Waccamaw Bankshares (WBNK) 10-Q 2007 Q3 Quarterly report

United States Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

(MARK ONE)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
	SEPTEMBER 30, 2007
	OR
o	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934

Commission File Number 000-32985

WACCAMAW BANKSHARES, INC.

(Exact name of registrant as specified in its charter)

NORTH CAROLINA	52-2329563
(State or other Jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

110 North J.K. Powell Boulevard, Whiteville, N.C. 28472

(address of Principal Executive Office)

(910) 641-0044

(Issuer’s telephone number, including area code)

Not Applicable

(former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 of 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    xNO    o

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

Large accelerated filer    oAccelerated filer    oNon-accelerated filer    x

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

YES    oNO    x

As of November 14, 2007 there were 5,415,087 shares of the issuer’s common stock, no par value, outstanding.

WACCAMAW BANKSHARES, INC.

INDEX

		Page Number
Part I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets September 30, 2007 (Unaudited) and December 31, 2006	1
	Consolidated Statements of Income, Nine Months Ended September 30, 2007 and September 30, 2006 (Unaudited)	2
	Consolidated Statements of Income, Quarters Ended September 30, 2007 and September 30, 2006 (Unaudited)	3
	Consolidated Statements of Cash Flows, Nine Months Ended September 30, 2007 and September 30, 2006 (Unaudited)	4
	Notes to Consolidated Financial Statements	5-7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	7-11
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	12
Item 4T.	Controls and Procedures	12
Part II. OTHER INFORMATION		13
Item 1.	Legal Proceedings	13
Item 1A.	Risk Factors	13
Item 5.	Other Information	13
Item 6.	Exhibits	13
SIGNATURES		14

WACCAMAW BANKSHARES, INC.

Consolidated Balance Sheets

September 30, 2007 and December 31, 2006

	(Unaudited)
	September 30, 2007			December 31, 2006
Assets:
Cash and due from banks	$	6,227,791			9,183,383
Interest-bearing deposits with banks		852,152			790,360
Federal funds sold		4,401,000			2,598,000
Investment securities, available for sale		65,062,262			50,529,163
Restricted equity securities		3,072,006			2,457,206
Loans, net of allowance for loan losses of $5,504,300 in 2007, and $4,885,992 in 2006		342,798,298			312,253,190
Other real estate owned		16,411			18,845
Property and equipment, net		8,823,668			6,671,773
Goodwill		2,727,152			2,665,602
Intangible assets, net		737,670			930,555
Accrued income		2,595,774			2,627,020
Bank owned life insurance		9,681,562			5,419,130
Other assets		3,617,908			3,437,066
Total assets	$	450,613,654		$	399,581,293
Liabilities and Stockholders’ Equity
Liabilities:
Demand deposits	$	35,911,772		$	49,163,297
Interest-bearing deposits		330,118,147			278,188,470
Total deposits		366,029,919			327,351,767
Securities sold under agreements to repurchase		6,344,000			5,410,000
Short-term borrowings		2,000,000			-
Long-term debt		30,500,000			23,500,000
Guaranteed preferred beneficial interest in the company’s junior subordinated debentures		8,248,000			8,248,000
Accrued interest payable		1,746,003			1,412,300
Other liabilities		1,314,494			1,956,596
Total liabilities		416,182,416			367,878,663
Commitments and contingencies		-			-
Stockholders’ equity:
Preferred stock, Series A, non-cumulative, non-voting, No par value; 1,000,000 shares authorized 65,111 and 59,192 issued and outstanding at September 30, 2007 and December 31, 2006, respectively		993,112			993,112
Common stock, no par value; 25,000,000 shares authorized; 5,415,087 and 4,837,666 shares issued and outstanding at September 30, 2007 and December 31, 2006, respectively		23,464,346			17,338,231
Retained earnings		10,492,209			13,216,891
Accumulated other comprehensive income		(518,429	)		154,396
Total stockholders’ equity		34,431,238			31,702,630
Total liabilities and stockholders’ equity	$	450,613,654		$	399,581,293

See notes to consolidated financial statements

1

WACCAMAW BANKSHARES, INC.

Consolidated Statements of Income

Nine-months ended September 30, 2007 and Nine-months ended September 30, 2006 (Unaudited)

	Nine Months Ended Sept 30, 2007		Nine Months Ended Sept 30, 2006
Interest income
Loans and fees on loans	$	20,561,291	$	16,313,438
Federal funds sold		271,694		211,262
Investment securities, taxable		2,232,143		1,586,118
Investment securities, nontaxable		406,247		237,886
Total interest income		23,471,375		18,348,704
Interest expense
Deposits		9,991,288		6,745,731
Federal funds purchased and securities sold under agreements to repurchase		257,083		138,015
Other borrowed funds		1,548,890		1,097,035
Total interest expense		11,797,261		7,980,781
Net interest income		11,674,114		10,367,923
Provision for loan losses		385,864		1,090,000
Net interest income after provision for loan losses		11,288,250		9,277,923
Non-interest income
Service charges on deposit accounts		894,721		821,772
Mortgage origination income		352,904		278,709
Other operating income		770,794		647,007
Earnings on bank owned life insurance		286,242		179,676
Net realized gains (losses) on sale or maturity of investment securities		256,321		(753	)
Total noninterest income		2,560,982		1,926,411
Non-interest expense
Salaries and employee benefits		4,982,178		3,859,166
Occupancy and equipment		1,077,305		797,421
Data processing		751,147		558,207
Amortization expense of intangible assets		192,885		202,034
Other expense		1,952,322		1,465,722
Total noninterest expense		8,955,837		6,882,550
Income (loss) before income taxes		4,893,395		4,321,784
Income Tax Expense		1,696,735		1,660,468
Net income	$	3,196,660	$	2,661,316
Basic earnings income per share	$	.60	$	.53
Diluted earnings income per share	$	.58	$	.51
Weighted average shares outstanding		5,347,514		5,062,549
Diluted average shares outstanding		5,508,292		5,217,484

See notes to consolidated financial statements

2

WACCAMAW BANKSHARES, INC.

Consolidated Statements of Income

Quarter ended September 30, 2007 and Quarter ended September 30, 2006 (Unaudited)

	Quarter Ended  Sept 30, 2007		Quarter Ended Sept 30, 2006
Interest income
Loans and fees on loans	$	7,149,037	$	5,979,263
Federal funds sold		31,510		18,625
Investment securities, taxable		780,521		629,790
Investment securities, nontaxable		161,100		90,813
Total interest income		8,122,168		6,718,491
Interest expense
Deposits		3,528,135		2,482,425
Fed funds purchased and securities sold under agreements to repurchase		105,802		77,082
Other borrowed funds		571,207		383,957
Total interest expense		4,205,144		2,943,464
Net interest income		3,917,024		3,775,027
Provision for loan losses		8,417		470,000
Net interest income after provision for loan losses		3,908,607		3,305,027
Non-interest income
Service charges on deposit accounts		303,993		268,740
Mortgage origination income		87,972		100,891
Other operating income		275,746		241,224
Earnings on bank owned life insurance		115,957		66,172
Net realized gains (losses) on sale or maturity of investment securities		49,380		(122	)
Total noninterest income		833,048		676,905
Non-interest expense
Salaries and employee benefits		1,732,726		1,441,375
Occupancy and equipment		395,155		291,881
Data processing		229,422		205,279
Amortization expense of intangible assets		64,295		50,678
Other expense		640,501		560,966
Total noninterest expense		3,062,099		2,550,179
Net income		1,679,556		1,431,753
Income Tax Expense		559,023		503,973
Net income	$	1,120,533	$	927,780
Basic earnings income per share	$	.21	$	.18
Diluted earnings income per share	$	.20	$	.18
Weighted average shares outstanding		5,376,975		5,102,981
Diluted average shares outstanding		5,503,663		5,230,840

See notes to consolidated financial statements

3

WACCAMAW BANKSHARES, INC.

Consolidated Statements of Cash Flows

Nine-months ended September 30, 2007 and Nine-months ended September 30, 2006 (Unaudited)

	Nine-Months  Ended Sept 30, 2007			Nine-Months Ended Sept 30, 2006
Cash flows from operating activities
Net income	$	3,196,660		$	2,661,316
Adjustments to reconcile net income to net cash used by operations:
Depreciation and amortization		573,889			462,179
Stock-based compensation		72,465			73,490
Provision for loan losses		385,864			1,090,000
Accretion of discount on securities, net of amortization of premiums		13,315			44,308
(Gain) loss on sale of investment securities		(256,321	)		753
(Gain) loss from sale of other real estate		-			(1,276	)
Income from bank owned life insurance		(262,432	)		-
Changes in assets and liabilities:
Accrued income		31,246			(721,558	)
Other assets		106,650			(483,107	)
Accrued interest payable		333,703			192,833
Other liabilities		(642,102	)		(399,334	)
Net cash provided by operating activities		3,552,937			2,919,604
Cash flows from investing activities
Net (increase) decrease in federal funds sold		(1,803,000	)		7,425,000
Purchases of investment securities		(26,206,089	)		(13,281,605	)
Maturities of investment securities		4,032,531			4,370,685
Net increase in loans		(30,930,972	)		(28,843,672	)
Proceeds from sale of other real estate		-			83,751
Sales of investment securities		6,249,232			935,000
Investment in bank owned life insurance		(4,000,000	)		-
Purchases of property and equipment		(2,532,900	)		(2,658,835	)
Acquisition of Bank of Heath Springs		-			(1,641,512	)
Net cash used in investing activities		(55,191,198	)		(33,611,188	)
Cash flows from financing activities
Net increase in non-interest-bearing deposits		(13,251,525	)		5,296,930
Net increase in interest-bearing deposits		51,929,677			19,925,071
Net increase in securities sold under agreements to repurchase		934,000			2,184,000
(Repayments) proceeds from short-term borrowings		2,000,000			(5,000,000	)
(Repayments) proceeds from long-term debt		7,000,000			5,000,000
Proceeds from exercise of stock options		91,352			255,655
Excess tax benefit from stock-based compensation		51,121			201,151
Proceeds (expense) from issuance of common stock		(10,164	)		3,582,025
Net cash provided by financing activities		48,744,461			31,444,832
Increase in cash and cash equivalents		(2,893,800	)		753,248
Cash and cash equivalents, beginning		9,973,743			7,662,133
Cash and cash equivalents, ending	$	7,079,943		$	8,415,381
Supplemental disclosure of cash flow information
Interest paid	$	11,463,558		$	7,787,948
Taxes paid	$	1,754,200		$	2,271,194
Supplemental disclosure of non cash activity
Other real estate acquired in settlement of loans	$	-		$	55,792
Issuance of stock in exchange for exercised stock options and stock already outstanding	$	271,101		$	-
Stock dividend	$	5,921,341		$	-

See notes to consolidated financial statements

4

WACCAMAW BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

The accompanying unaudited financial statements were prepared in accordance with instructions for Form 10-Q and therefore, do not include all disclosures required by generally accepted accounting principles for a complete presentation of financial statements. In the opinion of management, the financial statements contain all adjustments necessary to present fairly the financial condition of Waccamaw Bankshares, Inc. (the “Company”) and its subsidiary, Waccamaw Bank (the “Bank”) as of September 30, 2007 and December 31, 2006, and its cash flows for the nine months ended September 30, 2007 and 2006. The results of operations for the nine months and three months ended September 30, 2007 are not necessarily indicative of the results expected for the full year. These consolidated financial statements should be read in conjunction with the Company’s 10-K for the year ended December 31, 2006, as amended.

Waccamaw Bankshares, Inc. is located in Whiteville, North Carolina. Waccamaw Bank, the primary subsidiary of Waccamaw Bankshares, Inc. is a state chartered bank operating twelve offices in Whiteville, Wilmington, Shallote, Holden Beach, Chadbourn, Tabor City, Southport (2), Sunset Beach and Elizabethtown, North Carolina. Offices in South Carolina include Conway and Heath Springs. The accounting and reporting polices of the Company and Bank follow generally accepted accounting principles and general practices within the financial services industry.

PRESENTATION OF CASH FLOWS

For purposes of reporting cash flows, cash and cash equivalents include cash and amounts due from depository institutions (including cash items in process of collection) and interest-bearing deposits with banks which are considered to be cash equivalents. Federal funds sold are shown separately. Cash flows from demand deposits, NOW accounts and savings accounts are reported net since their original maturities are less than three months. Loans and time deposits are reported net per Financial Accounting Standards Board (“FASB”) Statement No. 104. Federal funds purchased are shown separately.

INVESTMENT SECURITIES

Investments classified as available for sale can be held for indefinite periods of time and include those securities that management may employ as part of asset/liability strategy or that may be sold in response to changes in interest rates, prepayments, regulatory capital requirements or similar factors. These securities are carried at fair value and are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.

Investment securities classified as held to maturity are those debt securities that the Bank has the ability and intent to hold to maturity. Accordingly, these securities are carried at cost adjusted for amortization of premiums and accretion of discount, computed by the interest-method over their contractual lives. At September 30, 2007 and December 31, 2006, the Bank had no investments classified as held to maturity.

LOANS

Loans are stated at the amount of unpaid principal, reduced by unearned fees and an allowance for loan losses.

The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. The allowance is increased by provisions charged to operating expense and reduced by net charge-offs. The Bank makes continuous credit reviews of the loan portfolio and considers economic conditions, historical loan loss experience, review of specific problem loans and other factors in determining the adequacy of the allowance balance.

Interest on all loans is accrued daily on the outstanding balance. Accrual of interest is discontinued on a loan when management believes, after considering collection efforts and other factors that the borrower’s financial condition is such that collection of interest is doubtful.

5

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.

NOTE 2. EARNINGS PER SHARE

Earnings per share for the nine months and quarters ended September 30, 2007 and 2006 were calculated by dividing net income by the weighted average number of shares outstanding during the period. Diluted earnings per share for the nine months and the quarters ended September 30, 2007 and 2006 were calculated by dividing net income by the weighted average number of dilutive shares outstanding.

The following table details the computation of basic and diluted earnings per share:

	Nine-Months  September 30,  2007		Nine-Months  September 30, 2006
Net income (income available to common shareholders)	$	3,196,660	$	2,661,316
Weighted average common shares outstanding		5,347,514		5,062,549
Effect of dilutive securities, options		95,667		89,824
Effect of dilutive securities, preferred stock		65,111		65,111
Weighted average common shares outstanding, diluted		5,508,292		5,217,484
Basic earnings per share	$	.60	$	.53
Diluted earnings per share	$	.58	$	.51

	Quarter ended September 30, 2007		Quarter ended September 30, 2006
Net income (income available to common shareholders)	$	1,120,533	$	927,780
Weighted average common shares outstanding		5,376,975		5,102,981
Effect of dilutive securities, options		61,577		62,748
Effect of dilutive securities, preferred stock		65,111		65,111
Weighted average common shares outstanding, diluted		5,503,663		5,230,840
Basic earnings per share	$	.21	$	.18
Diluted earnings per share	$	.20	$	.18

The Company declared an 11-for-10 stock split in the form of a 10% stock dividend payable on September 18, 2007 to the shareholders of record on September 2, 2007. To effect the split, the Company’s issued and outstanding stock was increased by 491,583 shares. The dilutive effects of preferred stock have also been adjusted to reflect an 11-for-10 stock split discussed in Note 4.

At September 30, 2007, the Company had 296,889 warrants outstanding. These warrants were not included in the diluted earnings per share calculation as the effect would have been anti-dilutive. The bank had 269,899 outstanding warrants at September 30, 2006.

6

NOTE 3. BALANCE SHEETS

The balance sheet at December 31, 2006 has been taken from the audited financial statements at that date.

The Bank is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing need of its customers. 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 sheets.

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 at September 30, 2007 and December 31, 2006 is as follows:

	September 30, 2007		December 31, 2006
Commitment to extend credit	$	49,790,000	$	68,610,000
Standby letters of credit		1,853,000		1,825,000

NOTE 4. SUBSEQUENT EVENTS

Waccamaw Bankshares, Inc., announced an 11-for-10 stock split in the form of a 10% stock dividend payable on November 10, 2007 to preferred shareholders of record on October 18, 2007. All references to preferred stock shares have been restated as appropriate.

Waccamaw Bank, announced an agreement to acquire four offices from BB&T Corporation as a result of BB&T’s merger with Coastal Financial Corporation. Waccamaw is acquiring two offices in Brunswick County, North Carolina and two offices in Horry County, South Carolina. These offices are located at 8001 East Oak Island Drive, Oak Island, North Carolina; 200 Smith Street, Shallotte, North Carolina; 5429 Dick Pond Road, Myrtle Beach, South Carolina; and 112 Waccamaw Medical Park, Conway, South Carolina.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

This discussion, analysis and related financial information is presented to explain the significant factors which affected the financial condition and results of operations for the nine months and three months ending September 30, 2007 and 2006 of Waccamaw Bankshares, Inc. This discussion should be read in conjunction with the financial statements and related notes included in this report.

Waccamaw Bank, the primary subsidiary of Waccamaw Bankshares, is a state charted bank operating North Carolina offices in Whiteville, Wilmington, Shallotte, Holden Beach, Chadbourn, Tabor City, Southport (2), Sunset Beach and Elizabethtown, North Carolina. Offices in South Carolina include Conway and Heath Springs. The Bank began operations on September 2, 1997. Waccamaw Bankshares, Inc. acquired all outstanding shares of Waccamaw Bank on July 1, 2001.

HIGHLIGHTS

Net income for the quarter ended September 30, 2007, was $1,120,533 or $.21 per weighted average basic share outstanding compared to a $927,780 net profit or $.18 per weighted average basic share outstanding for the quarter ended September 30, 2006.

7

On September 30, 2007, Waccamaw Bankshares, Inc. assets totaled $450,613,654 compared to $399,581,293 on December 31, 2006. Net loans were $342,798,298 compared to $312,253,190 on December 31, 2006. Total deposits

on September 30, 2007 were $366,029,919 compared to $327,351,767 at the end of 2006. Stockholders’ equity after adjustments for unrealized losses on securities available for sale as required by SFAS No. 115 increased by $2,728,608 resulting in a September 30, 2007 book value of $6.17 per common share, up from $5.77 on December 31, 2006.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

INVESTMENTS

The Bank maintains a portfolio of securities as part of its asset/liability and liquidity management programs which emphasize effective yields and maturities to match its needs. The composition of the investment portfolio is examined periodically and appropriate realignments are initiated to meet liquidity and interest rate sensitivity needs for the Bank.

Held to maturity securities are bonds, notes and debentures for which the Bank has the positive intent and ability to hold to maturity and which are reported at cost, adjusted by premiums and discounts that are recognized in interest income using the interest method over the period to maturity or to call dates. The Bank had no “Held to Maturity” securities at September 30, 2007 or December 31, 2006.

Available for sale securities are reported at fair value and consist of bonds, notes, debentures and certain equity securities not classified as trading securities or as held to maturity securities.

Unrealized holding gains and losses, net of tax, on available for sale securities are reported as a net amount in a separate component of stockholders’ equity. Realized gains and losses on the sale of available for sale securities are determined using the specific-identification method. Premiums and discounts are recognized in interest income using the interest method over the period to maturity or to call dates.

Declines in the fair value of individual held to maturity and available for sale securities below cost that are other than temporary are reflected as write-downs of the individual securities to fair value. Related write-downs are included in earnings as realized losses.

Investments in available for sale securities of $65,062,262 consisted of corporate securities, municipal securities, U.S. Governmental agencies and mortgage backed securities (MBS) at September 30, 2007. The $14,533,099 increase in investments was due to excess liquidity due to strong deposit growth in the first nine months of 2007.

FEDERAL FUNDS SOLD

Federal funds sold consist of short-term loans to other financial institutions. These loans are made to various financial institutions and were $4,401,000 and $2,598,000 on September 30, 2007 and December 31, 2006, respectively. No single loan exceeds Waccamaw Bank’s legal lending limit.

LOANS

Net loans outstanding on September 30, 2007, were $342,798,298 compared to $312,253,190 on December 31, 2006. The Bank maintains a loan portfolio dominated by real estate and commercial loans diversified among various industries. The $30,545,108 increase in loans was due to stronger real estate and commercial demand due to local economies improving in the areas covered by Waccamaw Bank. This resulted in increased construction and development lending during the first nine months of 2007.

DEPOSITS

Deposits on September 30, 2007, were $366,029,919 compared to $327,351,767 on December 31, 2006. Interest-bearing accounts represented 90.19% of total deposits at September 30, 2007 and 84.98% of total deposits at December 31, 2006.

8

The significant increase in deposits, necessary to satisfy strong loan demand, was the result of an aggressive marketing and advertising program offering higher deposit rates at the Bank. The decrease in non-interest bearing demand deposits was due to the pay-off of a short-term loan collateralized by a $13 million deposit at year end 2006 and conversion of part of the deposit to an interest-bearing deposit in the first quarter of 2007.

BANK OWNED LIFE INSURANCE

During the first quarter of 2007, the bank purchased additional life insurance policies in the amount of $4,000,000 on both directors and key employees.

LIABILITIES

Securities sold under agreements to repurchase on September 30, 2007, was $6,344,000 compared to $5,410,000 on December 31, 2006. Long-term debt at September 30, 2007 was $30,500,000 compared to $23,500,000 on December 31, 2006 as all long-term debt is funded by the Federal Home Loan Bank of Atlanta. Short-term borrowings at September 30, 2007 was $2,000,000 and no short-term borrowings on December 31, 2006 as all short-term borrowings are funded by the Federal Home Loan Bank of Atlanta and mature within one year.

STOCKHOLDERS’ EQUITY

Waccamaw Bankshares, Inc. maintains a strong capital position which exceeds all capital adequacy requirements of Federal regulatory authorities. Total stockholders’ equity at September 30, 2007 was $34,431,238 compared to $31,702,630 at December 31, 2006. This $2,728,608 increase was largely due to operating profits of $3,196,660. The Bank exceeds all capital requirements under the leverage guidelines.

The Company declared an 11-for-10 stock split in the form of a 10% stock dividend payable on September 18, 2007 to the shareholders of record on September 2, 2007. To effect the split, the Company’s issued and outstanding stock was increased by 491,583 shares. The fair value of the stock dividend was transferred from retained earnings to common stock in the amount of $5,921,341. All references to the number of common shares and per share amounts in the financial statements have been restated as appropriate to reflect the effect of the split for all periods presented.

ASSET QUALITY

The provision for possible loan losses charged to operations was $385,864 in the first nine months of 2007 and $1,090,000 for the same period of 2006. During the first nine months of 2007, a previously nonperforming loan paid off. The Company had expensed $500,000 to establish a specific reserve for the impaired loan. In the second quarter of 2007, the Company recovered $387,553 on the loan. Excluding this recovery, the Company would have recognized $773,417 as provision expense for the nine-month period ended September 30, 2007 due to increased loan demand. The allowance for loan losses on September 30, 2007, was $5,504,300 or 1.58% of period end loans compared to 1.54% at December 31, 2006.

The level of reserve is established based upon management’s evaluation of portfolio composition, current and projected national and local economic conditions and results of independent reviews of the loan portfolio by internal and external examination. Management recognizes the inherent risk associated with commercial and consumer lending, including whether or not a borrower’s actual results of operations will correspond to those projected by the borrower when the loan was funded, economic factors such as the number of housing starts and fluctuations in interest rates, etc., depression of collateral values, and completion of projects within the original cost and time estimates. As a result, management continues to actively monitor the Bank’s asset quality and lending policies. Management believes that its loan portfolio is diversified so that a downturn in a particular market or industry will not have a significant impact on the loan portfolio or the Bank’s financial condition.

Management believes that its reserve offers an appropriate allowance for probable loan losses incurred at the date of the financial statements.

At September 30, 2007 the Bank had $1,101,595 loans in nonaccrual status as compared to $2,085,042 at September 30, 2006. At September 30, 2007 there were $29,784 in repossessed assets and there were no repossessed assets at September 30, 2006.

9

COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006

The Company reported net income of $1,120,533 or $.21 per basic share and $.20 per diluted share for the three months ended September 30, 2007, as compared with net income of $927,780 or $.18 per basic share and $.18 per diluted share for the three months ended September 30, 2006, an increase of $192,753 or 20.78% in net income. The Company had moderate increases in net interest income in the third quarter of 2007 as compared to the third quarter of 2006, as these increases were due to growth in interest earning assets. The Company has incurred additional non-interest expenses both as a result of normal growth from period to period, and also as a result of additional hiring and other costs incurred as a result of the branch expansion during 2006 and 2007.

NET INTEREST INCOME

Like most financial institutions, the primary component of earnings for the Company is net interest income. Net interest income is the difference between the interest earned on loans, the investment portfolio and interest earning deposits and the cost of funds, consisting primarily of the interest paid on deposits and borrowings. Changes in net interest income result from changes in volume, spread and margin. For this purpose, volume refers to the average dollar level of interest-earning assets and interest-bearing liabilities, spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities, and margin refers to net interest income divided by average interest-earning assets. Margin is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities, as well as by levels of non interest-bearing liabilities and stockholders’ equity.

For the three months ended September 30, 2007, the net interest income of the Bank was $3,917,024 compared to $3,775,027 for the three months ended September 30, 2006. The increase in net interest income can primarily be attributed to moderate growth in interest earning assets.

PROVISION FOR LOAN LOSSES

The Company expensed $8,417 as the provision for loan losses in the third quarter of 2007, as compared to the $470,000 provision for loan losses in the third quarter of 2006. Provisions for loan losses are charged to income to bring the allowance for loan losses to a level deemed appropriate by Management. Management considers the current level of the loan loss allowance to be satisfactory based on loan volume, the current level of delinquencies, other non-performing assets, prevailing economic conditions and other factors that may affect a borrower’s ability to repay. The decrease in the provision for loan losses was due to the significant increase in real estate and commercial loan demand in the third quarter of 2006 versus the moderate loan increase in the third quarter of 2007.

NON-INTEREST INCOME

Non-interest income totaled $833,048 for the three months ended September 30, 2007 as compared with $676,905 for the three months ended September 30, 2006. The increase of approximately $156,000 in total non-interest income for the current quarter was the result of realized gains of approximately $49,000 through the sale of an investment in the third quarter of 2007, increases of approximately $35,000 in services charges on deposit accounts, increases in other operating income of approximately $35,000 and increases of earnings on bank owned life insurance of approximately $50,000. A decrease of approximately $13,000 in net servicing fees from mortgage origination income made up the difference in the three months ended September 30, 2007 compared to the three months ended September 30, 2006.

NON-INTEREST EXPENSES

Non-interest expenses totaled approximately $3.1 million for the three months ended September 30, 2007, an increase of approximately $512,000 or 20.07% over the approximately $2.5 million reported for the three months ended September 30, 2006. Substantially all of this increase resulted from the Bank’s growth and development, and reflects the additional expenses in the current quarter associated with new hires and the opening of two new branches. For the three months ended September 30, 2007, personnel costs increased by approximately $291,000, or 20.21% to approximately $1.7 million as compared to approximately $1.4 million for the three months ended September 30, 2006.

10

PROVISION FOR INCOME TAXES

The Company provided approximately $559,000 for income taxes during the three months ended September 30, 2007, at an effective tax rate of 33% compared to a provision for income taxes of approximately $504,000 for the three months ended September 30, 2006 at an effective tax rate of 35%. The primary reason for the decrease in the effective tax rate was due to the income from the additional purchase of bank owned life insurance and additional income from the increase in municipal securities which are exempt from income taxes.

COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006

The Company reported net income of $3,196,660 or $.60 per basic share and $.58 per diluted share for the nine months ended September 30, 2007, as compared with net income of $2,661,316 or $.53 per basic share and $.51 per diluted share for the nine months ended September 30, 2006, an increase of $535,344 or 20.12% in net income.

The Company had moderate increases in net interest income in the first nine months of 2007 as compared to the first nine months of 2006, as these increases were due to growth in interest earning assets. The Company has incurred additional non-interest expenses both as a result of normal growth from period to period, and also as a result of additional hiring and other costs incurred as a result of the branch expansion during 2006 and 2007.

NET INTEREST INCOME

For the nine months ended September 30, 2007, the net interest income of the Bank was approximately $11.7 million compared to approximately $10.4 million for the nine months ended September 30, 2006. The increase in net interest income can primarily be attributed to moderate growth in loans and investments.

PROVISION FOR LOAN LOSSES

The Company expensed $385,864 to the provision for loan losses in the first nine months of 2007 which was offset by a recovery of $387,553 as discussed in Asset Quality, as compared to the $1,090,000 provision for loan losses in the first nine months of 2006. Provisions for loan losses are charged to income to bring the allowance for loan losses to a level deemed appropriate by management. Management considers the current level of the loan loss allowance to be satisfactory based on loan volume, the current level of delinquencies, other non-performing assets, prevailing economic conditions and other factors that may affect a borrower’s ability to repay.

NON-INTEREST INCOME

Non-interest income totaled approximately $2.6 million for the nine months ended September 30, 2007 as compared with approximately $1.9 million for the nine months ended September 30, 2006. A significant portion of the increase of approximately $635,000 in total non-interest income for the nine months ended September 30, 2007 was realized gains of approximately $256,000 through the sale of three investments in the nine months ending September 30, 2007. Increases of approximately $74,000 in net servicing fees from mortgage origination income, increases of approximately $73,000 in services charges on deposit accounts, increases in other operating income of approximately $124,000 and increases of earnings on bank owned life insurance of approximately $107,000 made up the additional difference in the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006.

NON-INTEREST EXPENSES

Non-interest expenses totaled approximately $9.0 million for the nine months ended September 30, 2007, an increase of approximately $2.1 million or 30.12% over the approximately $6.9 million reported for the nine months ended September 30, 2006. Substantially all of this increase resulted from the Bank’s growth and development, and reflects the additional expenses in the current year associated with new hires and the opening of two new branches. For the nine months ended September 30, 2007, personnel costs increased by approximately $1.1 million, or 29.10% to approximately $5.0 million as compared to approximately $3.9 million for the nine months ended September 30, 2006.

11

PROVISION FOR INCOME TAXES

The Company provided $1,696,735 for income taxes during the nine months ended September 30, 2007, at a tax rate of 35% compared to a provision for income taxes of $1,660,468 for the nine months ended September 30, 2005 at a tax rate of 38%. The primary reason for the decrease in the effective tax rate was due to the income from the additional purchase of bank owned life insurance and additional income from the increase in municipal securities which are exempt from income taxes.

INTEREST SENSITIVITY AND LIQUIDITY

One of the principal duties of the Bank’s Asset/Liability Management Committee (“ALCO”) is management of interest rate risk. The Bank utilizes quarterly asset/liability reports prepared by a regional correspondent bank to project the impact on net interest income that might occur with hypothetical interest rate changes. The committee monitors and manages asset and liability strategies and pricing.

Another function of the ALCO is maintaining adequate liquidity and planning for future liquidity needs. Having adequate liquidity means the ability to meet current needs, including deposit withdrawals and commitments, in an orderly manner without sacrificing earnings. The Bank funds its investing activities, including making loans and purchasing investments, by attracting deposits and utilizing short-term borrowings when necessary.

At September 30, 2007, the liquidity position of the Bank was strong, with short-term liquid assets of $64,527,000 or 14.32% of total assets.

FORWARD - LOOKING INFORMATION

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. Amounts herein 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, general economic conditions, changes in interest rates, deposit flows, loan demand, real estate values, and competition; changes in accounting principals, policies, or guidelines; changes in legislation or regulation; and other economic, competitive, governmental, regulatory, and technological factors affecting the Company's operations, pricing, products and services.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company’s profitability is dependent to a large extent upon its net interest income, which is the difference between its interest income on interest-bearing assets, such as loans and investments, and its interest expense on interest-bearing liabilities, such as deposits and borrowings. The Company’s primary market risk is interest rate risk, which is the result of differing maturities or repricing intervals of interest-earning assets and interest-bearing liabilities with the goals of minimizing interest rate fluctuations in its net interest income.

The Company’s ALCO meets on a monthly basis in order to assess interest rate risk, liquidity, capital and overall balance sheet management through rate shock analysis measuring various interest rate scenarios over the future 12 months. Through ALCO, the Company is able to determine fluctuations to net interest income from changes in the Prime Rate of up to 300 basis points up or down during a 12-month period. ALCO also reviews policies and procedures related to funds management and interest rate risk based on local, national and global economic conditions along with funding strategies and balance sheet management to minimize the potential impact of earnings and liquidity from interest rate movements.

Additional information regarding interest rate risk is included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. The Company has not had any material changes in the overall interest rate risk since December 31, 2006.

12

ITEM 4T. CONTROLS AND PROCEDURES

Based on their evaluation, as of the end of the period covered by the report, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) are effective to provide reasonable assurance that information required to be disclosed by the Company in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and include controls and procedures designed to provide reasonable assurance that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including the Chief Executive Officer and the Chief Financial Officer of the Company, as appropriate to allow timely decisions regarding required disclosure. There have not been any changes in the Company’s internal control over financial reporting that occurred during the Company’s last quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

The Company is not party to, nor is any of its property the subject of, any material pending legal proceeding incidental to the business of the Company or the Bank.

Item 1A. Risk Factors

No material changes in the Issuer’s risk factors occurred during the quarter.

Item 5. Other Information

On November 6, 2006, the Company amended its articles of incorporation to establish a series of preferred stock designated Series A Convertible Preferred Stock (the “Series A Preferred Stock). The Series A Preferred Stock consists of 400,000 shares, no par value per share. A copy of the Company’s articles of incorporation, along with all amendments, is filed herewith.

Item 6. Exhibits

3.1 Articles of Incorporation, including Articles of Amendment, dated May 3, 2005 and Articles of Amendment, dated November 6, 2006

31.1 Section 302 Certification – CEO

31.2 Section 302 Certification – CFO

32 Section 906 Certification

13

SIGNATURES

Pursuant to the requirements of the Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	Waccamaw Bankshares, Inc.
Date: November 14, 2007	By:	/s/David A. Godwin
		David A. Godwin
		Chief Financial Officer
		(Principal Financial Officer)

14

EXHIBIT INDEX

Exhibit Number	Exhibit
3.1	Articles of Incorporation, including Articles of Amendment, dated May 3, 2005 and Articles of Amendment, dated November 6, 2006	Filed herewith
31.1	Section 302 Certification – CEO	Filed herewith
31.2	Section 302 Certification – CFO	Filed herewith
32	Section 906 Certification	Filed herewith

15