,293		389
Director fees		-		-		133
Data processing services		1,134		1,175		1,307
Amortization of deposit premium		90		191		286
Goodwill impairment charge		-		2,727		-
Other operating expense		1,223		1,330		1,118
Total noninterest expenses	$	16,990	$	18,515	$	15,397

Income Taxes

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

Income tax expense (benefit) was $3,688,212, $(3,628,000) and $(1,827,000) for 2010, 2009 and 2008, respectively. There were no net deferred income tax assets at December 31, 2010 and net deferred income tax assets of approximately $3,195,000 and $6,994,000 at December 31, 2009 and 2008, respectively which were included in other assets. At December 31, 2010 and 2009, $12,548,053 and $3,652,000 respectively, was placed in a valuation allowance established on net deferred tax assets as discussed in Note 18 of “Notes to Consolidated Financial Statements”. Accounting Standards Codification Topic 740, Income Taxes, requires that companies assess whether a valuation allowance should be established against their deferred tax assets based on the consideration of all available evidence using “a more likely than not” standard that the tax position will be realized or sustained upon examination. The Company’s management considers both positive and negative evidence and analyzes changes in near-term market conditions as well as other factors which may impact future operating results. At December 31, 2010, the Company’s management believes that it is not likely it will be able to realize its net deferred tax assets.

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

Management’s Discussion and Analysis

The cumulative loss incurred by the Company in 2008, 2009 and 2010 was the primary negative factor considered by management. Additionally general economic conditions in the Company’s primary markets and the potential for ongoing weakening asset quality were also evaluated as potential negative factors.

Earning Assets

Average earning assets were $500.5 million during 2010, an increase of 2.0% from 2009. Average earning assets were $481.9 million in 2009, a decrease of 1.8% over the $490.9 million balance for 2008. Total average earning assets represented 88.7%, 86.3%, and 91.0% of total average assets during the years ended December 31, 2010, 2009 and 2008, respectively. A summary of average assets is shown in the following table.

Average Asset Mix (dollars in thousands)

	2010					2009					2008
	Average					Average					Average
	Balance		Percent			Balance		Percent			Balance		Percent
Earning assets:
Loans, net	$	322,255		57.08	%	$	368,458		65.96	%	$	376,747		69.84	%
Investment securities		93,619		16.58	%		92,344		16.53	%		105,819		19.61	%
Federal funds sold		22,388		3.97	%		12,784		2.29	%		6,318		1.17	%
Deposits with banks		62,236		11.02	%		8,323		1.49	%		1,999		.37	%
Total earning assets	$	500,498		88.65	%	$	481,909		86.27	%	$	490,883		90.99	%

Nonearning assets:
Cash and due from banks		4,837		.86	%		25,450		4.55	%		8,181		1.52	%
Premises and equipment		16,737		2.96	%		17,346		3.11	%		17,093		3.17	%
Other assets		42,494		7.53	%		33,913		6.07	%		23,311		4.32	%
Total nonearning assets		64,068		11.35	%		76,709		13.73	%		48,585		9.01	%
Total assets	$	564,566		100.00	%	$	558,618		100.00	%	$	539,468		100.00	%

Loans

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

Management’s Discussion and Analysis

A significant portion of the loan portfolio is made up of loans secured by various types of real estate. Real estate loans represented 90.2%, 86.3%, and 83.6% of total loans at December 31, 2010, 2009, and 2008, respectively. Total loans secured by one-to-four family residential properties represented 45.5%, 22.8% and 21.7% of total loans at the end of 2010, 2009 and 2008, respectively. Loans for commercial and business purposes were $26.1 million, $32.5 million and $43.0 million, or 6.4%, 9.3% and 11.1% of total loans outstanding at December 31, 2010, 2009 and 2008, respectively.

The amounts of gross loans outstanding by type at December 31, 2010 through 2006 are shown in the following table.

Loan Portfolio Summary (thousands)

	2010		2009		2008		2007		2006

Construction and development	$	81,087	$	121,838	$	125,878	$	121,760	$	109,036
Farmland		2,494		2,473		3,343		3,806		2,412
1-4 family residential		184,218		80,071		83,734		75,671		64,475
Multifamily residential		8,946		9,879		11,802		3,670		3,650
Nonfarm, nonresidential		88,912		88,197		98,438		93,222		73,529
Total real estate		365,657		302,458		323,195		298,129		253,102

Agricultural		402		563		654		671		675
Commercial and industrial		26,134		32,551		42,958		43,617		48,858
Consumer		12,712		13,380		17,217		13,950		13,172
Other		328		1,512		2,432		4,610		1,783
Total	$	405,233	$	350,464	$	386,456	$	360,977	$	317,590

The maturity/re-pricing distributions of loans as of December 31, 2010 are set forth in the following table.

Maturity Schedule of Loans (dollars in thousands)

	Commercial		Construction
	and		and				Total
	Industrial		Development		Others		Amount		Percent

Three months or less	$	8,115	$	25,247	$	71,165	$	104,527		25.79	%
Over three months to twelve months		3,436		10,690		16,651		30,777		7.60	%
Over one year to five years		11,990		37,301		67,012		116,303		28.70	%
Over five years		2,593		7,849		143,184		153,626		37.91	%
Total loans	$	26,134	$	81,087	$	298,012	$	405,233		100.00	%

Investment Securities

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

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

Management’s Discussion and Analysis

The Company attempts to manage the investment portfolio in a conservative manner with virtually all investments taking the form of purchases of government sponsored enterprises, corporate securities, municipal securities, and mortgage-backed securities. Management views the investment portfolio as a source of income, and purchases securities with that objective in mind.

However, adjustments are necessary in the portfolio to provide an adequate source of liquidity which can be used to meet funding requirements for loan demand and deposit fluctuations and to mitigate interest rate risk. Therefore, management may sell certain securities prior to their maturity.

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

Investment Securities (dollars in thousands)

	December 31, 2010
	Amortized Cost Due
				After One			After Five
	In One Yr.			Through			Through			After Ten					Fair
	Or Less			Five Years			Ten Years			Years			Total		Value

Investment securities
Municipal securities		-			-			-			7,371			7,371		6,181
Corporate securities		2,000			-			-			2,235			4,235		3,399
Single issue trust preferred securities		-			1,002			-			5,476			6,478		5,067
Mortgage-backed securities		-			-			30			53,153			53,183		52,840
Total	$	2,000		$	1,002		$	30		$	68,235		$	71,267	$	67,487

Weighted average yields
Municipal securities		-	%		-	%		-	%		4.38	%				4.38	%
Corporate securities		1.83	%		-	%		-	%		7.63	%				4.89	%
Single issue trust preferred securities		-	%		6.75	%		-	%		4.61	%				4.94	%
Mortgage-backed securities		-	%		-	%		2.40	%		2.46	%				2.46	%
Consolidated		1.83	%		6.75	%		2.40	%		3.01	%				3.03	%

Management’s Discussion and Analysis

	2009
	Book		Fair
	Value		Value
Investment securities
Municipal securities		13,083		12,075
Corporate securities		5,618		4,502
Single issue trust preferred securities		12,090		10,552
Pooled trust preferred securities		134		82
Mortgage-backed securities		61,167		60,558
Total	$	92,092	$	87,769

The interest rate environment and the need for liquidity resulted in an annualized average yield on the investment portfolio of 3.5%, 5.1%, and 6.0% during 2010, 2009 and 2008, respectively. At December 31, 2010, 2009 and 2008, the market value of the investment portfolio was $67.5 million, $87.8 million, and $87.4 million, respectively. Amortized cost was $71.3 million, $92.1 million, and $96.7 million. The investment portfolio was restructured in 2010, as municipal securities, corporate securities and single issue trust preferred securities were replaced with mortgage-backed securities in an attempt to reduce risk on the balance sheet.

Federal Funds Sold

Federal funds represent the most liquid portion of the Bank's invested funds and generally the lowest yielding portion of earning assets. However, because of the flat yield curve and the need to maintain liquidity, management maintained a significant amount of federal funds during the past three years. At December 31, 2010 and December 31, 2009, federal funds sold were $2.2 million and $21.3 million, respectively.

Deposits

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

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

Average total deposits were $464.6 million during 2010. This is an increase of 11.8% over 2009. Average total deposits were $443.0 million for the year ended December 31, 2009, an increase of 6.6% over 2008. The majority of those deposits were core deposits. The percentage of the Bank's average deposits that were interest bearing in 2010 was 92.3%, 92.1% in 2009 and 91.9% in 2008. Average demand deposits which earn no interest were $35.6 million, $34.9 million and $33.8 million for the periods ended December 31, 2010, 2009 and 2008, respectively.

Management’s Discussion and Analysis

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

Average deposits and related average rates paid for the periods ended December 31, 2010, 2009, and 2008 are summarized in the following table.

Average Deposit Mix (dollars in thousands)

	2010					2009					2008
	Amount		Rate			Amount		Rate			Amount		Rate
Interest bearing deposits:
Demand accounts	$	42,293		.52	%	$	35,775		.49	%	$	29,399		.61	%
Money market		100,688		1.14			91,071		1.42			67,749		2.57
Savings		12,556		.55			10,552		.65			8,831		1.12
Time deposit		273,453		1.94			270,669		4.16			275,956		4.16
Total interest bearing deposits		428,990		1.57			408,067		2.27			381,935		3.54

Noninterest bearing demand deposits		35,646					34,892					33,775
Total deposits	$	464,636				$	442,959				$	415,710

The following table provides maturity information relating to time deposits of $100,000 or more at December 31, 2010.

Large Time Deposit Maturities, (dollars in thousands)

Remaining maturity of three months or less	$	42,803
Remaining maturity over three through twelve months		80,539
Remaining maturity over twelve months		63,820
Total time deposits of $100,000 or more	$	187,162

Securities Sold Under Agreements to Repurchase

Other borrowed funds consisting of securities sold under agreements to repurchase and federal funds purchased were $19.8 million, $20.6 million and $23.8 million at December 31, 2010, 2009 and 2008, respectively. Average short-term debt was $6.7 million, $8.9 million and $22.6 million during 2010, 2009 and 2008, respectively. The related interest expense was $127,511, $208,032 and $763,493 during 2010, 2009 and 2008, respectively.

Other Short-term Borrowings

There was one fixed rate FHLB advance of $5,000,000 at December 31, 2010 and one fixed rate FHLB advance of $2,500,000 at December 31, 2009. Also included in other short-term borrowings was a $900,000 facility which is funded by AloStar Bank of Commerce that will mature on July 1, 2020 at a 5.00% lending rate.

Management’s Discussion and Analysis

Long-term Debt

As a member of the Federal Home Loan Bank of Atlanta, the Bank has the ability to borrow up to 10% of total assets in the form of FHLB advances. At December 31, 2010 and 2009, advances of $35.0 million and $40.0 million, respectively, were outstanding. The average amount outstanding during 2010 and 2009 was $40.2 million and $40.2 million, respectively. Approximately $19.0 million in 1-4 family residential loans, $12.2 million in commercial real estate loans, $7.2 million in home equity line of credit loans and $5.2 million in securities were pledged as collateral for the FHLB advances at December 31, 2010.

Maturity Date	Advance		Rate

07/17/12		9,000,000		Fixed at 4.48%
09/04/12		6,000,000		Fixed at 4.00%
09/03/13		6,000,000		Fixed at 4.15%
12/02/13		5,000,000		Fixed at 4.39%
09/29/15		4,000,000		Fixed at 4.06%
04/22/19		5,000,000		Fixed at 4.75%
	$	35,000,000

On June 27, 2008, Waccamaw Bank, sold in a private placement to qualified institutional investors, an aggregate of $3,000,000 of subordinated notes that will mature on July 1, 2015 at 3 month LIBOR plus 350 basis points.

Capital

Stockholders’ equity was $14.1 million at December 31, 2010. This was a 17.6% decrease from the $17.2 million at the end of 2009. Average stockholders' equity as a percentage of average total assets was 3.5%, 5.2% and 6.2% for 2010, 2009, and 2008, respectively.

On March 31, 2011, the Company issued 546,375 shares of fixed rate noncumulative perpetual preferred stock, series B (the “Series B Preferred Stock”), to Monterey I Holdings, LLC. The Series B Preferred Stock was issued in exchange for 546,375 outstanding shares of fixed rate noncumulative perpetual preferred stock, series A, of the Company’s wholly owned subsidiary, Waccamaw Bank (the “Bank”). The shares of the Bank’s series A preferred stock were held by Monterey Holdings prior to the exchange and were originally issued to Monterey Holdings by the Bank pursuant to a subscription offer agreement dated December 23, 2010, whereby Monterey Holdings purchased 546,375 shares of the Bank’s series A preferred stock and a warrant covering 300,000 shares of the Company’s common stock for an aggregate contract price of $16,392,266. A discount against the fixed rate noncumulative perpetual preferred stock, Series A was taken in the amount of $6,944,605 at December 31, 2010.

The Company completed a rights offering on August 3, 2010 of shares of the Company’s common stock at a price per share of $1.25. The shares of common stock were offered for sale to the holders of record of the Company’s common stock as of the close of business on May 14, 2010. The offering raised $2,394,000 less expenses of $540,000 of additional capital through the sale of 1,915,041 shares of common stock.

Management’s Discussion and Analysis

Regulatory guidelines relating to capital adequacy provide minimum risk-based ratios which assess capital adequacy while encompassing credit risks, including those related to off-balance sheet activities. Capital ratios under these guidelines are computed by weighing the relative risk of each asset category to derive risk-adjusted assets. For the Company, risk-based capital guidelines require minimum ratios of core (Tier 1) capital to risk-weighted assets of 4.0% and total regulatory capital (core capital plus allowance for loan losses up to 1.25% of risk-weighted assets) to risk-weighted assets of 8.0%. As of December 31, 2010, the Company’s Tier 1 risk-weighted capital ratio and total capital ratio were 6.7% and 7.5%, respectively.

The Bank also has capital ratio constraints with which to comply. These ratios are slightly different than those required at the parent company level. At December 31, 2010, the Bank’s capital ratios were as follows: Tier 1 leverage ratio, 5.4%, Tier 1 risk-based capital ratio, 6.9% and total risk-based ratio, 8.8%. At December 31, 2010, these capital ratios classified the Bank as “adequately capitalized” in accordance with the FDIC’s regulatory capital rules. The Company’s and Bank’s actual capital amounts and ratios are presented at December 31, 2010 in the following table.

Capital Requirements (dollars in thousands)

Waccamaw Bankshares, Inc.

						Risk-based Capital
	Leverage Capital					Tier 1 Capital					Total Capital
	Amount		Percentage(1)			Amount		Percentage(2)			Amount		Percentage(2)

Actual	$	29,795		5.27	%	$	29,795		6.70	%	$	33,512		7.54	%
Well Capitalized		28,222		5.00	%		33,866		6.00	%		44,443		10.00	%

Waccamaw Bank

						Risk-based Capital
	Leverage Capital					Tier 1 Capital					Total Capital
	Amount		Percentage(1)			Amount		Percentage(2)			Amount		Percentage(2)

Actual	$	30,578		5.42	%	$	30,578		6.89	%	$	39,153		8.82	%
Well Capitalized		28,192		5.00	%		33,830		6.00	%		44,375		10.00	%

(1)

Percentage of total adjusted average assets. The Federal Reserve Board (“FRB”) minimum leverage ratio requirement is 4 percent to 5 percent, depending on the institution’s composite rating as determined by its regulators. The FRB has not advised the Company of any specific requirements applicable to it.

(2)

Percentage of risk-weighted assets.

Generally accepted accounting principles require that in the event of changes about the likelihood of realization of a deferred tax asset that results in the establishment of a deferred tax asset valuation allowance related to unrealized losses on available for sale investment securities, that valuation allowance be established through operation even thought the original deferred tax asset was established through other comprehensive income. The guidance on how to address this inconsistent treatment with respect to the calculation of regulatory capital is not well defined. Accordingly, the capital amounts and ratios in the table above include an adjustment related to establishment of such a deferred tax asset valuation. After this adjustment, regulatory capital as presented is the same amount as would be reported had the related deferred tax asset has not been recorded. Management has discussed this treatment with applicable bank regulators and management has not been informed that this treatment is incorrect. However, due to the lack of clear guidance, it is possible the regulators could conclude this adjustment is not appropriate. If that were the case, Tier 1 and total regulatory capital for December 31, 2011 and December 31, 2010 would be reduced by $1,457,000 and $898,000, respectively and the bank capital ratios would approximate the following:

	2011		2010

Total capital to risk weighted assets	1.93	%	5.16	%
Tier 1 capital to risk weighted assets	2.85	%	6.56	%
Tier 1 capital to average assets	4.73	%	8.49	%

Nonperforming and Problem Assets

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

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

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

Management’s Discussion and Analysis

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

Allowance for Loan Losses (dollars in thousands)

	2010			2009			2008			2007			2006

Balance at beginning of period	$	10,149		$	7,188		$	5,386		$	4,886		$	3,939
Charge-offs:
Construction loans		(4,320	)		(6,881	)		(492	)		(86	)		-
Commercial and industrial loans		(330	)		(1,847	)		(231	)		(1	)		(500	)
Consumer and other		(2,224	)		(4,983	)		(476	)		(201	)		(85	)
Total charge-offs		(6,874	)		(13,711	)		(1,199	)		(288	)		(585	)
Recoveries:
Construction loans		40			(55	)		-			379			-
Commercial and industrial loans		8			4			4			-			-
Consumer and other		12			143			7			23			36
Total recoveries		60			92			11			402			36

Net charge-offs		(6,814	)		(13,619	)		(1,188	)		114			(549	)

Allowance purchased from The Bank of Heath Springs		-			-			-			-			46

Provision for loan losses		12,206			16,580			2,990			386			1,450

Balance at the end of the year	$	15,541		$	10,149		$	7,188		$	5,386		$	4,886

Total loans outstanding at year-end	$	405,233		$	350,464		$	386,456		$	360,977		$	317,590

Average net loans outstanding for the year	$	322,255		$	368,458		$	376,747		$	332,451		$	279,625

Allowance for loan losses to loans outstanding		3.84	%		2.90	%		1.86	%		1.49	%		1.54	%
Ratio of net loan charge-offs to average loans outstanding		2.11	%		3.70	%		.32	%		(0.03	)%		0.20	%

The following table sets forth information about the Bank’s allowance for loan losses by asset category at the dates indicated. The allocation of the allowance to each category is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any category.

Allowance for Loan Losses by Category (dollars in thousands)

	2010				2009				2008				2007				2006
	Amount		%₍₁₎		Amount		%₍₁₎		Amount		%₍₁₎		Amount		%₍₁₎		Amount		%₍₁₎_

Construction and development	$	7,665		49.32	$	3,556		35.04	$	2,341		32.57	$	1,936		33.73	$	1,766		34.33
Farmland		66		.43		70		.69		62		.86		61		1.05		39		.76
1-4 family residential		1,405		9.04		2,282		22.48		1,557		21.67		1,059		20.96		954		20.30
Multifamily residential		1,676		10.78		327		3.22		220		3.05		42		1.02		42		1.15
Nonfarm, nonresidential		2,911		18.73		2,533		24.96		1,831		25.47		1,399		25.82		1,176		23.15
Total real estate		13,723		88.30		8,768		86.39		6,011		83.62		4,497		82.58		3,977		79.69

Agricultural		16		.10		16		.16		12		.17		10		.19		10		.22
Commercial and industrial		1,563		10.06		943		9.29		800		11.13		593		12.09		664		15.38
Consumer		105		.68		380		3.74		320		4.45		226		3.86		212		4.15
Other		134		.86		42		.42		45		.63		60		1.28		23		.56
Total	$	15,541		100.00	$	10,149		100.00	$	7,188		100.00	$	5,386		100.00	$	4,886		100.00

(1)

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

Management’s Discussion and Analysis

Real estate prices, general economic trends, and various other factors can greatly affect loan losses and no assurances can be made about future losses. It is management’s assessment that the allowance for loan losses as of December 31, 2010 was appropriate in light of the risk inherent within the Company’s loan portfolio.

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

Nonperforming Assets (dollars in thousands)

	2010			2009			2008			2007			2006

Nonaccrual loans	$	39,841		$	21,440		$	15,633		$	1,534		$	1,181
Loans past due 90 days or more and still accruing interest		2,924			1,409			1,451			2,608			340
Total nonperforming loans		42,765			22,849			17,084			4,142			1,521

Other real estate and repossessed personal property		9,594			5,015			963			340			32
Total nonperforming assets	$	52,359		$	27,864		$	18,047		$	4,482		$	1,553

Nonperforming assets as a percentage of:
Total assets		9.55	%		5.23	%		3.36	%		.88	%		.39	%
Total loans		12.93	%		7.96	%		4.67	%		1.24	%		.49	%

Asset Quality

At December 31, 2010, the Company had approximately $11.0 million in loans that were 30-89 days past due. This represented 2.72% of gross loans outstanding on that date. This is a decrease from December 31, 2009 when there were approximately $26.3 million in loans that were 30-89 days past due, or 7.50% of gross loans outstanding. At December 31, 2008 there were approximately $8.0 million in loans that were 30-89 days past due, or 2.07% of gross loans outstanding. The increase in past dues is spread throughout each category of the loan portfolio and is due primarily to the continued weakening of economic conditions both locally and nationally. Non-accrual loans increased $18.4 million to $39.8 million at December 31, 2010 compared to $21.4 million at December 31, 2009, primarily as a result of 8 loan relationships of $1 million or more totaling $17.5 million that were reclassified from past due status to non-accrual. Non-accrual loans totaled $15.6 million at December 31, 2008. The Company had ten loans that were considered troubled debt restructured loans which totaled $3,576,818 at December 31, 2010.

The percentage of non-performing loans (non-accrual loans and loans that were 90 days or more past due but still in accruing status) to total loans increased 378 basis points from 6.78% at December 31, 2009 to 10.56% at December 31, 2010. The percentage of non-performing loans at December 31, 2008 was 4.02%.

At December 31, 2010, there were $52.7 million of loans that were reviewed for individual impairment under ASC 310-10. $28.4 million of these loans required a specific reserve of $6.2 million. At December 31, 2009, $41.6 million in loans were classified as impaired. None of these impaired loans required a specific reserve at December 31, 2009. At December 31, 2008, $25.2 million in loans were classified as impaired of which $22.8 million required a specific reserve of $3.6 million. The allowance for loan losses was $15.5 million at December 31, 2010, or 3.84% of gross loans outstanding. This is an increase of 94 basis points from the 2.90% of gross loans at December 31, 2009. The allowance for loans losses was $7.2 million at December 31, 2008. The allowance for loan losses at December 31, 2010 represented 29.51% of impaired loans compared to 24.41% at December 31, 2009. The allowance for loans losses at December 31, 2008 represented 28.49% of impaired loans. This increase in the allowance for 2010 resulted from provisions for loan losses of $12.2 million, offset by net charge-offs of $6.8 million. Most of the loans charged-off in 2010 were classified as impaired at December 31, 2010. It is management’s assessment that the allowance for loan losses as of December 31, 2010 was appropriate in light of the risk inherent within the Company’s loan portfolio. No assurances, however, can be made that further adjustments to the allowance for loan losses may not be deemed necessary.

Management’s Discussion and Analysis

At December 31, 2010 there were potential problem loans of $24.4 million classified as special mention loans. Special mention loans have potential weaknesses which may, if not checked or corrected, weaken the loan or inadequately protect the Company’s credit position at some future date.

The total non-performing assets, (non-accrual loans, loans greater than 90 days past due and still accruing and other real estate owned), at December 31, 2010, December 31, 2009 and December 31, 2008 were $52.4 million, $27.9 million and $18.0 million, respectively. The allowance for loan losses at December 31, 2010 represented 29.7% of non-performing assets compared to 36.4% at December 31, 2009.

Since 2007, the allowance for loan losses model had been modified and refined. The previous method included a ASC 450 component that incorporated a risk grade assessment that was primarily based on peer group averages. In response to changes in the economic environment, in early 2008, the Bank implemented a new allowance for loan losses model, developed by a vendor with expertise in credit risk monitoring. The new model incorporates a ASC 450 component that builds upon actual historical losses by call report code, adjusted for certain environmental changes in the lending environment.

Additional information is as follows:

	2010			2009			2008

Impaired loans	$	52,658,648		$	41,575,130		$	25,227,758
Unimpaired loans		352,358,075			308,594,595			360,843,112
Gross loans	$	405,016,723		$	350,169,725		$	386,070,870

Specific reserve on impaired loans	$	6,191,765		$	-		$	3,586,786
Reserve related to ASC 450		9,349,523			10,148,927			3,601,195
Total allowance for loan losses	$	15,541,288		$	10,148,927		$	7,187,981

Allowance to gross loans		3.84	%		2.90	%		1.86	%
Specific reserve to impaired loans		11.76	%		-			14.22	%
ASC 450 reserves to unimpaired loans		2.65	%		3.29	%		1.00	%

The table on the following page presents certain information regarding the significant credit relationships that make up the majority of the non-accrual and impaired loans in our portfolio as of December 31, 2010.

Management’s Discussion and Analysis

Loan Customer Type

Loan Amount

Loan
Type

Reserve $

As of Date

Previous
Charge-
off

Regulatory
Classification

Status

Initial
Impairment

Valuation

Appraisal
Date

Valuation
Basis

Loan
Origination

Past due
Counters
(30/60/90)

Residential A&D

4,639,903

1A2

268,903

1/16/2011

Substandard

NA*

4,371,000

6/15/2009

8/1/2006
12/20/2007

4/1/1
2/1/1

Residential A&D

4,031,543

1A2

10/28/2010

Substandard

4,699,200

10/1/2010

7/9/2007

4/1/1

Residential A&D

3,330,299

1A2

12/13/2010

347,266

Substandard

3,789,610

6/15/10
3/29/10

10/31/2008

1/0/0

Hotels (3)

2,994,264

9/9/2010

Substandard

4,393,967

9/3/2008

9/14/2005

16/1/1

Hardwood flooring manufacturer

2,548,375

1E1

9/13/2010

725,000

Substandard

2,548,375

4/24/2009

8/9/2006
1/16/2007

2/0/0

Commercial income producing

2,107,879

1E2

10/21/2010

Substandard

2,089,032

1/31/2009

3/25/2003
2/18/2009

7/2/1 4/2/2

Residential A&D

1,554,805

1E2

12/13/2010

8,555

Substandard

1,564,375

7/15/2008

6/28/2004

11/4/1

Wrecker service

1,354,944

1C2A

9/9/2010

Substandard

Accrual

1,465,782

6/1/2005 3/1/2008

3/11/2005

35/0/0

Residential A&D

1,235,684

1A2

610,884

12/27/2010

Substandard

624,800

4/29/2010

1/17/2008

10/1/1

Individual

1,061,887

1C2A

6,765

10/20/2010

Special Mention

Accrual

1,055,122

1/11/2010 12/7/2009

11/8/2007

2/0/0

Residential A&D

1,029,628

1A2

1/16/2011

Substandard

Accrual

1,333,679

1/11/10 12/7/09

7/31/2009

11/1/00

Residential A&D

1,010,411

1A2

10/22/2010

Substandard

Accrual

1,665,280

12/23/2010

12/28/2008

0/0/0

Residential A&D

1,002,500

1A2

9/9/2010

Substandard

1,585,300

2/1/2008

8/25/2003

9/2/1

Commercial income producing

963,330

1E2

9/9/2010

Substandard

Accrual

1,315,250

1/10/2010

7/9/2007

4/0/0

Residential A&D

938,846

1A2

283,063

10/19/2010

16,043

Substandard

655,783

3/29/2010

8/15/2006
4/24/2007

10/5/0

Day Care

904,170

1E1

25,320

10/20/2010

Substandard

Accrual

878,850

12/28/2009

4/7/2005

5/0/0

Residential A&D

887,980

12/13/2010

324,000

Substandard

887,980

6/7/2010

6/26/2010

0/0/0

Residential A&D

869,465

1A2

9/9/2010

Substandard

1,989,784

1/15/2009

3/17/2006

7/2/1

Tile flooring operation

825,847

1E2

9/13/2010

126,527

Substandard

840,000

7/15/2009

4/10/2007

3/5/3

* Nonaccrual.

Management’s Discussion and Analysis

The Bank’s allowance for loan and lease losses methodology involves the following: First, the Bank evaluates loans and relationships greater than $500,000 which are in non-performing status (non-accrual, greater than 90 days still accruing, etc.) or otherwise deemed to be impaired for individual impairment under ASC 310-10. Further, individual impairment is calculated for any loan, regardless of size, if classified as a Troubled Debt Restructure. Once the ASC 310-10 analysis is completed, the valuation is reviewed for required specific reserve adjustment at least quarterly. On large or complex credits (generally those in excess of $1,000,000), the Bank obtains a liquidation or quick-sale appraisal at the initial impairment determination and adjusts the specific reserve upon receipt and review of the appraisal. Generally, the Bank obtains an updated appraisal on such properties annually. On smaller credits, the decision to pay for an in-debt appraisal is made on a case-by-case basis. In cases where such an updated appraisal is not obtained, the Bank may elect to apply a discount to the most recent appraisal obtained for the property in question. This discount is based on changes in value observed from appraisals on similar properties and knowledge about recent sales of similar properties. Again, these evaluations are reviewed quarterly.

Loans evaluated under ASC 310-10 are removed from the ASC 450 general loan classifications, to avoid double reserving. Our ALLL model breaks ASC 450 down into two parts: reserves based upon historical losses (adjusted to account for current economic outlook or other factors), risk grade or past due status, years to impairment, and an “unallocated” section based on observations of general economic conditions, local unemployment figures, GDP trends, or other quantitative or qualitative factors.

Liquidity and Sensitivity

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

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

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

At December 31, 2010, the Bank was cumulatively asset-sensitive (earning assets subject to interest rate changes exceeded interest-bearing liabilities subject to changes in interest rates). Demand, savings and money market accounts re-pricing within three months totaled $153.4 million. Historically, these short-term deposits are not as rate sensitive as other types of interest-bearing deposits. The Bank is asset sensitive in the three month or less time period, with the four to twelve months time period being liability-sensitive, the thirteen to sixty months time period being asset-sensitive and the over sixty months time period being asset-sensitive.

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

Management’s Discussion and Analysis

Mortgage backed securities are shown based on their contractual maturity but tend to be repaid earlier. Repurchase agreements with a put feature are shown in the re-pricing period in which the structure may be put back to the Bank.

The Company’s historical liquidity management process included anticipating operating cash requirements, evaluating time deposit maturities, monitoring loan to deposit ratios and correlating these activities to an overall periodic internal liquidity measure. In evaluating our asset mix, we have sought to maintain a securities portfolio sufficient to provide short-term liquidity in periods of unusual fluctuations.

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

Interest Rate Sensitivity (dollars in thousands)

	December 31, 2010
	Maturities/Re-pricing
	1-3			4-12			13-60			Over 60
	Months			Months			Months			Months			Total
Earning assets:
Loans	$	104,527		$	30,777		$	116,303		$	153,626		$	405,233
Investments		-			1,985			993			68,269			71,247
Federal funds sold		2,210			-			-			-			2,210
Deposits with banks		28,080			-			-			-			28,080
Total		134,817			32,762			117,296			221,895			506,770

Interest-bearing liabilities:
Demand accounts		46,482			-			-			-			46,482
Savings and money market		106,906			-			-			-			106,906
Time deposits		63,803			127,255			75,146			-			266,204
Repurchase agreements and purchased funds		2,776			-			10,000			7,000			19,776
Other short-term borrowings		900			5,000			-			-			5,900
Long-term debt		-			-			26,000			12,000			38,000
Subordinated debentures		12,372			-			-			-			12,372
Total		233,239			132,255			111,146			19,000			495,640
Interest rate gap	$	(98,422	)	$	(99,493	)	$	6,150		$	202,895		$	11,130

Cumulative interest sensitivity gap	$	(98,422	)	$	(197,915	)	$	(191,765	)	$	11,130

Ratio of sensitivity gap to total earnings assets		(19.42	)%		(19.63	)%		1.21	%		40.04	%		2.20	%
Cumulative ratio of sensitivity gap to total earnings assets		(19.42	)%		(39.05	)%		(37.84	)%		2.20	%

Effects of Inflation

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

Management’s Discussion and Analysis

Commitments and Contingencies

Litigation

No legal proceedings are required to be disclosed pursuant to this item as of December 31, 2010.

Financial Instruments with Off-Balance-Sheet Risk

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

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

	2010		2009

Commitments to extend credit	$	65,392,000	$	41,072,000
Stand-by letters of credit		1,066,000		796,000
	$	66,458,000	$	41,868,000

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

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

Concentrations of Credit Risk

Substantially all of the Bank's loans and commitments to extend credit have been granted to customers in the Bank's market area and such customers are generally depositors of the Bank. The concentrations of credit by type of loan are set forth in Note 7. The distribution of commitments to extend credit approximates the distribution of loans outstanding.

The Bank's primary focus is commercial, consumer and small business transactions. The Bank endeavors to avoid significant credit exposure to any single borrower or group of related borrowers.

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

Financial Ratios

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

Key Financial Ratios

	2010			2009			2008

Average equity to average assets		3.48	%		5.17	%		6.20	%
Return on average assets		(2.70	)%		(2.54	)%		(.38	)%
Return on average equity		(77.64	)%		(49.18	)%		(6.11	)%

ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Smaller reporting companies such as the Company are not required to provide the information required by this item.

ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
Waccamaw Bankshares, Inc.

Whiteville, North Carolina

We have audited the accompanying consolidated balance sheets of Waccamaw Bankshares, Inc. and subsidiary (the “Company”) as of December 31, 2010 and 2009, and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits include consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An also audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Waccamaw Bankshares, Inc. and subsidiary as of December 31, 2010 and 2009, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring credit losses that have eroded regulatory capital ratios. As of December 31, 2011 the Company is considered substantially undercapitalized based on their regulatory capital level. This raises substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that would be necessary should the Company be unable to continue as a going concern.

/s/ Elliott Davis, PLLC

Galax, Virginia
February 29, 2012

Consolidated Balance Sheets

December 31, 2010 and 2009

	2010			2009
Assets

Cash and due from banks	$	4,877,988		$	13,973,474
Interest-bearing deposits with banks		28,079,615			7,695,499
Federal funds sold		2,210,000			21,315,000
Total cash and cash equivalents		35,167,603			42,983,973

Investment securities, available for sale		67,487,471			87,769,319
Restricted equity securities		3,759,500			4,041,350
Loans, net of allowance for loan losses of $15,541,288 in 2010 and $10,148,927 in 2009		389,475,435			340,020,798
Property and equipment, net		16,410,961			17,035,644
Intangible assets, net		160,000			237,270
Accrued income		1,831,912			2,449,081
Bank owned life insurance		18,330,003			18,576,015
Foreclosed assets		9,588,710			4,994,241
Other assets		6,010,023			15,113,381
Total assets	$	548,221,618		$	533,221,072

Liabilities and Stockholders' Equity

Liabilities
Noninterest-bearing deposits	$	35,354,965		$	32,940,811
Interest-bearing deposits		419,591,979			400,597,148
Total deposits		454,946,944			433,537,959

Securities sold under agreements to repurchase		19,776,000			20,615,000
Other short-term borrowings		5,900,000			3,500,000
Long-term debt		38,000,000			43,000,000
Junior subordinated debentures		12,372,000			12,372,000
Accrued interest payable		1,275,231			942,689
Other liabilities		1,812,132			2,098,993
Total liabilities		534,082,307			516,066,641

Commitments and contingencies (Note 13,16, 19)		-			-

*Stockholders’ equity*
Preferred stock, Series A, convertible, non-cumulative, non-voting, no par value; 1,000,000 shares authorized; 550 shares issued and outstanding at December 31, 2010 and 2009, respectively		9,064			9,064
Preferred stock, Series B, convertible, non-cumulative, non-voting, no par value; 1,000,000 shares authorized; 546,375 and 0 shares issued and outstanding at December 31, 2010 and 2009, respectively, less discount of $6,488,497		9,603,769			-
Common stock, no par value; 50,000,000 shares authorized; 7,466,224 and 5,551,183 shares issued and outstanding at December 31, 2010 and 2009, respectively		27,084,927			25,099,770
Common stock warrants		300,000			-
Retained deficit		(20,535,626	)		(5,129,490	)
Accumulated other comprehensive loss		(2,322,823	)		(2,824,913	)
Total stockholders’ equity		14,139,311			17,154,431
Total liabilities and stockholders’ equity	$	548,221,618		$	533,221,072

See Notes to Consolidated Financial Statements

546

~~Shareholder Letter~~Consolidated Statements of Operations Years ended December 31, 2010 and 2009

At December 31, 2009, net loans were $340.0 million, a decrease of 10.3% compared to $378.9 million as of December 31, 2008. Total deposits were $433.5 at December 31, 2009, a 3.6% increase over the year earlier figure of $418.6 million.

	2010			2009

*Interest income*
Loans and fees on loans	$	17,076,159		$	21,113,676
Investment securities, taxable		2,932,446			4,110,706
Investment securities, nontaxable		367,633			586,998
Federal funds sold		180,789			30,502
Deposits with banks		123,693			47,429
Total interest income		20,680,720			25,889,311

*Interest expense*
Deposits		6,750,280			9,262,674
Federal funds purchased and securities sold under agreements to repurchase		675,395			747,349
Other borrowed funds		2,332,992			2,526,195
Total interest expense		9,758,667			12,536,218
Net interest income		10,922,053			13,353,093

Provision for loan losses		12,205,554			16,579,908
Net interest loss after provision for loan losses		(1,283,501	)		(3,226,815	)

*Noninterest income (expense)*
Service charges on deposit accounts		2,778,195			3,022,511
ATM and check cashing fees		997,844			875,361
Mortgage origination income		377,665			380,263
Income from financial services		101,601			139,275
Earnings on bank owned life insurance		647,649			741,252
Net realized (losses) gains on sale of investment securities		1,593,388			(886,653	)
Impairment on investment securities available for sale		-			(418,710	)
Other operating income		227,700			55,311
Total noninterest income		6,724,042			3,908,610

*Noninterest expense*
Salaries and employee benefits		6,291,938			7,129,531
Occupancy and equipment		2,057,780			2,096,787
Data processing		1,134,293			1,175,402
Advertising		260,755			310,577
Regulatory agency expense		1,643,459			1,292,849
Professional services		1,157,843			852,530
Foreclosed assets, net		2,503,628			775,692
Goodwill impairment charge		-			2,727,152
Other expense		1,940,318			2,154,695
Total noninterest expense		16,990,014			18,515,215
Loss before income taxes		(11,549,473	)		(17,833,420	)

Income tax expense (benefit)		3,688,212			(3,627,888	)
Net loss	$	(15,237,685	)	$	(14,205,532	)

Basic loss per share	$	(2.45	)	$	(2.57	)
Diluted loss per share	$	(2.45	)	$	(2.57	)
Weighted average common shares outstanding		6,217,512			5,534,458
Weighted average dilutive common shares outstanding		6,217,512			5,534,458

Waccamaw Bank remains focused on our strategic effort to become the strongest community bank in the coastal region of the Carolinas. The good news for our region is that we have begun to recover from this long and painful recession and look forward to reporting strong operating results in the future. To be sure any recovery that is sustainable will never take our country back to the same ‘business as usual’ practices; from Wall Street to Main Street.

During 2009, our bank implemented a number of efficiencies to lower our expenses and costs. Through diligent efforts by our entire staff, we were able to create over $1.5 million in cost saving measures. Most of these savings came from a reduction in payroll, benefits, and cut backs in other areas of our day to day expenses.

We have endured a most traumatic time in the history of Waccamaw Bank and indeed in the last half century and remain at a “well capitalized” position. Our newer offices are gaining financial strength and are achieving a stronger level of profitability each and every month. We would like to take this time to thank our dedicated shareholders for their loyalty to the bank. We are confident of our financial future as we move forward.

It is with a great deal of gratitude and appreciation we thank our loyal, hard-working staff for the tumultuous year we have all endured. As we reduced overhead expenses to create additional efficiencies, our fine employees were asked to give more than ever before. We can’t over emphasize the answer to the call they made. We are humbled by their ongoing dedication to their clients, shareholders, fellow coworkers and communities. Without question, our Company’s future performance will be the result of their untiring and unselfish efforts.

Sincerely, James G. Graham Alan W. Thompson President and Chief Executive Officer Chairman of the Board

Consolidated Balance Sheets

December 31, 2009 and 2008

	2009			2008
Assets
Cash and due from banks	$	13,973,474		$	8,947,752
Interest-bearing deposits with banks		7,695,499			2,684,741
Federal funds sold		21,315,000			4,281,000
Total cash and cash equivalents		42,983,973			15,913,493
Investment securities, available for sale		87,769,319			87,402,799
Restricted equity securities		4,041,350			4,131,906
Loans, net of allowance for loan losses of $10,148,927 in 2009 and $7,187,981 in 2008		340,020,798			378,882,889
Property and equipment, net		17,035,644			17,597,502
Goodwill		-			2,727,152
Intangible assets, net		237,270			416,194
Accrued income		2,449,081			2,448,477
Bank owned life insurance		18,576,015			17,834,763
Foreclosed assets		4,994,241			956,832
Other assets		15,113,381			9,138,427
Total assets	$	533,221,072		$	537,450,434
Liabilities and Stockholders' Equity
Liabilities
Noninterest-bearing deposits	$	32,940,811		$	36,159,809
Interest-bearing deposits		400,597,148			382,420,080
Total deposits		433,537,959			418,579,889
Securities sold under agreements to repurchase		20,615,000			23,830,000
Other short-term borrowings		3,500,000			7,000,000
Long-term debt		43,000,000			45,500,000
Junior subordinated debentures		12,372,000			12,372,000
Accrued interest payable		942,689			1,328,976
Other liabilities		2,098,993			995,414
Total liabilities		516,066,641			509,606,279
Commitments and contingencies (Note 18)		-			-
Stockholders’ equity
Preferred stock, Series A, convertible, non-cumulative, non-voting, no par value; 1,000,000 shares authorized; 550 and 28,184 shares issued and outstanding at December 31, 2009 and 2008, respectively		9,064			464,476
Common stock, no par value; 25,000,000 shares authorized; 5,551,183 and 5,523,549 shares issued and outstanding at December 31, 2009 and 2008, respectively		25,099,770			24,591,884
Retained earnings (deficit)		(5,129,490	)		8,907,591
Accumulated other comprehensive loss		(2,824,913	)		(6,119,796	)
Total stockholders’ equity		17,154,431			27,844,155
Total liabilities and stockholders’ equity	$	533,221,072		$	537,450,434

See Notes to Consolidated Financial Statements

747

Consolidated Statements of ~~Operations~~Changes in Stockholders’ Equity Years ended December 31, 2010 and 2009

Years ended December 31, 2009 and 2008

															Accumulated
				Common											Other
	Preferred Stock			Stock		Preferred			Common			Retained			Comprehensive
	Stock, Series B			Warrants		Stock, Series A			Stock			Earnings			Income (Loss)			Total

December 31, 2008	$	-		$	-	$	464,476		$	24,591,884		$	8,907,591		$	(6,119,796	)	$	27,844,155

Comprehensive income
Net loss		-			-		-			-			(14,205,532	)		-			(14,205,532	)
Net change in unrealized gain on investment securities available for sale, net of income taxes of $1,669,468		-			-		-			-			-			2,661,189			2,661,189
Reclassification adjustment of impairment in investments securities available for sale, net of income taxes of $161,413		-			-		-			-			-			257,297			257,297
Reclassification adjustment of loss recognized on sale net of income taxes of $341,805		-			-		-			-			-			544,848			544,848
Total comprehensive loss																			(10,742,198)

Reversal of non-credit related impairment		-			-		-			-			168,451			(168,451	)		-
Stock based compensation		-			-		-			122,378			-			-			122,378
Stock issuance costs		-			-		-			(69,904	)		-			-			(69,904	)
Conversion of preferred stock to common stock		-			-		(455,512	)		455,412			-			-			-
December 31, 2009		-			-		9,064			25,099,770			(5,129,490	)		(2,824,913	)		17,154,431

Comprehensive loss
Net loss		-			-		-			-			(15,237,685	)		-			(15,237,685	)
Net change in unrealized gain on investment securities available for sale, net of income taxes of $823,516		-			-		-			-			-			1,312,712			1,312,712
Reclassification adjustment of gain recognized on sale net of income taxes of $(614,315)		-			-		-			-			-			(979,073	)		(979,073	)
Total comprehensive loss																			(14,904,046	)

Issuance of preferred stock, Series B		16,092,266			-		-			-			-			16,092,266
Issuance of common stock-warrants		-			300,000		-			-			-			-			300,000
Discount on preferred stock, Series B		(6,488,497	)		-		-			-			-			-			(6,488,497	)
Issuance of common stock		-			-		-			2,393,801			-			2,393,801
Reversal of non-credit related impairment		-			-		-			-			(168,451	)		168,451			-
Stock based compensation		-			-		-			85,335			-			-			85,335
Stock issuance costs		-			-		-			(493,979	)		-			-			(493,979	)
December 31, 2010	$	9,603,769		$	300,000	$	9,064		$	27,084,927		$	(20,535,626	)	$	(2,322,823	)	$	14,139,311

	2009			2008
Interest income
Loans and fees on loans	$	21,113,676		$	24,056,784
Investment securities, taxable		4,110,706			5,612,932
Investment securities, nontaxable		586,998			714,011
Federal funds sold		30,502			69,850
Deposits with banks		47,429			31,745
Total interest income		25,889,311			30,485,322
Interest expense
Deposits		9,262,674			13,502,304
Federal funds purchased and securities sold under agreements to repurchase		747,349			1,103,935
Other borrowed funds		2,526,195			2,328,430
Total interest expense		12,536,218			16,934,669
Net interest income		13,353,093			13,550,653
Provision for loan losses		16,579,908			2,990,096
Net interest income (loss) after provision
for loan losses		(3,226,815	)		10,560,557
Noninterest income (expense)
Service charges on deposit accounts		3,022,511			2,115,172
ATM and check cashing fees		875,361			755,029
Mortgage origination income		380,263			352,929
Income from financial services		139,275			264,201
Earnings on bank owned life insurance		741,252			547,952
Net realized (losses) gains on sale or maturity of investment securities		(886,653	)		98,207
Impairment on investment securities available for sale		(418,710	)		(3,348,460	)
Other operating income		55,311			181,442
Total noninterest income		3,908,610			966,472
Noninterest expense
Salaries and employee benefits		7,129,531			8,196,516
Occupancy and equipment		2,096,787			2,012,137
Data processing		1,175,402			1,306,998
Advertising		310,577			705,462
Regulatory agency expense		1,292,849			389,327
Professional services		852,530			489,537
Foreclosed assets, net		775,692			43,845
Goodwill impairment charge		2,727,152			-
Other expense		2,154,695			2,253,467
Total noninterest expense		18,515,215			15,397,289
Loss before income taxes		(17,833,420	)		(3,870,260	)
Income tax expense (benefit)		(3,627,888	)		(1,827,230	)
Net loss	$	(14,205,532	)	$	(2,043,030	)
Basic loss per share	$	(2.57	)	$	(.37	)
Diluted loss per share	$	(2.57	)	$	(.37	)
Weighted average common shares outstanding		5,534,458			5,490,982
Weighted average dilutive common shares outstanding		5,534,458			5,490,982

See Notes to Consolidated Financial Statements

848

Consolidated Statements of Changes in ~~Stockholders’~~Cash ~~Equity~~Flows For the years ended December 31, 2010 and 2009

Years ended December 31, 2009 and 2008

	2010			2009
Cash flows from operating activities
Net loss	$	(15,237,685	)	$	(14,205,532	)
Adjustments to reconcile net loss to net cash provided by operations:
Depreciation and amortization		920,088			942,966
Impairment of goodwill		-			2,727,152
Stock-based compensation		85,335			122,378
Provision for loan losses		12,205,554			16,579,908
Accretion of discount on securities, net of amortization of premiums		729,207			209,020
Write-down of foreclosed assets		2.357,318			469,411
(Gain) loss on sale of investment securities		(1,593,388	)		886,653
Impairment of investment securities		-			418,710
Income from bank owned life insurance		(647,649	)		(741,252	)
Deferred taxes		(3,666,532	)		(1,403,202	)
Changes in assets and liabilities:
Accrued income		617,169			(604	)
Other assets		13,883,522			(6,397,438	)
Accrued interest payable		332,542			(386,287	)
Other liabilities		(286,861	)		1,103,579
Net cash provided by operating activities		9,698,620			325,462

Cash flows from investing activities
Sales (purchases) of restricted equity securities		281,850			(62,100	)
Purchases of investment securities		(115,823,040	)		(93,133,979	)
Maturities of investment securities		8,940,943			13,787,672
Net decrease in loans		21,847,641			17,182,817
Purchase of HELOC loans		(82,833,207	)		-
Proceeds from sales of investment securities		127,248,131			82,870,608
Surrender (investment) in bank owned life insurance		893,660			-
Purchases of property and equipment		(218,134	)		(165,712	)
Proceeds from sale of foreclosed assets		2,277,358			592,546
Net cash provided by (used in) investing activities		(37,384,798	)		21,071,852

Cash flows from financing activities
Net increase (decrease) in noninterest-bearing deposits		2,414,155			(3,218,998	)
Net increase in interest-bearing deposits		18,994,831			18,177,068
Net decrease in securities sold under agreements to repurchase		(839,000	)		(3,215,000	)
Net (decrease) in short-term borrowings		2,400,000			(3,500,000	)
Net repayment of long-term debt		(5,000,000	)		(2,500,000	)
Proceeds from issuance of common stock		2,393,801			-
Proceeds from acquisition of preferred stock, Series B, net		2,393,801			-
Proceeds from issuance of common stock warrants		9,603,769			-
Stock issuance costs and redemption of fractional shares		(493,979	)		(69,904	)
Net cash provided by financing activities		19,869,808			5,673,166
Increase (decrease) in cash and cash equivalents		(7,816,370	)		27,070,480

Cash and cash equivalents, beginning		42,983,973			15,913,493
Cash and cash equivalents, ending	$	35,167,603		$	42,983,973

Supplemental disclosure of cash flow information
Interest paid	$	9,426,125		$	12,922,505
Taxes paid	$	-		$	52,647

Supplemental disclosure of noncash activities
Real estate acquired in settlement of loans	$	9,229,145		$	5,099,366

										Accumulated
										Other
	Preferred			Common			Retained			Comprehensive
	Stock			Stock			Earnings			Income (Loss)			Total
December 31, 2007	$	793,967		$	23,785,199		$	11,124,589		$	(680,614	)	$	35,023,141
Adoption of Topic 320 of ASC		-			-			(173,968	)		-			(173,968	)
Comprehensive loss
Net loss		-			-			(2,043,030	)		-			(2,043,030	)
Net change in unrealized loss on investment securities available for sale, net of income taxes of ($2,714,873)		-			-			-			(7,438,637	)		(7,438,637	)
Reclassification adjustment of impairment in investments securities available for sale, net of income taxes of $1,290,965		-			-			-			2,057,495			2,057,495
Reclassification adjustment of gain recognized in net of income taxes of ($40,167)		-			-			-			(58,040	)		(58,040	)
Total comprehensive loss		(7,482,212	)
Stock based compensation		-			127,409			-			-			127,409
Exercise of stock options		-			165,774			-			-			165,774
Excess tax benefits from stock-based
compensation		-			184,011			-			-			184,011
Conversion of preferred stock to common stock		(329,491	)		329,491			-			-			-
December 31, 2008		464,476			24,591,884			8,907,591			(6,119,796	)		27,844,155
Comprehensive loss
Net loss		-			-			(14,205,532	)		-			(14,205,532	)
Net change in unrealized gain on investment securities available for sale, net of income taxes of $1,669,468		-			-			-			2,661,189			2,661,189
Reclassification adjustment of impairment in investments securities available for sale, net of income taxes of $161,413		-			-			-			257,297			257,297
Reclassification adjustment of loss recognized in net of income taxes of $341,805		-			-			-			544,848			544,848
Total comprehensive loss		(10,742,198	)
Reversal of non-credit related impairment		168,451			(168,451	)		-
Stock based compensation		-			122,378			-			-			122,378
Stock issuance costs		-			(69,904	)		-			-			(69,904	)
Conversion of preferred stock to
common stock		(455,412	)		455,412			-			-			-
December 31, 2009	$	9,064		$	25,099,770		$	(5,129,490	)	$	(2,824,913	)	$	17,154,431

See Notes to Consolidated Financial Statements

949

Notes to Consolidated Financial Statements ofFor ~~Changes~~the inyears ~~Cash~~ended ~~Flows~~December 31, 2010 and 2009

For the years ended December 31, 2009 and 2008

	2009			2008
Cash flows from operating activities
Net loss	$	(14,205,532	)	$	(2,043,030	)
Adjustments to reconcile net loss to net cash provided by operations:
Depreciation and amortization		942,966			1,011,671
Impairment of goodwill		2,727,152			-
Stock-based compensation		122,378			127,409
Provision for loan losses		16,579,908			2,990,096
Accretion of discount on securities, net of amortization of premiums		209,020			(19,032	)
Write-down of OREO		469,411			-
(Gain) loss on sale of investment securities		886,653			(98,207	)
Impairment of investment securities		418,710			3,348,460
Income from bank owned life insurance		(741,252	)		(547,952	)
Deferred taxes		(1,403,202	)		(1,881,102	)
Changes in assets and liabilities:
Accrued income		(604	)		490,787
Other assets		(6,397,438	)		559,531
Accrued interest payable		(386,287	)		(796,697	)
Other liabilities		1,103,579			(819,024	)
Net cash provided by operating activities		325,462			2,322,910
Cash flows from investing activities
Purchases of restricted equity securities		(62,100	)		-
Purchases of investment securities		(93,133,979	)		(38,148,849	)
Maturities of investment securities		13,787,672			2,927,227
Net (increase) decrease in loans		17,182,817			(27,373,415	)
Proceeds from sales of investment securities		82,870,608			34,858,839
Investment in bank owned life insurance		-			(5,509,450	)
Purchases of property and equipment		(165,712	)		(3,814,254	)
Proceeds from sale of other real estate		592,546			-
Net cash provided by (used in) investing activities		21,071,852			(37,059,902	)
Cash flows from financing activities
Net increase (decrease) in noninterest-bearing deposits		(3,218,998	)		3,788,636
Net increase in interest-bearing deposits		18,177,068			36,611,918
Net decrease in securities sold under
agreements to repurchase		(3,215,000	)		(5,392,000	)
Net increase (decrease) in federal funds purchased		-			(15,429,300	)
Net increase in junior subordinated debentures		-			4,000,000
Net decrease in short-term borrowings		(3,500,000	)		(7,000,000	)
Net proceeds from (repayment of) long-term debt		(2,500,000	)		21,000,000
Proceeds from issuance of common stock		-			165,774
Benefit of non-qualified stock option exercise		-			184,011
Stock issuance costs and redemption of fractional shares		(69,904	)		-
Net cash provided by financing activities		5,673,166			37,929,039
Increase (decrease) in cash and cash equivalents		27,070,480			3,192,047
Cash and cash equivalents, beginning		15,913,493			12,721,446
Cash and cash equivalents, ending	$	42,983,973		$	15,913,493
Supplemental disclosure of cash flow information
Interest paid	$	12,922,505		$	17,731,365
Taxes paid	$	52,647		$	133,750
Supplemental disclosure of noncash activities
Real estate acquired in settlement of loans	$	5,099,366		$	638,597

See Notes to Consolidated Financial Statements

Notes to Consolidated Financial Statements

For the years ended December 31, 2009 and 2008

Note 1. Organization and Summary of Significant Accounting Policies

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

During 2001, Waccamaw Bankshares, Inc. (Company), a bank holding company chartered in North Carolina was formed. On July 1, 2001, Waccamaw Bankshares, Inc. acquired all the outstanding shares of Waccamaw Bank in a tax-free reorganization.

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

Going Concern Considerations

The ~~substantial~~ substantial uncertainties throughout the economy and U.S. banking industry coupled with current market conditions have adversely affected ~~the~~ the Company’s ~~2009~~2010 results and capital levels. The significant ~~loss~~losses in 2010 and 2009, primarily related to credit losses, ~~goodwill impairment~~ and the valuation allowance on deferred tax assets, reduced the Company’s capital levels. In order to ~~remain~~again become well capitalized under federal banking agencies’ guidelines, management believes that the Company will need to raise additional capital to recapitalize the Bank and to absorb the potential future credit losses associated with the disposition of its nonperforming assets. Accordingly, management is in the process of evaluating various alternatives to increase tangible common equity and regulatory capital through the issuance of additional equity in public or ~~private~~ private offerings. Management is actively evaluating a number of potential capital sources, asset reductions, and other balance sheet management strategies to ~~ensure~~with ~~that~~ the ~~projected~~goal of increasing its level of regulatory capital ~~can~~to support its balance sheet long-term. Management is currently reducing and otherwise restructuring its balance sheet to improve capital ratios.

Current market conditions for banking institutions, the overall uncertainty in financial markets, and ~~depressed~~a depressed stock price are significant barriers to the success of any plan to issue additional equity in public or private offerings. An equity financing transaction would result in substantial dilution to the Company's current shareholders and could adversely affect the market price of the Company's common stock. There can be no assurance as to whether these efforts will be successful, either on a short-term or long-term basis. Should these efforts be unsuccessful, due to existing regulatory restrictions on cash payments and dividends between the Bank and the holding company, the Company may be unable to discharge its liabilities in the normal course of business. There can be no assurance that the Company will be successful in ~~any~~ any efforts to raise additional capital during ~~2010~~2012.

Both the parent company and the banking ~~subsidiary~~ subsidiary actively manage liquidity and cash flow needs. The Company ~~has~~is ~~suspended~~prohibited from declaring or paying dividends without prior approval of its ~~common~~ federal and ~~preferred~~state banking regulators. Even if this requirement were not in place, the Company does not intend to declare or pay dividends to shareholders ~~until~~at ~~such~~any time asin the ~~Company returns~~foreseeable ~~to profitability~~future. At December 31, ~~2009~~2010, the Company had $4235 million of cash and cash equivalents. The Company has no long-term debt maturing in ~~2010~~2011 and $15 million maturing in 2012.

~~Liquidity~~The ~~at the bank level is dependent upon the deposit franchise which funds 81% of the~~ Company’s ~~assets~~loan ~~(or 62% excluding~~agreement, ~~brokered~~for ~~CDs). The FDIC’s temporary changes to increase~~ the ~~amount of deposit insurance to~~ $~~250~~1,000,000 ~~per~~line ~~deposit~~of ~~relationship~~credit ~~and~~debt toobligation, ~~provide~~includes ~~unlimited~~financial ~~deposit insurance~~covenants ~~for~~requiring ~~certain transaction accounts have contributed to~~ the ~~stable deposit~~Bank ~~base. All banks that have elected~~ to ~~participate~~maintain ina ~~the Transaction~~minimum ~~Account~~weighted ~~Guarantee~~average ~~Program~~return ~~(“TAGP”)~~on ~~have~~assets ~~the same FDIC insurance coverage. Potential loss~~ of ~~deposits~~greater ~~would~~than ~~be a primary funding need in a liquidity crisis~~0. ~~Deposit~~50% ~~balances~~on ~~which~~an ~~are~~annualized ~~not~~basis, ~~covered~~maintain ~~by FDIC insurance~~ total ~~approximately~~equity ~~$9.6~~capital ~~million~~of ~~currently~~$43, 499,000, and ~~would~~that ~~increase~~at ~~to approximately~~all ~~$13.5~~times ~~million without~~ the ~~benefit~~percentage of ~~the~~non-performing ~~FDIC’s~~loans ~~TAGP, currently scheduled~~ to ~~expire~~gross atloans ~~June~~shall ~~30,~~not ~~2010~~exceed 4. ~~Thus,~~00%. ~~the~~The ~~primary deposit-related~~Company ~~liquidity~~did ~~risk relates to balances which are~~ not meet ~~insured. As~~these ofcovenants ~~March~~in ~~31,~~ 2010 ~~the~~and ~~Company~~ has ~~liquid~~not ~~assets~~obtained ~~of approximately~~a ~~$95~~waiver ~~million~~through toDecember ~~address~~31, ~~liquidity~~2011. ~~needs~~The inobligation ais ~~crisis~~collateralized ~~scenario.~~by If a pledge ~~liquidity~~of ~~issue~~all ~~presents~~shares ~~itself,~~of ~~deposit~~common ~~promotions~~stock ~~would~~in beWaccamaw ~~expected~~Bank. toThe ~~yield significant~~lender ~~in-flows~~could ofdemand ~~cash,~~the ~~but~~common ~~could~~stock befrom ~~limited~~the ~~based~~Company onunless ~~recently~~and ~~approved~~until ~~limitations~~the oncovenants ~~maximum~~are ~~interest~~in ~~rates~~compliance ~~that~~or ~~may~~a bewaiver ~~offered~~has bybeen ~~should the bank not be well capitalized~~issued.

Notes to Consolidated Financial Statements

For the years ended December 31, 2010 and 2009

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

Going Concern Considerations, continued

Liquidity at the bank level is dependent upon the deposit franchise which funds 81% of the Company’s assets (or 57% excluding brokered CDs). The FDIC’s changes to permanently increase the amount of deposit insurance to $250,000 per deposit relationship and to provide unlimited deposit insurance for certain transaction accounts until December 31, 2012, have contributed to the stability of the deposit base. All banks that have elected to participate in the Transaction Account Guarantee Program (“TAGP”) have the same FDIC insurance coverage. Potential loss of deposits would be a primary funding need in a liquidity crisis. Deposit balances which are not covered by FDIC insurance total approximately $16.0 million currently, and would increase to approximately $22.5 million without the benefit of the FDIC’s TAGP, currently scheduled to expire at December 31, 2012. Thus, the primary deposit-related liquidity risk relates to balances which are not insured. As of December 31, 2011 the Company has liquid assets of approximately $128 million to address liquidity needs. If a liquidity issue presents itself, deposit promotions would be expected to yield significant in-flows of cash, but could be limited based on limitations on maximum interest rates that may be offered by banks that are not well capitalized.

In addition, certain borrowings, such as brokered CDs and FHLB advances, are dependent on various credit eligibility criteria which may be impacted by changes in the Company’s financial position and/or results of operations. Given the weakened economy, and current market conditions, there is no assurance that the Company will, if it chooses to do so, be able to obtain new borrowings or issue additional equity on terms that are satisfactory.

~~Based~~Effective onNovember ~~current~~29, ~~capital levels and expected liquidity needs and sources~~2011, ~~management expects~~ the Company ~~to be able to meet its~~and ~~obligations~~the atBank ~~least~~entered ~~through~~into ~~December 31,~~a ~~2010.~~Prompt IfCorrective ~~unanticipated~~Action ~~market factors~~Directive ~~emerge, or if~~ (the ~~Company~~“Directive”) ~~is unable to raise additional capital, successfully execute its plans, or comply~~ with ~~regulatory~~the ~~requirements, then its~~Board ~~banking~~of ~~regulators~~Governors ~~could~~of ~~take~~the ~~further action, which could include~~Federal ~~actions~~Reserve ~~that~~System ~~may have a material adverse effect on~~ (the ~~Company’s~~“Board ~~business, results~~ of ~~operations and financial position~~Governors”).

11The Directive is a formal corrective action in which the Board of Governors has determined that, as of October 30, 2011, Waccamaw Bank is critically undercapitalized, as defined in section 208.43(b)(5) of Regulation H of the Board of Governors.

Among other things, the Directive requires the Bank no later than January 6, 2012 to:

•

Take other necessary measures to make the Bank adequately capitalized;

•

Restrict the making of any capital distributions, including, but not limited to, the payment of dividends;

•

Restrict the payment of bonuses to senior executive officers and increases in compensation of such officers; and

•

Notes to Consolidated Financial Statements

For the years ended December 31, 2010 and 2009

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

Going Concern Considerations, continued

During 2011, the Company continued to experience losses from operations primarily due to loan losses. Based on unaudited financial information, as of December 31, 2011, consolidated total assets are $561,120,907, equity is $(3,625,647) and net loss from operations is $18,725,248 for the year ended December 31, 2011. The resulting bank regulatory capital ratios of total capital to risk weighted assets, Tier 1 capital to risk weighted assets and Tier 1 capital to average assets are 4.96%, 3.08% and 2.08%, respectively. Based on these levels, the Bank is considered significantly undercapitalized.

	2011

Total capital to risk weighted assets	1.93	%
Tier 1 capital to risk weighted assets	2.85	%
Tier 1 capital to average assets	4.73

Based on current capital levels and continued operating losses management believes the Company will require additional capital to be able to remain viable. Management has implemented various strategies including a private stock offering and selling branches to provide this needed capital. In spite of Management’s best efforts, there is no guarantee management will be successful in raising the additional capital. Accordingly, there is substantial doubt about the Company’s ability to continue as a going concern.

Critical Accounting Policies

We believe our policies with respect to the methodology for our determination of the allowance for loan losses, investment impairment charges, goodwill impairment and asset impairment judgments, including the recoverability of intangible assets, involve a higher degree of complexity and require management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could cause reported results to differ materially. These critical policies and their application are periodically reviewed with the Audit Committee and our Board of Directors.

Principles of Consolidation

Our consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.

Business Segments

The Company reports its activities as a single business segment. In determining the appropriateness of segment definition, the Company considers components of the business about which financial information is available and regularly evaluated relative to resource allocation and performance assessment.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and (“GAAP”) disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, the determination of other than temporary impairment on investment securities, the valuation of deferred tax assets and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowances for loan and foreclosed real estate losses, management obtains independent appraisals for significant properties.52

12Notes to Consolidated Financial Statements For the years ended December 31, 2010 and 2009

Notes to Consolidated Financial Statements

For the years ended December 31, 2009 and 2008

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

Use of Estimates, continued

~~The~~Material ~~Bank’s~~estimates ~~loan~~that ~~portfolio~~are ~~consists~~particularly ~~primarily~~susceptible ofto ~~loans~~significant inchange ~~its~~relate ~~market area. Accordingly,~~to the ~~ultimate~~determination ~~collectability~~ of athe ~~substantial~~allowance for loan losses, ~~portion~~the determination of other than temporary impairment on investment securities, the ~~Bank’s~~valuation ~~loan~~of ~~portfolio~~deferred tax assets and the ~~recovery~~valuation of real estate acquired in connection with foreclosures or in satisfaction of aloans. ~~substantial~~In ~~portion~~ connection with the determination of the allowances ~~carrying~~for ~~amount~~loan ofand foreclosed real estate ~~are~~losses, ~~susceptible~~management toobtains ~~changes~~independent ~~in local~~appraisals ~~market~~for ~~conditions~~significant properties.

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

Cash and Cash Equivalents

For the purpose of presentation in the statement of cash flows, cash and cash equivalents are defined as those amounts included in the balance sheet caption "cash and due from banks" and "interest-bearing deposits with banks", and “federal funds sold.” Generally, federal funds are purchased and sold for one-day periods.

Interest-Bearing Deposits with Banks

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

Trading Securities

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

Investment Securities

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

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

Notes to Consolidated Financial Statements

For the years ended December 31, 2010 and 2009

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

Loans

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

Notes to Consolidated Financial Statements

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

Loans, continued

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

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

Allowance for Loan Losses

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

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

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

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

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

1454

Notes to Consolidated Financial Statements For the years ended December 31, 2010 and 2009

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

Property and Equipment

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

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

Goodwill

Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Goodwill is assessed at least annually for impairment.

Fair value of the reporting unit in 2009 was determined using a discounted cash flow model with estimated cash flows based on internal forecasts of net income. Our goodwill impairment testing for 2009, which was updated at December 31, 2009, indicated that our goodwill was impaired. As a result of the recent decline in our stock price and operating results, the excess of the fair value over carrying value narrowed in our assessment. Based on the impairment testing process, the Company recorded a goodwill impairment charge of $2.7 million in 2009.

Intangible Assets

Intangible assets consist ~~primarily~~ of purchased core deposit intangible assets and are accounted for in accordance with generally accepted accounting principles. The Company evaluates the remaining useful life of each intangible asset that is being amortized to determine whether events and circumstances warrant a revision to the remaining period of amortization. Intangible assets are currently being amortized over estimated useful lives of 10 years.

Foreclosed Assets

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

Transfers of Financial Assets

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

Stock Compensation Plans

The Company recognizes compensation cost relating to share-based payment transactions. Generally accepted accounting principles require entities to measure the cost of employee services received in exchange for stock options based on the grant-date fair value of the award, and to recognize the cost over the period the employee is required to provide services for the award. Compensation cost has been measured using the fair value of an award on the grant date and is recognized over the service period, which is usually the vesting period.

1555

Notes to Consolidated Financial Statements For the years ended December 31, 2010 and 2009

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

Advertising Expense

The Company expenses advertising costs as they are incurred. Advertising expense for the years ended December 31, ~~2009~~2010 and ~~2008~~2009 was ~~approximately~~ approximately $~~311~~261,000 and $~~705~~311,000, respectively.

Income Taxes

Provision for income taxes is based on amounts reported in the statements of income (after exclusion of non-taxable income such as interest on state and municipal securities) and consists of taxes currently due plus deferred taxes on temporary differences in the recognition of income and expense for tax and financial statement purposes. Deferred tax assets, net of a valuation allowance if appropriate, and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which ~~the~~ the deferred tax assets or liabilities are expected to be realized or settled. Due to uncertainty regarding the realization of the entire deferred tax asset, management has recorded a deferred tax asset valuation allowance as of December 31, ~~2009~~2010. Details are included in Note 1718. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.

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

When ~~tax~~ tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions ~~that~~ that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax position taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in ~~the~~ the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities ~~upon~~ upon examination. Management is not aware of any material uncertain tax positions and no liability has been recognized at December 31, ~~2009~~ 2010. Interest and penalties associated with unrecognized tax benefits would be classified as additional interest expense or other expense, respectively, in the statement of income.

Comprehensive Income

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

Basic Earnings per Share

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

1656

Notes to Consolidated Financial Statements For the years ended December 31, 2010 and 2009

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

Diluted Earnings per Share

The computation of diluted earnings (loss) per share is similar to the computation of basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if dilutive potential common shares had been issued. The numerator is adjusted for any changes in income or loss that would result from the assumed conversion of those potential common stock equivalents. Potential common ~~stockequivalents~~stock equivalents include the Company’s Series A convertible preferred stock and related outstanding ~~warrants~~ warrants and shares associated with stock-based compensation. Due to the net ~~loss~~ losses in 2010 and 2009, dilutive common stock equivalents have been excluded from the computation of dilutive earnings per share as the result would be anti-dilutive.

Financial Instruments

Derivatives that are used as part of the asset/liability management process are linked to specific assets or liabilities and have high correlation between the contract and the underlying item being hedged, both at inception and throughout the hedge period. In In addition, forwards and option contracts must reduce the risk attributed to a particular exposure, and for hedges of ~~anticipatory~~ anticipatory transactions, the significant terms and characteristics of the transaction must be identified and the transactions must be probable of occurring. All derivative financial instruments held or issued by the Company are held or issued for purposes other than trading. InThe ~~December 2007, the~~ Bank has entered into to a structured repo obligation with Barclays Capital, Inc., see innote ~~the amount of $20 million~~13. Within the structured repo are embedded derivatives which will not have a material effect on the results of operations.

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

Fair Value of Financial Instruments

Generally accepted accounting principles (“GAAP”) define fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company determines the fair value of its financial instruments based on the fair value hierarchy established per GAAP which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Investment securities available for sale, loans held for sale and servicing assets are recorded at fair value on a recurring basis. Certain impaired loans and foreclosed assets are carried at fair value on a nonrecurring basis.

Reclassification

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

Subsequent Events

In accordance with accounting guidance, the Company evaluated events and transactions for potential recognition or disclosure in ~~our~~the financial statements through the date the financial statements were issued.

Notes to Consolidated Financial Statements

For the years ended December 31, 2010 and 2009

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

Recent Accounting Pronouncements

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

17In March 2010, guidance related to derivatives and hedging was amended to exempt embedded credit derivative features related to the transfer of credit risk from potential bifurcation and separate accounting. Embedded features related to other types of risk and other embedded credit derivative features are not exempt from potential bifurcation and separate accounting. The amendments were effective for the Company on July 1, 2010. These amendments will have no impact on the financial statements.

~~Notes~~Stock compensation guidance was updated in April 2010 to ~~Consolidated~~address ~~Financial~~the ~~Statements~~classification of employee share-based payment awards with exercise prices denominated in the currency of a market in which a substantial portion of the entity’s equity securities trade. The guidance states that these awards should not be considered to contain a condition that is not a market, performance, or service condition. Share based payments that contain conditions related to market performance and service must be recorded as liabilities. These awards should not be classified as liabilities if they otherwise qualify to be classified as equity. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The Company does not expect the update to have an impact on the financial statements.

In April 2010, guidance was issued related to accounting for acquired troubled loans that are subsequently modified. The guidance provides that if these loans meet the criteria to be accounted for within a pool, modifications to one or more of these loans does not result in the removal of the modified loan from the pool even if the modification would otherwise be considered a troubled debt restructuring. The pool of assets in which the loan is included will continue to be considered for impairment. The amendments do not apply to loans not meeting the criteria to be accounted for within a pool. These amendments are effective for modifications of loans accounted for within pools occurring in the first interim or annual period ending on or after July 15, 2010. These amendments had no impact on the financial statements.

In July 2010, the Receivables topic of the ASC was amended to require expanded disclosures related to a company’s allowance for credit losses and the credit quality of its financing receivables. The amendments will require the allowance disclosures to be provided on a disaggregated basis. The Company included the disclosures in its financial statements for the year ended December 31, 2010.

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which significantly changes the regulation of financial institutions and the financial services industry. The Dodd-Frank Act includes several provisions that will affect how community banks, thrifts, and small bank and thrift holding companies will be regulated in the future. Among other things, these provisions abolish the Office of Thrift Supervision and transfer its functions to the other federal banking agencies, relax rules regarding interstate branching, allow financial institutions to pay interest on business checking accounts, change the scope of federal deposit insurance coverage, and impose new capital requirements on bank and thrift holding companies. The Dodd-Frank Act also establishes the Bureau of Consumer Financial Protection as an independent entity within the Federal Reserve, which will be given the authority to promulgate consumer protection regulations applicable to all entities offering consumer financial services or products, including banks. Additionally, the Dodd-Frank Act includes a series of provisions covering mortgage loan origination standards affecting originator compensation, minimum repayment standards, and pre-payments. Management is actively reviewing the provisions of the Dodd-Frank Act and assessing its probable impact on our business, financial condition, and results of operations.

Notes to Consolidated Financial Statements

For the years ended December 31, 2010 and 2009

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

Recent Accounting Pronouncements, continued

InDisclosures about Troubled Debt Restructurings ~~June~~(“TDRs”) ~~2009,~~required by ASU 2010-20 were deferred by the Financial Accounting Standards Board (“FASB”) ~~issued guidance~~in ~~which~~ASU ~~restructured~~2011-01 ~~generally~~issued ~~accepted~~in ~~accounting~~January ~~principles~~2011. ~~(“GAAP”)~~In ~~and simplified~~April ~~access~~2011 tothe ~~all~~FASB ~~authoritative~~issued ~~literature~~ASU by2011-02 ~~providing~~to aassist ~~single~~creditors ~~source of~~with ~~authoritative~~their ~~nongovernmental~~determination ~~GAAP. The~~of ~~guidance~~when a restructuring is ~~presented~~a inTDR. ~~a topically~~The ~~organized~~determination ~~structure~~is ~~referred~~based toon aswhether the ~~FASB~~ ~~Accounting~~restructuring ~~Standards~~constitutes ~~Codification~~a ~~(“ASC”).~~concession ~~The~~and ~~new~~whether ~~structure~~the debtor is ~~effective for~~experiencing ~~interim~~financial ordifficulties ~~annual~~as ~~periods~~both ~~ending~~events ~~after~~must ~~September~~be ~~15, 2009~~present. ~~All~~This ~~existing accounting~~standard ~~standards~~is ~~have~~expected ~~been~~to ~~superseded~~have ~~and~~no ~~all~~impact ~~other~~on ~~accounting~~the ~~literature not included is considered non-authoritative~~Company.

~~The~~In ~~FASB~~December 2010, ~~issued~~the ~~new~~Intangibles ~~accounting~~topic ~~guidance on accounting for transfers~~ of ~~financial assets in June 2009. The guidance limits~~ the ~~circumstances~~ASC inwas ~~which~~amended ~~a financial~~to ~~asset~~modify ~~should~~Step be1 ~~derecognized~~of ~~when~~ the ~~transferor~~goodwill ~~has~~impairment ~~not~~test ~~transferred the~~for ~~entire~~reporting ~~financial~~units ~~asset~~with byzero ~~taking~~or negative ~~into~~carrying ~~consideration~~amounts. ~~the~~For ~~transferor’s continuing~~those ~~involvement. The~~reporting ~~standard~~units, ~~requires~~an ~~that~~entity ais ~~transferor recognize~~required ~~and~~to ~~initially~~perform ~~measure~~Step at2 ~~fair~~of ~~value~~the ~~all~~goodwill ~~assets~~impairment ~~obtained~~test ~~(including a~~if ~~transferor’s~~it ~~beneficial~~is ~~interest)~~more ~~and~~likely ~~liabilities~~than ~~incurred~~not asthat a ~~result~~goodwill ofimpairment ~~a transfer~~exists. ofAny ~~financial~~resulting ~~assets~~goodwill ~~accounted~~impairment ~~for~~should asbe arecorded ~~sale. The~~as ~~concept of~~ a ~~qualifying special~~cumulative-~~purpose entity is no longer applicable. The~~effect ~~standard~~adjustment isto ~~effective~~beginning ~~for~~retained ~~the~~earnings ~~first~~upon ~~annual~~adoption. ~~reporting~~Impairments ~~period~~occurring ~~that~~subsequent ~~begins~~to ~~after November~~adoption ~~15,~~should ~~2009,~~be ~~for~~included ~~interim~~in ~~periods within the first annual reporting period, and for interim and annual reporting periods thereafter~~earnings. ~~Earlier~~ ~~application is prohibited.~~ The ~~Company~~amendment ~~does~~was ~~not~~effective ~~expect~~for the ~~guidance to~~Company ~~have any impact~~ on ~~the~~January ~~Company’s financial statements. The ASC was amended in December~~1, ~~2009, to include this guidance~~2011.

~~Guidance was~~In ~~issued~~September in2011, ~~June~~the ~~2009~~Intangibles ~~requiring~~topic was aagain ~~company~~amended to ~~analyze~~permit ~~whether~~an ~~its interest in a variable interest~~ entity ~~(“VIE”)~~to ~~gives~~consider itqualitative afactors ~~controlling~~to ~~financial~~determine ~~interest that should be included in consolidated financial statements. A company must assess~~ whether it ~~has~~is anmore ~~implicit~~likely ~~financial~~than ~~responsibility~~not ~~to ensure~~ that ~~the~~ ~~VIE operates as designed when determining whether it has~~ the ~~power to direct~~ ~~the~~fair ~~activities~~value of ~~the~~a ~~VIE~~reporting ~~that~~unit ~~significantly~~is ~~impact~~less than its ~~economic~~carrying ~~performance, making~~amount itas ~~the~~a ~~primary~~basis ~~beneficiary. Ongoing~~for ~~reassessments~~determining of whether ~~a company~~it is ~~the~~necessary ~~primary~~to ~~beneficiary~~perform ~~are also required by~~ the ~~standard. This~~two-step ~~guidance~~goodwill ~~amends~~impairment ~~the criteria to qualify as a primary beneficiary as well as how to determine the existence of a VIE~~test. ~~The standard~~ ~~also~~These ~~eliminates~~amendments ~~certain exceptions that~~ were ~~previously available. This guidance is~~ effective ~~as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009,~~ for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. Comparative disclosures will be required for periods after the ~~effective date. The~~ Company ~~does not expect the guidance to have any impact~~ on ~~the~~January ~~Company’s financial position. An update was issued in December~~1, ~~2009, to include this guidance in the ASC~~2012.

AnIn ~~update was~~April ~~issued~~2011, inthe ~~October,~~criteria ~~2009~~used to determine ~~provide~~effective ~~guidance~~control ~~requiring~~of ~~companies~~transferred toassets ~~allocate revenue~~ in ~~multi-element~~the ~~arrangements. Under~~Transfers ~~this~~and ~~guidance,~~Servicing ~~products or~~topic ~~services~~of ~~(deliverables)~~the ~~must~~ASC bewas ~~accounted~~amended ~~for~~by ~~separately~~ASU ~~rather~~2011-03. The ~~than~~requirement asfor ~~a combined~~the ~~unit~~transferor ~~utilizing~~to ahave ~~selling~~the ~~price~~ability ~~hierarchy~~ to ~~determine~~repurchase or redeem the ~~selling~~financial ~~price of~~assets aon ~~deliverable. The~~substantially ~~selling~~the ~~price~~agreed terms isand ~~based~~the oncollateral ~~vendor-specific evidence,~~maintenance ~~third-party~~implementation ~~evidence~~guidance orrelated ~~estimated~~to ~~selling~~that ~~price. The amendments~~criterion inwere removed from the ~~update~~assessment ~~are~~of effective control. ~~prospectively~~The ~~for~~other ~~revenue~~criteria ~~arrangements entered~~to ~~into~~assess oreffective ~~materially~~control ~~modified~~were innot ~~fiscal~~changed. ~~years~~The ~~beginning~~amendments onare oreffective ~~after~~for ~~June 15,~~the ~~2010~~Company ~~with~~beginning January ~~early~~1, ~~adoption~~2012 ~~permitted. The~~but ~~Company~~are ~~does~~ not ~~expect the~~expected ~~update~~ to have ana ~~impact~~material effect on ~~its~~the financial statements.

In October, 2009, updated guidance was issued to provide for accounting and reporting for own-share lending arrangements issued in contemplation of a convertible debt issuance. At the date of issuance, a share-lending arrangement entered into on an entity’s own shares should be measured at fair value in accordance with prior guidance and recognized as an issuance cost, with an offset to additional paid-in capital. Loaned shares are excluded from basic and diluted earnings per share unless default of the share-lending arrangement occurs. The amendment also requires several disclosures including a description and the terms of the arrangement and the reason for entering into the arrangement. The effective dates of the amendment are dependent upon the date the share-lending arrangement was entered into and include retrospective application for arrangements outstanding as of the beginning of fiscal years beginning on or after December 15, 2009. The Company has no plans to issue convertible debt and, therefore, does not expect the update to have an impact on its financial statements.59

18Notes to Consolidated Financial Statements For the years ended December 31, 2010 and 2009

Notes to Consolidated Financial Statements

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

Recent Accounting Pronouncements, continued

~~In January,~~ASU ~~2010,~~2011-04 ~~guidance~~ was issued ~~to alleviate diversity~~ in ~~the~~May ~~accounting~~2011 ~~for~~to ~~distributions~~amend ~~to shareholders that allow~~ the ~~shareholder~~Fair toValue ~~elect~~Measurement totopic ~~receive their~~of ~~entire~~the ~~distribution~~ASC inby ~~cash~~clarifying ~~or shares but with a limit on~~ the ~~aggregate amount~~application of ~~cash~~existing tofair bevalue ~~paid. The~~measurement ~~amendment~~and ~~states that the stock~~disclosure ~~portion~~requirements ofand aby ~~distribution~~changing toparticular ~~shareholders~~principles ~~that~~or ~~allows~~requirements ~~them~~for tomeasuring ~~elect~~fair tovalue ~~receive cash~~ or ~~shares~~for ~~with~~disclosing ainformation ~~potential limitation on the total amount of cash that all~~about ~~shareholders~~fair ~~can~~value ~~elect to receive in the aggregate is considered a share issuance~~measurements. The ~~amendment~~amendments iswere effective for ~~interim~~the ~~and~~Company ~~annual~~beginning ~~periods~~January ~~ending~~1, on2012 orbut ~~after~~are ~~December~~not ~~15,~~expected ~~2009~~to ~~and~~have ~~had no~~a ~~impact~~material effect on the ~~Company’s~~ financial statements.

~~Also~~The ~~in January,~~Comprehensive ~~2010,~~Income antopic ~~amendment~~of ~~was issued to clarify~~ the ASC ~~scope~~was ofamended ~~subsidiaries~~in ~~for consolidation~~June ~~purposes~~2011. The amendment ~~provides~~eliminates ~~that~~ the ~~decrease~~option ~~in ownership~~to ~~guidance~~present ~~should~~other ~~apply~~comprehensive toincome ~~(1)~~as a ~~subsidiary~~part orof ~~group~~the statement of ~~assets~~changes ~~that~~in isstockholders’ ~~a business~~equity orand ~~nonprofit~~requires ~~activity,~~consecutive ~~(2)~~presentation aof ~~subsidiary~~the ~~that~~statement isof anet ~~business~~income orand ~~nonprofit~~other comprehensive ~~activity~~income. ~~that~~The isamendments ~~transferred~~will tobe anapplicable ~~equity~~to ~~method~~the ~~investee~~Company oron ~~joint~~January ~~venture~~1, 2012 and ~~(3)~~ anwill ~~exchange~~be ofapplied aretrospectively. ~~group~~In ofDecember ~~assets that constitutes a business or nonprofit~~2011, ~~activity~~the ~~for~~topic awas ~~non-controlling~~further ~~interest~~amended into andefer ~~entity. The~~the ~~guidance does~~effective ~~not~~date ~~apply~~of topresenting areclassification ~~decrease~~adjustments infrom ~~ownership~~other incomprehensive ~~transactions related~~ income to ~~sales~~net ofincome ~~in substance~~on ~~real~~the ~~estate~~face ~~or conveyances~~ of ~~oil~~the ~~and~~financial ~~gas mineral rights~~statements. ~~The~~ ~~update~~Companies isshould ~~effective~~continue ~~for~~to ~~the~~report ~~interim~~reclassifications orout ~~annual~~of ~~reporting~~accumulated ~~periods~~other ~~ending~~comprehensive onincome orconsistent ~~after~~with ~~December~~the ~~15,~~presentation ~~2009~~requirements ~~and~~in ~~had~~effect noprior ~~impact~~to on the ~~Company’s~~amendments while FASB redeliberates ~~financial~~future ~~statements~~requirements.

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

Note 2. ~~Adjustment~~Loan toSwap ~~Earnings~~and Preferred Stock Transaction

Due to a system error discovered during the October 2009, dating back to the second quarter of 2008 and extending to the second quarter of 2009, interest income on certain loan participations was understated by $552,151 and net income understated by $340,274. Interest income of $212,350 and net income of $130,480 relating to 2008 was corrected as an out-of period adjustment in the third quarter of 2009. The correction of this error affected both the asset account, “Accrued income” and income account “Loans ~~and fees on loans”, as this was an accrual entry only there were no cash transactions affected by this error.~~

~~The~~On September 30, 2010, the Bank entered into ~~following~~an ~~table~~agreement ~~details~~whereby the ~~income~~Bank would sell and ~~tax~~Augusta ~~effect~~Holdings, LLC (“Augusta”) would buy nonperforming real estate loans for the contractual pay-off amount (par value) of $11.2 million. The carrying value of these loans was $7.3 million as the carrying ~~error~~amounts onhad been reduced to reflect the ~~affected~~fair value of the underlying collateral in measuring the impairment under the ~~previously~~requirements ~~issued~~of ~~financial~~ASC ~~statements~~310-10-35. During the negotiations of this transaction, the Bank agreed to purchase from Augusta, a home equity line of credit (HELOC) loan pool. The price of the pool was the amount of the aggregate principal balances (par value) of the loans in the pool, effectively the pool par value of $110.1 million. The pool met certain credit quality and performance criteria. Under the terms of the HELOC pool purchase agreement, the Bank was able to exclude loans that did not meet the following criteria:

	Year Ended
	2008
Interest income	$	212,350
Income tax expense

Filing Compare · WACCAMAW BANKSHARES INC