Waccamaw Bankshares (WBNK) 10-Q 2010 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, 2010
	OR
¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-33046

WACCAMAW BANKSHARES, INC.

(Exact name of registrant as specified in its Charter)

NORTH CAROLINA	52-2329563
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

110 North J.K. Powell Boulevard, Whiteville, N.C.	28472
(address of principal executive offices)	(Zip Code)

(910) 641-0044

(Registrant’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 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 to 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 Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) 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 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.

Large accelerated filer o	Accelerated filer o
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    ¨                 NO    x

As of November 15, 2010 there were 7,466,224 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, 2010 (Unaudited) and December 31, 2009 (Audited)	1
	Consolidated Statements of Operations, Nine Months Ended September 30, 2010 and September 30, 2009 (Unaudited)	2
	Consolidated Statements of Operations, Quarters Ended September 30, 2010 and September 30, 2009 (Unaudited)	3
	Consolidated Statements of Cash Flows, Nine Months Ended September 30, 2010 and September 30, 2009 (Unaudited)	4
	Notes to Consolidated Financial Statements (Unaudited)	5-15
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15-26
Item 4T.	Controls and Procedures	26
Part II.  OTHER INFORMATION		27
Item 1.	Legal Proceedings	27
Item 6.	Exhibits	27
SIGNATURES		28
EXHIBIT INDEX		29

Waccamaw Bankshares, Inc.

Consolidated Balance Sheets

September 30, 2010 and December 31, 2009

	(Unaudited)			(Audited)
	September 30,			December 31,
	2010			2009
Assets
Cash and due from banks	$	9,347,754		$	13,973,474
Cash in escrow		56,307,314			-
Interest-bearing deposits with banks		24,249,610			7,695,499
Federal funds sold		23,360,000			21,315,000
Total cash and cash equivalents		113,264,678			42,983,973
Investment securities, available-for-sale		98,020,910			87,769,319
Restricted equity securities		3,815,550			4,041,350
Loans, net of allowance for loan losses of $9,412,813 in 2010, and $10,148,927 in 2009		301,395,076			340,020,798
Foreclosed assets		10,265,824			4,994,241
Property and equipment, net		16,575,498			17,035,644
Intangible assets, net		167,500			237,270
Accrued income		1,776,252			2,449,081
Bank owned life insurance		6,193,987			18,576,015
Other assets		14,591,815			15,113,381
Total assets	$	566,067,090		$	533,221,072
Liabilities and Stockholders’ Equity
Liabilities
Noninterest-bearing deposits	$	34,238,883		$	32,940,811
Interest-bearing deposits		431,947,317			400,597,148
Total deposits		466,186,200			433,537,959
Securities sold under agreements to repurchase		20,462,000			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		1,339,300			942,689
Other liabilities		2,061,842			2,098,993
Total liabilities		546,321,342			516,066,641
Commitments and contingencies		-			-
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 September 30, 2010 and December 31, 2009, respectively		9,064			9,064
Common stock, no par value; 50,000,000 shares authorized; 7,466,224 and 5,551,183 shares issued and outstanding at September 30, 2010 and December 31, 2009, respectively		27,134,544			25,099,770
Retained deficit		(6,323,091	)		(5,129,490	)
Accumulated other comprehensive loss		(1,074,769	)		(2,824,913	)
Total stockholders’ equity		19,745,748			17,154,431
Total liabilities and stockholders’ equity	$	566,067,090		$	533,221,072

See notes to consolidated financial statements

1

WACCAMAW BANKSHARES, INC.

Consolidated Statements of Operations

Nine-months ended September 30, 2010 and September 30, 2009 (Unaudited)

	Nine-Months			Nine-Months
	Ended			Ended
	Sept 30, 2010			Sept 30, 2009
Interest income
Loans and fees on loans	$	13,176,541		$	15,977,468
Federal funds sold and interest earning deposits		129,823			13,914
Investment securities, taxable		2,552,075			3,286,867
Investment securities, nontaxable		286,859			446,400
Total interest income		16,145,298			19,724,649
Interest expense
Deposits		5,296,210			7,445,004
Federal funds purchased and securities sold under agreements to repurchase		506,349			558,197
Short-term borrowings		69,619			253,318
Long-term borrowings		1,685,633			1,651,178
Total interest expense		7,557,811			9,907,697
Net interest income		8,587,487			9,816,952
Provision for loan losses		3,026,284			4,856,894
Net interest income after provision for loan losses		5,561,203			4,960,058
Non-interest income  (loss)
Service charges on deposit accounts		2,102,135			2,263,858
Mortgage origination income		270,092			294,983
Income from financial services		68,988			110,423
Earnings on bank owned life insurance		511,632			547,060
Net realized gains on sale or maturity of investment securities		1,481,372			1,354,435
Impairment on investment securities		-			(2,319,476	)
Other operating income		906,280			664,607
Total non-interest income		5,340,499			2,915,890
Non-interest expense
Salaries and employee benefits		4,719,850			5,441,093
Occupancy expense		1,543,270			1,566,101
Data processing		856,821			895,189
Regulatory agency expense		1,343,430			848,758
Amortization expense of intangible assets		79,270			145,471
Foreclosed assets, net		1,439,606			-
Other expense		2,265,555			2,248,472
Total non-interest expense		12,247,802			11,145,084
Loss before income taxes		(1,346,100	)		(3,269,136	)
Income tax benefit		(763,766	)		(1,554,938	)
Net loss	$	(582,334	)	$	(1,714,198	)
Basic loss per share	$	(.10	)	$	(.31	)
Diluted loss per share	$	(.10	)	$	(.31	)
Weighted average shares outstanding		5,796,701			5,529,540
Diluted average shares outstanding		5,796,701			5,529,540

See notes to consolidated financial statements

2

WACCAMAW BANKSHARES, INC.

Consolidated Statements of Operations

Quarter ended September 30, 2010 and September 30, 2009 (Unaudited)

	Quarter Ended			Quarter Ended
	Sept 30, 2010			Sept 30, 2009
Interest income
Loans and fees on loans	$	4,502,513		$	5,488,874
Federal funds sold and interest earning deposits		59,234			11,895
Investment securities, taxable		791,847			968,742
Investment securities, nontaxable		80,775			141,649
Total interest income		5,434,369			6,611,160
Interest expense
Deposits		1,708,456			2,235,730
Federal funds purchased and securities sold under agreements to repurchase		174,967			187,358
Short-term borrowings		28,230			81,563
Long-term borrowings		565,854			552,413
Total interest expense		2,477,507			3,057,064
Net interest income		2,956,862			3,554,096
Provision for loan losses		1,215,670			1,230,048
Net interest income after provision for loan losses		1,741,192			2,324,048
Non-interest income (loss)
Service charges on deposit accounts		717,217			886,191
Mortgage origination income		100,168			91,576
Income from financial services		18,471			56,251
Earnings on bank owned life insurance		137,484			195,787
Net realized gains on sale or maturity of investment securities		833,180			483,758
Impairment on investment securities		-			(10,000	)
Other operating income		359,523			100,645
Total non-interest income		2,166,043			1,804,208
Non-interest expense
Salaries and employee benefits		1,548,684			1,736,058
Occupancy expense		551,479			519,374
Data processing		289,972			250,324
Regulatory agency expense		703,279			431,158
Amortization expense of intangible assets		10,667			46,119
Foreclosed assets, net		1,354,201			-
Other expense		763,515			858,244
Total non-interest expense		5,221,797			3,841,277
Income (loss) before income taxes		(1,314,562	)		286,979
Income tax expense (benefit)		(571,566	)		(44,059	)
Net income (loss)	$	(742,996	)	$	331,038
Basic income (loss) per share	$	(.12	)	$	.06
Diluted income (loss) per share	$	(.12	)	$	.06
Weighted average shares outstanding		6,279,731			5,540,833
Diluted average shares outstanding		6,279,731			5,548,564

See notes to consolidated financial statements

3

WACCAMAW BANKSHARES, INC.

Consolidated Statements of Cash Flows

Nine-months ended September 30, 2010 and September 30, 2009 (Unaudited)

	Nine-Months			Nine-Months
	Ended			Ended
	Sept 30, 2010			Sept 30, 2009
Cash flows from operating activities
Net income (loss)	$	(582,334	)	$	(1,714,198	)
Adjustments to reconcile net income to net cash provided (used) by operations:
Depreciation and amortization		621,234			704,609
Stock-based compensation		66,527			92,956
Provision for loan losses		3,026,284			4,856,894
Accretion of discount on securities, net of amortization of premiums		437,850			130,304
Write-down of foreclosed assets		1,612,917			-
Gain on sale of investments		(1,481,372	)		(1,354,435	)
Impairment of investment securities		-			2,319,476
Income from bank owned life insurance		(511,632	)		(547,060	)
Changes in assets and liabilities:
Accrued income		672,829			395,449
Other assets		1,130,042			(185,660	)
Accrued interest payable		396,611			(251,091	)
Other liabilities		(37,151	)		(766,349	)
Net cash provided by operating activities		5,351,805			3,680,895
Cash flows from investing activities
Purchases of investment securities available-for-sale		(114,552,164	)		(83,321,744	)
Sales (purchases) of restricted equity securities		225,800			(62,100	)
Principal repayments of investments available-for-sale		5,626,480			12,262,146
Net decrease in loans		27,464,450			8,478,686
Sales and maturities of investment securities available-for-sale		100,248,016			77,021,930
Surrender of bank owned life insurance		12,893,660			-
Proceeds from the sale of foreclosed assets		1,250,488			225,745
Purchases of property and equipment		(91,318	)		(167,920	)
Net cash provided by investing activities		33,065,412			14,436,743
Cash flows from financing activities
Net increase in non-interest-bearing deposits		1,298,072			2,355,202
Net increase in interest-bearing deposits		31,350,169			3,843,076
Net decrease in securities sold under agreements to repurchase		(153,000	)		(691,000	)
Proceeds (repayments) from short-term borrowings		2,400,000			(3,500,000	)
Repayments of long-term debt		(5,000,000	)		(2,500,000	)
Stock issuance costs		(425,554	)		(54,230	)
Proceeds from issuance of common stock		2,393,801			-
Net cash (used in) provided by financing activities		31,863,488			(546,952	)
Net increase in cash and cash equivalents		70,280,705			17,570,686
Cash and cash equivalents, beginning		42,983,973			15,913,493
Cash and cash equivalents, ending	$	113,264,678		$	33,484,179
Supplemental disclosure of cash flow information
Interest paid	$	7,161,200		$	10,158,788
Taxes paid	$	-		$	38,000
Conversion of common stock to preferred stock	$	-		$	343,993
Supplemental disclosure of noncash activities
Real estate acquired in settlement of loans	$	8,134,988		$	4,722,626

See notes to consolidated financial statements

4

WACCAMAW BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

The balance sheet at December 31, 2009 was derived from the audited financial statements at that date.

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, 2010 and December 31, 2009, and its results of operations  and cash flows for the nine months ended September 30, 2010 and 2009. The results of operations for the nine months and three months ended September 30, 2010 and 2009 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 Form 10-K for the year ended December 31, 2009.

Waccamaw Bankshares, Inc. is located in Whiteville, North Carolina. Waccamaw Bank, the primary subsidiary of Waccamaw Bankshares, Inc. is a state chartered bank operating seventeen offices in Whiteville, Wilmington, Shallotte (2), Holden Beach, Chadbourn, Tabor City, Southport (2), Sunset Beach, Oak Island and Elizabethtown, North Carolina. Offices in South Carolina include Conway (2), Socastee, Little River and Heath Springs. The accounting and reporting policies 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) interest-bearing deposits with banks which are considered to be cash equivalents and federal funds sold. 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 FASB ASC Topic 205.  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.

Declines in the fair value of available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (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. The declines in fair value are due to changes in market rates.

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 appropriate 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 performs 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 appropriate balance of the allowance for loan losses.

5

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.

Allowance for loan losses, charge-offs, impaired loans and non-accrual loans along with market conditions and loan portfolio concentrations are discussed further under “Asset Quality” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

NOTE 2. REGULATORY CAPITAL AND REGULATORY MATTERS

WRITTEN AGREEMENT

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;

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

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. The Bank reports regularly to its regulators on matters of compliance with the Agreement, and the progress made to comply with the Agreement.

NOTE 3. EARNINGS PER SHARE

Loss per share for the nine months and the quarters ended September 30, 2010 and 2009 was calculated by dividing net income by the weighted average number of shares outstanding during the period. Diluted earnings (loss) per share for the nine months and the quarters ended September 30, 2010 and 2009 were calculated by dividing net income by the weighted average number of dilutive shares outstanding. For the nine months and three months ended September 30, 2010, as well as the nine months ended September 30, 2009, there was no dilutive effect as the Company reported a loss on operations.

6

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

	Nine-Months			Nine-Months
	ended			ended
	Sept 30, 2010			Sept 30, 2009
Net income (loss) (income available to common shareholders)	$	(582,334	)	$	(1,714,198	)
Weighted average common shares outstanding		5,796,701			5,529,540
Effect of dilutive securities, options		-			-
Effect of dilutive securities, preferred stock		-			-
Weighted average common shares outstanding, diluted		5,796,701			5,529,540
Basic loss per share	$	(.10	)	$	(.31	)
Diluted loss per share	$	(.10	)	$	(.31	)

	Quarter			Quarter
	ended			ended
	Sept 30, 2010			Sept 30, 2009
Net income (loss) (income available to common shareholders)	$	(742,996	)	$	331,038
Weighted average common shares outstanding		6,279,731			5,540,833
Effect of dilutive securities, options		-			420
Effect of dilutive securities, preferred stock		-			7,311
Weighted average common shares outstanding, diluted		6,279,731			5,548,564
Basic earnings (loss) per share	$	(.12	)	$	.06
Diluted earnings (loss) per share	$	(.12	)	$	.06

At September 30, 2010 and September 30, 2009, the Company had 296,889 warrants outstanding. At September 30, 2010 and September 30, 2009 these warrants were not included in the diluted earnings per share calculation as the effect would have been anti-dilutive. There were 314,539 anti-dilutive options at September 30, 2010 and 313,768 anti-dilutive options at September 30, 2009 which have been excluded from the diluted weighted shares outstanding. For the nine months ended September 30, 2010, the stock compensation expense of the Company was $66,527 compared to $92,956 for the nine months ended September 30, 2009. The unrecognized stock compensation expense for the nine months ended September 30, 2010 was $154,459 compared to $230,408 for the nine months ended September 30, 2009.

In 2008, the shareholders approved an equity compensation plan (the “2008 Omnibus Stock Ownership and Long Term Incentive Plan (the “Omnibus Plan”)) which replaced the Company’s 1998 Incentive Stock Option Plan and 1998 Non-statutory Stock Option Plan (the “Previous Plans”). After the approval of the Omnibus Plan, no further options have been or will be issued under the Previous Plans. The term of the Omnibus Plan is indefinite, except that no stock option award can be granted after the tenth anniversary of the plan. Under the Omnibus Plan, the Company may grant incentive stock options, non-qualified stock options, restricted stock, stock appreciation rights, or long-term incentive compensation units to eligible employees and directors. The compensation committee of the board of directors determines the exercise price and all other terms of all grants.

NOTE 4. COMMITMENTS AND CONTINGENCIES

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

7

The Bank’s exposure to credit loss in the event of nonperformance by counterparties to financial instruments 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. On September 30, 2010, Waccamaw Bank entered into an Asset Purchase and Sale Agreement with Augusta Holdings, LLC (“Augusta”) in which the Bank has committed to purchase approximately $56,000,000 of home equity lines of credit in the 4th quarter of 2010.  These loans are to be recorded at fair value prior the exchange and may result in a loss subject to valuation. A summary of the Bank’s commitments at September 30, 2010 and December 31, 2009 is as follows:

	Sept 30, 2010		December 31, 2009
Commitments to extend credit	$	85,515,000	$	41,072,000
Standby letters of credit		1,310,000		796,000

NOTE 5.  RECENT ACCOUNTING PRONOUNCEMENTS

In 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.

Income Tax guidance was amended in April 2010 to reflect an SEC Staff Announcement after the President signed the Health Care and Education Reconciliation Act of 2010 on March 30, 2010, which amended the Patient Protection and Affordable Care Act signed on March 23, 2010.   According to the announcement, although the bills were signed on separate dates, regulatory bodies would not object if the two Acts were considered together for accounting purposes. This view is based on the SEC staff's understanding that the two Acts together represent the current health care reforms as passed by Congress and signed by the President.  The amendment had no impact on the financial statements.

Stock compensation guidance was updated in April 2010 to address the classification of employee share-based payment awards with exercise prices dominated 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 critieria 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 is required to begin to comply with the disclosures in its financial statements for the year ended December 31, 2010.

8

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.

In August 2010, two updates were issued to amend various SEC rules and schedules pursuant to Release No. 33-9026: Technical Amendments to Rules, Forms, Schedules and Codification of Financial Reporting Policies and based on the issuance of SEC Staff Accounting Bulletin 112.  The amendments related primarily to business combinations and removed references to “minority interest” and added references to “controlling” and “noncontrolling interests(s)”.  The updates were effective upon issuance but had no impact on the Company’s financial statements.

NOTE 6.  FAIR VALUE

GAAP provides a framework for measuring and disclosing fair value which requires disclosures about the fair value of assets and liabilities recognized in the balance sheet, whether the measurements are made on a recurring basis (for example, available for sale investment securities) or on a nonrecurring basis (for example, impaired loans).

Fair value is defined 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.  GAAP also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The Company utilizes fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures.  Securities available for sale are recorded at fair value on a recurring basis.  Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as loans held for sale, loans held for investment and certain other assets.  These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.

Fair Value Hierarchy

The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine the fair value. These levels are:

Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets.

Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

Level 3 – Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of option pricing models, discounted cash flow models and similar techniques.

The following is a description of valuation methodologies used for assets and liabilities recorded at fair value.

Investment Securities Available-for-Sale

Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.

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Loans

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value, and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. As of September 30, 2010, the Bank identified $41,544,302 in impaired loans.  Of these impaired loans, $11,588,058 was identified to have impairment of $1,337,506.  The determination of impairment was based on the fair market value of collateral for each loan. In situations where management discounts appraised values in determining fair value of appraisals, these levels will be considered to be a Level 3 input.

Foreclosed Assets

Foreclosed assets are adjusted to fair value upon transfer of the loans to other real estate owned.  Real estate acquired in settlement of loans is recorded initially at estimated fair value of the property less estimated selling costs at the date of foreclosure.  The initial recorded value may be subsequently reduced by additional allowances, which are charges to earnings if the estimated fair value of the property less estimated selling costs declines below the initial recorded value.  Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral.  When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring.

Goodwill and Other Intangible Assets

Goodwill and identified intangible assets are subject to impairment testing. The Company’s approach to testing goodwill for impairment is to compare the business unit’s carrying value to the implied fair value based on multiples of earnings and tangible book value for recently completed merger transactions. In the event the fair value is determined to be less than the carrying value, the asset is recorded at fair value as determined by the valuation model. Based on management’s assessment of fair value of the Company, goodwill was determined to be impaired during 2009. The Company classifies other intangible assets subjected to nonrecurring fair value adjustments as Level 3.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

The following table presents the recorded amount of assets and liabilities measured at fair value on a recurring basis:

September 30, 2010	Total		Level 1		Level 2		Level 3
Mortgage backed securities	$	82,515,261	$	-	$	82,515,261	$	-
Corporate securities		3,394,685		-		2,170,685		1,224,000
Single issue trust preferred securities		5,230,162		-		3,431,562		1,798,600
Municipal securities		6,880,802		-		6,880,802		-
	$	98,020,910	$	-	$	94,998,310	$	3,022,600
December 31, 2009
Mortgage backed securities	$	60,558,270	$	3,890,233	$	56,668,037	$	-
Corporate securities		4,501,810		-		3,381,810		1,120,000
Single issue trust preferred securities		10,552,149		-		8,802,149		1,750,000
Pooled trust preferred securities		82,255		-		82,255		-
Municipal securities		12,074,835		-		12,074,835		-
	$	87,769,319	$	3,890,233	$	81,009,086	$	2,870,000

There were no liabilities measured at fair value on a recurring basis at September 30, 2010 and December 31, 2009.

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Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a nonrecurring basis are included in the following tables (in thousands):

September 30, 2010	Total		Level 1		Level 2		Level 3
Construction and development impaired loans	$	10,251	$	-	$	-	$	10,251
Foreclosed assets		10,266		-		-		10,266
Total assets at fair value	$	20,517	$	-	$	-	$	20,517
December 31, 2009
Impaired loans	$	-	$	-	$	-	$	-
Foreclosed assets		4,994		-		-		4,994
Total assets at fair value	$	4,994	$	-	$	-	$	4,994

There were no liabilities measured at fair value on a nonrecurring basis at September 30, 2010 and December 31, 2009.

The following table, which presents additional information about financial assets and liabilities measured at fair value at September 30, 2010 and 2009, on a recurring basis and for which Level 3 inputs are utilized to determine fair value:

	Available
	for Sale
	Securities
	(In thousands)
Balance, January 1, 2009	$	3,939
Total gains or losses (realized/unrealized)		-
Included in earnings (or changes in net assets)		-
Included in other comprehensive income		830
Purchases, issuances, and settlements		(1,990	)
Transfers in and/or out of Level 3		1,661
Balance, September 30, 2009	$	4,440
Balance, January 1, 2010	$	2,870
Total gains or losses (realized/unrealized)		-
Included in earnings (or changes in net assets)		-
Included in other comprehensive income		153
Purchases, issuances, and settlements		-
Transfers in and/or out of Level 3		-
Balance, September 30, 2010	$	3,023

For the nine months ended September 30, 2010, there were no net transfers into Level 3.

Generally accepted accounting principles require disclosure of fair value information about financial instruments, whether or not recognized in the Statement of Condition, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Also, the fair value estimates presented herein are based on pertinent information available to Management as of September 30, 2010 and December 31, 2009. Such amounts have not been comprehensively revalued for purposes of these financial statements since those dates, and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.

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The estimated fair values of the Company’s financial instruments are as follows (dollars in thousands):

	September 30, 2010				December 31, 2009
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial Assets
Cash and due from banks	$	65,655	$	65,655	$	13,973	$	13,973
Interest-bearing deposits with banks		24,250		24,250		7,695		7,695
Federal funds sold		23,360		23,360		21,315		21,315
Investment securities		98,021		98,021		87,769		87,769
Restricted equity securities		3,816		3,816		4,041		4,041
Loans, net of allowance for loan losses		301,395		298,325		340,021		333,368
Financial Liabilities
Deposits		466,186		469,174		433,538		431,370
Securities sold under agreements to repurchase and federal funds purchased		20,462		20,462		20,615		20,615
Other short-term borrowings		5,900		5,900		3,500		3,484
Long-term debt		38,000		35,266		43,000		41,450
Junior subordinated debentures		12,372		8,227		12,372		8,234

NOTE 7. COMPREHENSIVE INCOME (LOSS)

Recognized revenue, expenses, gains, and losses must be included in net income or loss. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with the operating net income or loss, are components of comprehensive income or loss. A summary of comprehensive income (loss) is as follows:

	Nine-Months			Nine-Months
	ended			ended
	Sept 30, 2010			Sept 30, 2009
Net income (loss)	$	(582,334	)	$	(1,714,198	)
Other comprehensive loss:
Gain on sale of investments		(1,481,372	)		(1,354,435	)
Unrealized (losses) on available-for-sale investment securities		3,334,711			6,762,778
Tax effect		(714,462	)		(1,663,021	)
Total other comprehensive loss		1,138,877			3,745,322
Comprehensive income	$	556,543		$	2,031,124

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	Quarter ended			Quarter ended
	Sept 30,			Sept 30,
	2010			2009
Net income (loss)	$	(742,996	)	$	331,038
Other comprehensive loss:
Gain on sale of investments		(833,180	)		(483,758	)
Unrealized (losses) on available-for-sale investment securities		467,731			5,227,554
Tax effect		140,881			(1,828,733	)
Total other comprehensive income (loss)		(224,568	)		2,915,063
Comprehensive income (loss)	$	(967,564	)	$	3,246,101

NOTE 8 – INVESTMENT SECURITIES

Investments in available for sale securities of $98,020,910 consisted of corporate securities, single issue trust preferred securities, municipal securities, and mortgage backed securities (MBS) at September 30, 2010.

At September 30, 2010, we had 42 individual available for sale investments that were in an unrealized loss position. The unrealized losses on investments in corporate securities, municipal securities, U.S. Governmental agencies and mortgage backed securities (MBS) summarized below were attributable to market turmoil and liquidity. The unrealized losses on the corporate securities are due to credit quality, as well as liquidity. We have the intent and the ability to hold the remaining investments until a market price recovery or maturity, and therefore these investments are not considered impaired on an other-than-temporary basis.

The following is a summary of the securities portfolio by major classification at the dates presented.

	September 30, 2010
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Mortgage backed securities	$	82,386,842	$	379,664	$	(251,245	)	$	82,515,261
Corporate securities		4,253,097		-		(858,412	)		3,394,685
Single issue trust preferred securities		6,478,351		153,666		(1,401,855	)		5,230,162
Municipal securities		7,372,245		942		(492,385	)		6,880,802
	$	100,490,535	$	534,272	$	(3,003,897	)	$	98,020,910

	December 31, 2009
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Mortgage backed securities	$	61,167,200	$	159,880	$	(768,810	)	$	60,558,270
Corporate securities		5,617,961		-		(1,116,151	)		4,501,810
Single issue trust preferred securities		12,089,781		148,661		(1,686,293	)		10,552,149
Pooled trust preferred securities		133,935		-		(51,680	)		82,255
Municipal securities		13,083,406		29,210		(1,037,781	)		12,074,835
	$	92,092,283	$	337,751	$	(4,660,715	)	$	87,769,319

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Gross realized gains and losses resulting from the sale of securities for the nine months ended and quarters ended September 30, 2010 and 2009 are as follows:

	Nine-Months			Nine-Months
	ended			ended
	Sept 30, 2010			Sept 30, 2009
Realized gains	$	1,624,312		$	1,484,189
Realized losses		(142,940	)		(129,754	)
	$	1,481,372		$	1,354,435

	Quarter		Quarter
	ended		ended
	Sept 30, 2010		Sept 30, 2009
Realized gains	$	833,180	$	507,772
Realized losses		-		(24,014	)
	$	833,180	$	483,758

The following tables show the gross unrealized losses and fair values for our investments and length of time that the individual securities have been in a continuous unrealized loss position.

	Less Than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
September 30, 2010
Mortgage backed securities	$	48,531,744	$	(251,245	)	$	-	$	-		$	48,531,744	$	(251,245	)
Corporate securities		-		-			3,394,685		(858,412	)		3,394,685		(858,412	)
Single issue trust preferred securities		700,000		(301,455	)		1,899,600		(1,100,400	)		2,599,600		(1,401,855	)
Municipal securities		514,305		(695	)		5,830,555		(491,690	)		6,344,860		(492,385	)
Total temporarily impaired securities	$	49,746,049	$	(553,395	)	$	11,124,840	$	(2,450,502	)	$	60,870,889	$	(3,003,897	)

	Less Than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
December 31, 2009
Mortgage backed securities	$	42,983,307	$	(768,810	)	$	-	$	-		$	42,983,307	$	(768,810	)
Corporate securities		1,398,872		(896,151	)		1,780,000		(220,000	)		3,178,872		(1,116,151	)
Single issue trust preferred securities		1,994,732		(925,992	)		3,967,017		(760,301	)		5,961,749		(1,686,293	)
Pooled trust preferred securities		33,118		(51,680	)		49,138		-			82,256		(51,680	)
Municipal securities		1,356,260		(43,738	)		6,714,609		(994,043	)		8,070,869		(1,037,781	)
Total temporarily impaired securities	$	47,766,289	$	(2,686,371	)	$	12,510,764	$	(1,974,344	)	$	60,277,053	$	(4,660,715	)

The scheduled contractual maturities of securities (all available for sale) at September 30, 2010 and December 31, 2009 are as follows:

	September 30, 2010				December 31, 2009
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
Due in one year or less	$	2,000,000	$	1,940,000	$	1,322,937	$	1,322,937
Due in one through five years		1,001,872		1,013,802		2,470,000		2,255,560
Due in five through ten years		31,233		31,474		1,002,184		952,851
Due after ten years		97,457,430		95,035,634		87,297,162		83,237,971
	$	100,490,535	$	98,020,910	$	92,092,283	$	87,769,319

The Company’s unrealized losses on other securities relate to its investment in bank-only pooled trust preferred securities, corporate securities, municipal securities and mortgage backed securities (MBS). The Company is closely monitoring its investments in these securities in light of recent price volatility in the marketplace. Due to uncertainty in the credit markets broadly, and the lack of both trading and new issuance in pooled trust preferred securities, market price indications generally reflect the illiquidity in these markets and not the credit quality of the individual securities.

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Due to this illiquidity, it is unlikely that the Company would be able to recover its investment in these securities if it sold them at this time. The Company has the intent and ability to hold these securities until a recovery of costs, which may be at maturity. Based on an assessment of the credit quality of the underlying issuers, the Company did not consider the investment in these securities to be other-than-temporarily impaired at September 30, 2010. The Company will continue to monitor the market price of these securities and the default rates of the underlying issuers and continue to evaluate these securities for possible other-than-temporary impairment, which could result in a future non-cash charge to earnings.

NOTE 9 – OTHER ASSETS

Other assets of $14,591,815 consisted of prepaid FDIC assessment of $2,717,389, deferred tax charges less deferred tax valuation allowance of $2,438,014 and income tax receivable of $5,157,421 at September 30, 2010. Bank owned life insurance was $6,193,987 at September 30, 2010 compared to $18,576,015 at December 31, 2009. The Bank surrendered policies of $12,893,661 during the third quarter of 2010, but has committed to purchase $12,000,000 of bank owned life insurance in the fourth quarter of 2010.

NOTE 10 – ASSET PURCHASE AND SALE AGREEMENTS

On September 30, 2010, the bank entered into two separate agreements whereby Augusta Holdings, LLC “Augusta” would purchase nonperforming loans from the bank and the bank would purchase performing Home Equity Lines of Credit “HELOCs” from Augusta.  Under the first agreement Augusta purchased for approximately $11.2 million nonperforming loans that had a carrying value of approximately $7.8 million.  This amount included payment for back-interest of approximately $462,000.  This transaction was recorded in the third quarter.  In the second agreement which is expected to close in the fourth quarter, the bank agreed to purchase performing HELOC loans of approximately $56 million subject to certain underwriting criteria.  These criteria include the loan not being past due more than 30 days since origination, a current credit score of at least 725.  In addition, as a credit enhancement Augusta will place on deposit at Waccamaw $3.9 million for 4 years that will be available to absorb any credit losses related to this pool over this time period.

As of the date of this filing, Augusta has delivered a pool of HELOC loans and the bank is applying due diligence procedures related to the underwriting criteria.  As required by generally accepted accounting principles, the transaction will be recorded on the books of the bank at the fair value of the assets acquired as the value of those assets is more readily determinable than the fair value of assets disposed.  This value will be determined by an independent valuation once the specific HELOCs have been identified.  Based on valuations for similar transactions, management expects the valuation to result in a discount of approximately 1.5% to 2.5%.  Accordingly, the bank has included in the Allowance for Loan Losses as of September 30, 2010 a net recovery of the amount of the sale price of the nonperforming loans less the carrying value ($3.4 million), net of the estimated discount of the HELOCs to be acquired ($1.25 million).  The actual amount of the net recovery may vary when the actual HELOC valuation is performed.  The bank has deposited in escrow cash of approximately $56 million for the close of this transaction.

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 three and nine months ending September 30, 2010 and 2009 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 chartered bank operating seventeen offices in Whiteville, Wilmington, Shallotte (2), Holden Beach, Chadbourn, Tabor City, Southport (2), Sunset Beach, Oak Island and Elizabethtown, North Carolina. Offices in South Carolina include Conway (2), Socastee, Little River 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 loss for the quarter ended September 30, 2010 was ($742,996) or ($.12) per weighted average basic share outstanding compared to $331,038 net income or $.06 per weighted average basic share outstanding for the quarter ended September 30, 2009.

On September 30, 2010, Waccamaw Bankshares, Inc. assets totaled $566,067,090 compared to $533,221,072 on December 31, 2009. Net loans on September 30, 2010 were $301,395,076 compared to $340,020,798 on December 31, 2009. Total deposits on September 30, 2010 were $466,186,200 compared to $433,537,959 at the end of 2009. Stockholders’ equity after adjustments for unrealized losses on securities available for sale increased by $2,591,317 resulting in a September 30, 2010 book value of $2.64 per common share, down from $3.09 on December 31, 2009.

Impact of Dodd-Frank Act. On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) into law. The Dodd-Frank Act represents a comprehensive overhaul of the financial services industry in the United States. The Dodd-Frank Act includes, among other things:

· the creation of a Financial Stability Oversight Council to identify emerging systemic risks posed by financial firms, activities and practices, and improve cooperation between federal agencies;

· the creation of a Bureau of Consumer Financial Protection authorized to promulgate and enforce consumer protection regulations relating to financial products, which would affect both banks and non-bank financial companies;

· the establishment of strengthened capital and prudential standards for banks and bank holding companies;

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· enhanced regulation of financial markets, including derivatives and securitization markets;

· the elimination of certain trading activities by banks;

· a permanent increase of the previously implemented temporary increase of FDIC deposit insurance to $250,000 per account, an extension of unlimited deposit insurance on qualifying noninterest-bearing transaction accounts, and an increase in the minimum deposit insurance fund reserve requirement from 1.15% to 1.35%, with assessments to be based on assets as opposed to deposits;

· amendments to the Truth in Lending Act aimed at improving consumer protections with respect to mortgage originations, including originator compensation, minimum repayment standards, and prepayment considerations; and

· new disclosure and other requirements relating to executive compensation and corporate governance.

The Company is unable to predict the extent to which the Dodd-Frank Act or the forthcoming rules and regulations will impact the Company’s business. However, the Company believes that certain aspects of the new legislation, including, without limitation, the additional cost of higher deposit insurance coverage and the costs of compliance with disclosure and reporting requirements and examinations could have a significant impact on the Company’s business, financial condition, and results of operations. Additionally, the Company cannot predict whether there will be additional proposed laws or reforms that would affect the U.S. financial system or financial institutions, whether or when such changes may be adopted, how such changes may be interpreted and enforced, or how such changes may affect the Company.

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. At September 30, 2010 and at December 31, 2009, the Bank had no investments classified as held to maturity. 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. For the nine month period ended September 30, 2010, there were no impairment write-downs. For the nine month period ended September 30, 2009, the Company wrote down $2,156,820 in two single issue trust preferred securities and $152,656 of stock in Silverton Bank.

Investments in available for sale securities of $98,020,910 consisted of corporate securities, municipal securities, U.S. Governmental agencies and mortgage backed securities (MBS) at September 30, 2010.

DEPOSITS WITH BANKS

Interest-bearing deposits consist of deposits with other financial institutions. These interest-bearing accounts at other financial institutions were $24,249,610 on September 30, 2010 and $7,695,499 on December 31, 2009. The increase in interest-bearing deposits was due to increased on-balance sheet liquidity and a reduction of net loans outstanding. Non interest-bearing deposits consist of cash on hand and a deposit with another financial institution that consists of $56,307,314. This amount is to be used to purchase approximately $56,000,000 of home equity lines of credit, as Waccamaw Bank entered into an Asset Purchase and Sale Agreement with Augusta Holdings, LLC (“Augusta”) in which the Bank has committed to purchase these loans in the 4th quarter of 2010. These non interest-bearing accounts were $65,655,068 on September 30, 2010 and $13,973,474 on December 31, 2009.

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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 $23,360,000 on September 30, 2010 and $21,315,000 on December 31, 2009.

LOANS

Net loans outstanding on September 30, 2010, were $301,395,076, compared to $340,020,798 on December 31, 2009.  The Bank maintains a loan portfolio dominated by real estate and commercial loans diversified among various industries. Curtailment of real estate lending in the first nine months of 2010, coupled with very low loan demand and aggressive resolution of problem loans, including the addition of $5,271,583 in foreclosed assets in the first nine months of 2010 and net charge-offs of $3,762,398 in the first nine months of 2010 are the major factors contributing to the $38,625,722 decrease in loans in the period since December 31, 2009.

DEPOSITS

Deposits on September 30, 2010, were $466,186,200 compared to $433,537,959 on December 31, 2009. Interest-bearing accounts represented 92.7% of total deposits at September 30, 2010 and 92.4% of total deposits at December 31, 2009. The significant increase in deposits was the result of the Bank taking advantage of low deposit interest rates in the brokered CD market, purchasing brokered CDs of approximately $40,000,000 in the first quarter of 2010.

LIABILITIES

Securities sold under agreements to repurchase on September 30, 2010, were $20,462,000 compared to $20,615,000 on December 31, 2009. Long-term debt on September 30, 2010 was $38,000,000 compared to $43,000,000 on December 31, 2009. At September 30, 2010 and December 31, 2009, $35,000,000 and $40,000,000, respectively, was outstanding under Federal Home Loan Bank advances. Also included in long-term debt at September 30, 2010 and December 31, 2009 was $3,000,000 of subordinated notes bearing interest at 3-month LIBOR plus 350 basis points that will mature on July 1, 2015. Short-term borrowings at September 30, 2010 were $5,900,000 compared to $3,500,000 at December 31, 2009. There was $5,000,000 and $2,500,000, respectively in short-term borrowings funded by the Federal Home Loan Bank of Atlanta at September 30, 2010 and December 31, 2009. Also included in other short-term borrowings at September 30, 2010 was $900,000 compared to $1,000,000 at December 31, 2009 line of credit at a 5.00% lending rate that will mature on July 1, 2020. Other liabilities at September 30, 2010 were $2,061,842 compared to $2,098,993 on December 31, 2009.

TRUST PREFERRED SECURITIES

In December 2003, the Company privately issued $8.0 million aggregate liquidation amount of floating rate trust preferred securities through Waccamaw Statutory Trust I, which was formed for the sole purpose of issuing the securities. We may redeem these trust preferred securities at our option with prior regulatory approval.  In July 2008, the Company completed a private offering of trust preferred securities through a Delaware statutory trust sponsored by the Company. Waccamaw Statutory Trust II, wholly owned by the Company, issued $4.0 million of preferred securities. The proceeds from the offering have been used to continue to support Waccamaw Bank’s growth. The interest payable on the trust preferred securities resets quarterly, and is equal to LIBOR plus 4.00%. On December 17, 2009 the Company began to defer interest payments on the junior subordinated debentures issued to Waccamaw Statutory Trust I.  On January 1, 2010 the Company began to defer payments on the junior subordinated debentures issued to Waccamaw Statutory Trust II.

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STOCKHOLDERS’ EQUITY

Waccamaw Bankshares, Inc. maintains a capital position which exceeds all capital adequacy requirements of Federal regulatory authorities. Total stockholders’ equity at September 30, 2010 was $19,745,748 compared to $17,154,431 at December 31, 2009. This $2,591,317 increase was primarily due to unrealized gains on securities available for sale increasing $1,750,144, net of tax, operating loss of $582,334and the sale of $2,393,801 of common stock through a rights offering to shareholders pursuant to a prospectus dated June 17, 2010. Regulatory guidelines relating to capital adequacy provide minimum risk-based ratios which assess capital adequacy while encompassing all 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 (common stockholders’ equity, retained earnings, and a limited amount of qualifying perpetual preferred stock, less goodwill and certain other intangibles) to risk-weighted assets of 4.0% and total regulatory capital (core capital plus subordinated debt, other preferred stock, and the allowance for loan losses up to 1.25% of risk-weighted assets) to risk-weighted assets of 8.0%. As of September 30, 2010, the Company’s Tier 1 risk-weighted capital ratio and total capital ratio were 8.3% and 9.3%, respectively. As of December 31, 2009, the Company’s Tier 1 risk-weighted capital ratio and total capital ratio were 7.9% and 8.9%, 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 September 30, 2010, the Bank’s capital ratios were as follows: Tier 1 leverage ratio, 5.9%, Tier 1 risk-based capital ratio, 8.5% and total risk-based ratio, 10.5%.  At December 31, 2009, the Bank’s capital ratios were as follows:  Tier 1 leverage ratio, 6.0%, Tier 1 risk-based capital ratio, 8.1% and total risk-based ratio, 10.1%.  These capital ratios were sufficient at September 30, 2010 and December 31, 2009 to classify the Bank as “well capitalized” in accordance with the FDIC’s regulatory capital rules.

ASSET QUALITY

At September 30, 2010, the Company had $13,684,469 in loans that were 30-89 days past due. This represented 4.40% of gross loans outstanding on that date. This is a decrease from December 31, 2009 when there were $26,301,069 in loans that were 30-89 days past due, or 7.50% of gross loans outstanding. The decrease in past dues is spread throughout each category of the loan portfolio and is due primarily to increased staffing in the special assets and collections department.

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 520 basis points from 6.78% at December 31, 2009 to 11.98% at September 30, 2010. The increase in non-performing loans includes increases in six non-performing commercial real estate loans. The Company had ten loans that were considered troubled debt restructured loans which totaled $3,576,818 at September 30, 2010.

During 2009, management refined its allowance for loan losses methodology taking into account existing Securities and Exchange Commission (SEC) and regulatory guidance. The refinement in methodology focused on revised loss factors that are more indicative of actual loss experience in recent years and current borrower analysis. The results of the allowance for loan loss model indicated that a $3,026,284 provision was needed for the nine months ended September 30, 2010.

ALLL Methodological Changes

· Effective March 31, 2010, on the advice of the Bank’s examiners, the Bank has changed its selections parameters for review under FAS 114, as follows.

o Loans and relationships of $500,000 and more (versus previous threshold of $250,000).

o Expanded review to include loans in risk grade 50 (Substandard), from previous concentration on risk grade 55 (Doubtful).

· As a result of these changes, the complexion of FAS 114 is somewhat different.  We eliminated approximately 25 smaller relationships from the analysis, returning them to FAS 5 and we added approximately 15 grade 50 loans, previously not reviewed.

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· Effective December 31, 2009, on the advice of the Bank’s CPAs, the Bank elected to write down substantially all of the previously-calculated FAS 114 impairments, totaling approximately $7,000,000.

o This leaves the ALLL with a distinctly different balance than previous submissions.  During the past 3 years, the ALLL has typically approximated a 50/50 balance between FAS 5 and FAS 114.  We now have essentially all of the bank’s calculated reserve in FAS 5.

o The Bank will follow this same guidance with FAS 114 reserves in the future.  As soon as an impairment can be reasonably calculated (that is, not upon initial impairment calculation, which is often an educated guess at best, but upon receipt and review of an updated appraisal, reasonable offer for purchase, etc…) the bank will write the loan down by the level of that impairment.

o Where previous reports have typically carried approximately 20% of FAS 114 loan balances in reserve, we expect future reports to more closely approximate this one.

The decrease in the provision is the result of the Reserve related to FAS 5 decreasing $2,073,620 due to a decrease in net loans of $38,625,722 at September 30, 2010 compared to December 31, 2009 loans along with loans identified as impaired under FAS 114 as discussed under Note 6 – “Fair Value” – in the notes to the Company’s consolidated financial statements included under Item 1 of this report. As of September 30, 2010 the Bank identified $41,544,302 in impaired loans.  Of these impaired loans, $11,588,058 was identified to have impairment of $1,337,506. At December 31, 2009, there was $41,575,130 of loans that were reviewed for individual impairment under FAS 114. None of these impaired loans required a specific reserve at December 31, 2009.  The decreases in impaired loans resulted from net charge-offs of $13,618,962 at December 31, 2009, as most of the loans charged-off in 2009 were classified as impaired.

The allowance for loan losses on September 30, 2010, was $9,412,813 or 3.03% of period end loans compared to $10,148,927 and 2.90% at December 31, 2009. The allowance for loan losses at September 30, 2010 represented 22.66% of impaired loans compared to 24.41% at December 31, 2009. At September 30, 2010 the Bank had loans totaling $36,397,107 in nonaccrual status as compared to $26,010,130 at December 31, 2009. The increase in non-accrual loans includes increases in six non-performing commercial real estate loans. On September 30, 2010, Waccamaw Bank entered into an Asset Purchase and Sale Agreement with Augusta Holdings, LLC (“Augusta”) pursuant to which the Bank sold non-accrual commercial and construction and development loans to Augusta, without recourse, for $11,220,136, with no loss to the Bank. The largest non-accrual loan relationship totaled $4,263,370, with the average balance for the one hundred nine non-accrual loans totaling $333,918. At September 30, 2010 there was $3,762,398 in net charge-offs compared to $2,482,575 at September 30, 2009. The result of the above Sale Agreement with “Augusta” resulted in a recovery of three loan relationships totaling $3,408,183 less an estimated reserve of the Purchase Agreement of $1,250,000.

The following table, which presents additional information about performing non accrual loans that were paying at September 30, 2010 and December 31, 2009, are as follows:

	Sept 30, 2010		December 31, 2009
Performing non accrual loans	$	10,078,100	$	989,338
Non performing non accrual loans		26,319,007		25,020,792
Total non accrual loans	$	36,397,107	$	26,010,130

There was $12,548 in repossessed assets at September 30, 2010 and $1,600 in repossessed assets at September 30, 2009. At September 30, 2010 there was $10,265,824 in other real estate owned compared to $5,453,713 at September 30, 2009.

The total non-performing assets, (non-accrual loans, loans greater than 90 days past due and still accruing and other real estate owned), at September 30, 2010 was $47,489,971 and $27,843,085 at December 31, 2009. The allowance for loan losses at September 30, 2010 represented 19.82% of non-performing assets compared to 36.45% at December 31, 2009.

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The following is a roll forward of the Company’s allowance for loan losses for the nine months ended September 30, 2010 and 2009:

	Nine-Months			Nine-Months
	ended			ended
	Sept 30, 2010			Sept 30, 2009
Allowance for loan losses at beginning of period	$	10,148,927		$	7,187,982
Provision for loan losses		3,026,284			4,856,894
Charge-offs		(6,138,110	)		(2,515,843	)
Recoveries		2,375,712			33,268
Allowance for loan losses at end of period	$	9,412,813		$	9,562,301

The following is a roll forward of the Company’s allowance for loan losses for the quarter ended September 30, 2010 and 2009:

	Three-Months			Three-Months
	ended			ended
	Sept 30, 2010			Sept 30, 2009
Allowance for loan losses at beginning of period	$	10,902,377		$	10,484,950
Provision for loan losses		1,215,671			1,230,048
Charge-offs		(4,895,485	)		(2,163,335	)
Recoveries		2,190,250			10,638
Allowance for loan losses at end of period	$	9,412,813		$	9,562,301

In addition to the impact on our allowance for loan losses resulting from our loan portfolio rebalancing efforts, which have reduced our concentrations in construction and development sector loans, our refined allowance for loan losses methodology, as previously discussed, has resulted in an overall increase in the allowance for loan losses as a percent of total loans. In management’s judgment, an appropriate allowance for estimated losses has been established; however, there can be no assurance that actual losses will not exceed the estimated amounts in the future.

The Bank’s allowance for loan and lease losses methodology involves the following:  The Bank evaluates loans and relationships greater than $500,000 and in non-performing status (non-accrual, greater than 90 days still accruing, etc.) or otherwise deemed to be impaired for individual impairment under FAS 114.  Further, individual impairment is calculated for any loan, regardless of size, rising to the level of Troubled Debt Restructure.  Once the FAS 114 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 FAS 114 are removed from the FAS 5 general loan classifications, to avoid double reserving.  Our ALLL model breaks FAS 5 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.

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Additional information is as follows:

	Sept 30, 2010			December 31, 2009
Impaired loans	$	41,544,302		$	41,575,130
Unimpaired loans		269,263,587			308,594,595
Gross loans	$	310,807,889		$	350,169,725
Specific reserve on impaired loans	$	1,337,506		$	-
Reserve related to FAS 5		8,075,307			10,148,927
Total allowance for loan losses	$	9,412,813		$	10,148,927
Allowance to gross loans		3.03	%		2.90	%
Specific reserve to impaired loans		3.22	%		-
FAS 5 reserves to unimpaired loans		3.00	%		3.29	%

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 September 30, 2010.

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Loan Name	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	$	4,654,783		1A2	$	283,783		9/10/2010	0	Substandard	NA		7,400,000	6/15/2009	FV	8/1/2006 12/20/2007	3/1/1 1/1/1
Residential A&D	$	4,031,543		1A2	$	-		9/9/2010	0	Substandard	NA		7,075,000	4/1/2009	FV	7/9/2007	4/1/1
Residential A&D	$	3,342,636		1A2	$	-		9/9/2010	347,266	Substandard	NA		5,177,000	6/15/10 3/29/10	FV	10/31/2008	0/0/0
Hotels (3)	$	2,850,119		1D	$	-		9/9/2010	0	Substandard	NA		11,730,000	9/3/2008	FV	9/14/2005	16/1/1
Hardwood flooring manufacturer	$	2,548,375		1E1	$	-		9/13/2010	725,000	Substandard	na		2,548,375	4/24/2009	FV	8/9/2006 1/16/2007	2/0/0
Commercial income producing	$	2,107,879		1E2	$	-		10/21/2010	0	Substandard	na		2,828,000	1/31/2009	FV	2/18/2009	(3/2/2) (6/2/1)
Residential A&D	$	1,546,251		1E2	$	-		9/13/2010		Substandard	accrual		1,875,000	7/15/2008	FV	6/28/2004	11/2/0
Wrecker service	$	1,354,944		1C2A	$	-		9/9/2010		Substandard	accrual		3,669,600	6/1/2005 3/1/2008 6/1/2005	FV	3/11/2005	33/0/0
Residential A&D	$	887,980		1D	$	-		10/22/2010	324,000	Substandard	na		887,980	6/7/2010	FV
Individual	$	1,061,887		1C2A	$	6,765		10/20/2010		Special Mention	accrual		415,000	1/11/2010	FV	11/8/2007	2/0/0
Residential A&D	$	1,029,628		1A2	$	-		1/0/1900		Special Mention	accrual		1,799,300		FV	7/31/2009	8/0/0
Residential A&D	$	1,010,411		1A2	$	-		10/22/2010		Special Mention	accrual		2,245,000	7/9/2008
Residential A&D	$	1,002,500		1A2	$	-		9/9/2010	0	Substandard	na		3,000,000	2/1/2008	FV	12/23/2008	0/0/0
Commercial income producing	$	963,330		1E2	$	-		9/9/2010		Substandard	accrual		1,425,000	1/10/2010	FV	7/9/2007	3/0/0
Residential A&D	$	938,846		1A2	$	283,063		10/19/2010	0	Substandard	na		655,783		DCF	8/15/2006 4/24/2007	9/4/0
Day Care	$	904,170		1E1	$	25,320		10/20/2010		Substandard	accrual		1,050,000	12/28/2009	FV	4/7/2005	5/0/0
Residential A&D	$	869,465		1A2	$	-		9/9/2010	0	Substandard	na		3,100,000	1/15/2009	FV	5/19/2006 3/17/2006	7/2/1
Residential A&D	$	290,740		1A2	$	-		10/22/2010	571,357	Substandard	na		318,000	3/19/2010	FV	1/31/2007	12/2/2
Tile flooring operation	$	822,521		1E2	$	-		9/13/2010	126,527	Substandard	na		840,000	7/15/2009	FV	4/10/2007	3/5/3
Total	$	32,218,008			$	598,931
% of total (below)		77.55	%			44.78	%
Total impaired loans for the Bank at September 30, 2010	$	41,544,302
Total impaired loans with calculated impairment	$	11,588,058
Impairment calculated on those loans	$	1,337,506
Fair value of those loans	$	10,250,552

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COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

The Company reported a net loss of ($742,996) or ($.12) per share for the three months ended September 30, 2010, as compared with a net profit of $331,038 or $.06 per basic share and diluted share for the three months ended September 30, 2009, a decrease of $1,074,034 or (324.44%) in net income.

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, 2010, the net interest income of the Company was $2,956,862 compared to $3,554,096 for the three months ended September 30, 2009. For the three months ended September 30, 2010, as compared to the three months ended September 30, 2009, the net interest income decreased as the decrease in loan market interest rates coupled with the $13,590,405 increase in the nonaccrual loans from September 30, 2009 accounted for a $1,176,791 decrease in interest income which was offset by a $579,557 decrease in interest expense resulting from a decrease in deposit rates.

PROVISION FOR LOAN LOSSES

The Company expensed $1,215,670 to the provision for loan losses in the third quarter of 2010, as compared to the $1,230,048 provision for loan losses in the third quarter of 2009. The decrease in the provision was due to differing levels of net charge-offs of loans over the periods under comparison. 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 appropriate 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 $2,166,043 for the three months ended September 30, 2010 as compared with $1,804,208 for the three months ended September 30, 2009. The principal reason for the increase of $361,835 in total non-interest income for the current quarter was that the Company had realized gains on sales or maturity of investment securities of $833,180, increases in fees from mortgage origination income of $8,592 and increases in other operating income of $258,878. Decreases in service charges on deposit accounts of $168,974, decreases of $37,780 in financial services income and decreases of $58,303 in earnings on bank owned life insurance accounted for the additional difference in non-interest income for the three months ended September 30, 2010 compared to the three months ended September 30, 2009.

NON-INTEREST EXPENSES

Non-interest expenses totaled $5,221,797 for the three months ended September 30, 2010, an increase of $1,380,520 or 35.9% over the $3,841,277 reported for the three months ended September 30, 2009. For the three months ended September 30, 2010, personnel costs decreased by $187,374, or 10.8% to $1,548,684 as compared to $1,736,058 for the three months ended September 30, 2009. Increases of regulatory agency expenses of $272,121, increases in foreclosed asset expenses of $1,354,201, increases in data processing of $39,648, increases in occupancy expense of $32,105, decreases of $35,452 in amortization expense of intangible assets and decreases in other expenses of $94,729 accounted for the additional difference in non-interest expense for the three months ended September 30, 2010 compared to the three months ended September 30, 2009.

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PROVISION FOR INCOME TAXES

The Company recognized a benefit of $571,566 for income taxes during the three months ended September 30, 2010 compared to a benefit for income taxes of $44,059 for the three months ended September 30, 2009.

COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

The Company reported a net loss of ($582,334) or ($.10) per basic share and diluted share for the nine months ended September 30, 2010, as compared with a net loss of ($1,714,198) or ($.31) per basic share and diluted share for the nine months ended September 30, 2009, an increase of $1,131,864 or 66.0% in net income.

NET INTEREST INCOME

For the nine months ended September 30, 2010, the net interest income of the Bank was $8,587,487 compared to $9,816,952 for the nine months ended September 30, 2009. For the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009, the net interest income decreased due to the decrease in loan market interest rates coupled with the $13,590,405 increase in the nonaccrual loans from September 30, 2009 accounted for a $3,579,351 decrease in interest income which was offset by a $2,349,886 decrease in interest expense resulting from a decrease in deposit rates.

PROVISION FOR LOAN LOSSES

The Company expensed $3,026,284 to the provision for loan losses in the first nine months of 2010, as compared to the $4,856,894 provision for loan losses in the first nine months of 2009. The decrease in the provision is the result of the reserve related to FAS 5 decreasing $2,073,620 due to a decrease in net loans of $38,625,722 at September 30, 2010 compared to December 31, 2009. 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 appropriate 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 $5,340,499 for the nine months ended September 30, 2010 as compared with $2,915,890 for the nine months ended September 30, 2009. The principal reason for the increase of $2,424,609 in total non-interest income for the nine months ended September 30, 2010 was that the Company had realized gains on sales of investment securities of $1,481,372 and increases in other operating income of $241,673.  Decreases in service charges on deposit accounts of $161,723, decreases of $24,891 in fees from mortgage origination income from the continued slowdown in the housing market, decreases of $41,435 in financial services income, decreases of $35,428 in earnings on bank owned life insurance and write-downs of $2,156,820 in two single issue trust preferred securities and $152,656 of stock in Silverton Bank in the first nine months of 2009 accounted for the additional difference in non-interest income for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009.

NON-INTEREST EXPENSES

Non-interest expenses totaled $12,247,802 for the nine months ended September 30, 2010, an increase of $1,102,718 or 9.9% of the $11,154,084 reported for the nine months ended September 30, 2009. For the nine months ended September 30, 2010, personnel costs decreased by $721,243, or 13.3% to $4,719,850 as compared to $5,441,093 for the nine months ended September 30, 2009. Increases of regulatory agency expenses of $494,672, increases in foreclosed asset expenses of $1,439,606, decreases in data processing of $38,368, decreases in occupancy expense of $22,831, decreases of $66,201 in amortization expense of intangible assets and increases in other expenses of $17,083 accounted for the additional difference in non-interest expense for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009.

PROVISION FOR INCOME TAXES

The Company recognized a benefit of $763,766 for income taxes during the nine months ended September 30, 2010 compared to a benefit for income taxes of $1,554,938 for the nine months ended September 30, 2009.

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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 in order to manage interest rate risk.

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.

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, 2009. The Company has not had any material changes in the overall interest rate risk profile since December 31, 2009.

At September 30, 2010, liquid assets (cash and due from banks, interest-earning deposits with banks, fed funds sold, and investment securities available for sale) totaled $211,285,588, which represented 37.3% 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. 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, general economic conditions, changes in interest rates, deposit flows, loan demand, real estate values, and competition; changes in accounting principles, 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 4T. CONTROLS AND PROCEDURES

Based on their evaluation, as of the end of the period covered by this 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. During the period covered by this Quarterly Report, no change in our internal control over financial reporting has occurred that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1.         LEGAL PROCEEDINGS

Neither the Company nor the Bank is subject to any material legal proceedings at the date of this report. From time to time, the Bank is engaged in routine litigation incidental to its business.

ITEM 6.      EXHIBITS

EXHIBIT NUMBER	DESCRIPTION OF EXHIBIT
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	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act (Filed herewith)

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SIGNATURES

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

	Waccamaw Bankshares, Inc.
Date:    November 15, 2010	By:	/s/ David A. Godwin
		David A. Godwin
		Senior Vice President and
		Chief Financial Officer
		(Principal Financial Officer)

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EXHIBIT INDEX

EXHIBIT NUMBER	DESCRIPTION OF EXHIBIT
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	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act (Filed herewith)

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