Waccamaw Bankshares (WBNK) 10-Q 2005 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, 2005
o	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 000-32985

WACCAMAW BANKSHARES, INC

(Name of Small Business Issuer in its Charter)

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

110 N. Powell Boulevard Whiteville, N.C. 28472

(address of Principal Executive Office)

(910) 641-0044

(Issuer’s telephone number, including area code)

Not Applicable

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 of 15 (d) of the Exchange Act 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 o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    

Yes o No x

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

Yes o No x

As of November 8, 2005 there were 4,564,587 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, 2005 (Unaudited) and December 31, 2004	1
		Consolidated Statements of Income, Nine Months  Ended September 30, 2005 and September 30, 2004 (Unaudited)	2
		Consolidated Statements of Income, Quarters Ended September 30, 2005 and September 30, 2004 (Unaudited)	3
		Consolidated Statements of Cash Flows,  Nine Months Ended September 30, 2005 and September 30, 2004 (Unaudited)	4
		Notes to Consolidated Financial Statements	5-6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	7-11
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	12
	Item 4.	Controls and Procedures	12
Part II.  OTHER INFORMATION			13
SIGNATURES			14
	Item 6.	Exhibits	15-17

WACCAMAW BANKSHARES, INC.
Consolidated Balance Sheets
September 30, 2005 and December 31, 2004

	September 30,			December 31,
	2005			2004
	(Unaudited)
Assets:
Cash and due from banks	$	7,353,385			3,751,318
Interest-bearing deposits with banks		1,014,014			974,469
Federal funds sold		10,255,000			4,529,000
Investment securities, available for sale		30,534,447			28,599,527
Restricted equity securities		2,005,906			1,632,605
Loans, net of allowance for loan losses of $3,812,804 in 2005, and $2,791,008 in 2004		255,126,869			206,666,022
Other real estate owned		200,347			82,475
Property and equipment, net		3,279,222			3,301,220
Intangible assets, net		934,531			1,104,916
Accrued income		1,412,672			1,137,359
Bank owned life insurance		5,160,083			5,030,074
Other assets		1,998,391			1,603,456
Total assets	$	319,274,867		$	258,412,441
Liabilities and Stockholders’ Equity
Liabilities:
Demand deposits	$	27,149,641		$	19,065,902
Interest-bearing deposits		241,913,324			188,575,792
Total deposits		269,062,965			207,641,694
Securities sold under agreements to repurchase		2,710,000			3,268,000
Long-term debt		16,500,000			18,500,000
Guaranteed preferred beneficial interest in the company’s junior subordinated debentures		8,248,000			8,248,000
Accrued interest payable		825,646			546,324
Other liabilities		71,644			309,866
Total liabilities		297,418,255			238,513,884
Commitments and contingencies		—			—
Stockholders’ equity:
Preferred stock, no par value; 1,000,000 shares authorized; none outstanding
Common stock, no par value; 25,000,000 shares authorized; 4,551,787 shares issued in 2005 and 4,530,402 shares  issued in 2004		13,223,041			13,142,612
Retained earnings		8,657,712			6,529,502
Accumulated other comprehensive income		(24,141	)		226,443
Total stockholders’ equity		21,856,612			19,898,557
Total liabilities and stockholders’ equity	$	319,274,867		$	258,412,441

1

WACCAMAW BANKSHARES, INC.
Consolidated Statements of Income
Nine-months ended September 30, 2005 and Nine-months ended September 30, 2004 (Unaudited)

	Nine-Months Ended Sept 30, 2005			Nine-Months Ended Sept 30, 2004
Interest income
Loans and fees on loans	$	11,638,840		$	7,164,974
Federal funds sold		296,428			23,944
Investment securities, taxable		990,963			868,231
Investment securities, nontaxable		68,971			77,857
Total interest income		12,995,202			8,135,006
Interest expense
Deposits		4,386,808			2,095,934
Federal funds purchased and securities sold under agreements to repurchase		57,615			31,293
Other borrowed funds		817,892			502,640
Total interest expense		5,262,315			2,629,867
Net interest income		7,732,887			5,505,139
Provision for loan losses		1,180,000			411,500
Net interest income after provision for loan losses		6,552,887			5,093,639
Noninterest income
Service charges on deposit accounts		818,760			728,749
Mortgage origination income		215,901			155,234
Other operating income		517,498			447,115
Gain attributable to minority interest in mortgage investee		—			274,108
Earnings on bank owned life insurance		141,097			170,370
Net realized gains (losses) on sale or maturity of investment securities		(909	)		12,952
Total noninterest income		1,692,347			1,788,528
Noninterest expense
Salaries and employee benefits		2,693,528			2,210,396
Occupancy and equipment		598,161			501,263
Data processing		463,396			306,485
Amortization expense of intangible assets		189,534			188,857
Other expense		1,101,790			943,989
Total noninterest expense		5,046,409			4,150,990
Income (loss) before income taxes		3,198,825			2,731,177
Income Tax Expense		1,070,615			965,108
Net income	$	2,128,210		$	1,766,069
Basic earnings income per share	$	.47		$	.39
Diluted earnings income per share	$	.45		$	.37
Weighted average shares outstanding		4,537,367			4,502,580
Diluted average shares outstanding		4,737,050			4,820,950

2

WACCAMAW BANKSHARES, INC.
Consolidated Statements of Income
Quarter ended September 30, 2005 and Quarter ended September 30, 2004 (Unaudited)

	Quarter Ended Sept 30, 2005			Quarter Ended Sept 30, 2004
Interest income
Loans and fees on loans	$	4,418,248		$	2,602,310
Federal funds sold		138,696			12,308
Investment securities, taxable		346,342			305,175
Investment securities, nontaxable		22,991			23,983
Total interest income		4,926,277			2,943,776
Interest expense
Deposits		1,721,863			807,566
Fed funds purchased and securities sold under agreements to repurchase		21,765			11,773
Other borrowed funds		264,061			179,310
Total interest expense		2,007,689			998,649
Net interest income		2,918,588			1,945,127
Provision for loan losses		700,000			201,000
Net interest income after provision for loan losses		2,218,588			1,744,127
Noninterest income
Service charges on deposit accounts		285,805			262,984
Mortgage origination income		90,818			63,555
Other operating income		161,329			142,285
Gain attributable to minority interest in mortgage investee		—			194,377
Earnings on bank owned life insurance		53,290			56,790
Net realized gains (losses) on sale or maturity of investment securities		(798	)		(1,848	)
Total noninterest income		590,444			718,143
Noninterest expense
Salaries and employee benefits		921,658			780,933
Occupancy and equipment		204,834			187,236
Data processing		150,883			114,630
Amortization expense of intangible assets		63,177			75,267
Other expense		440,439			348,905
Total noninterest expense		1,780,991			1,506,971
Net income		1,028,041			955,299
Income Tax Expense		282,450			350,043
Net income	$	745,591		$	605,256
Basic earnings income per share	$	.16		$	.13
Diluted earnings income per share	$	.16		$	.13
Weighted average shares outstanding		4,546,312			4,509,367
Diluted average shares outstanding		4,753,358			4,828,617

3

WACCAMAW BANKSHARES, INC.
Consolidated Statements of Cash Flows
Nine-months ended September 30, 2005 and Nine-months ended September 30, 2004 (Unaudited)

	Nine-Months Ended Sept 30, 2005			Nine-Months Ended Sept 30, 2004
Cash flows from operating activities
Net income	$	2,128,210		$	1,766,069
Adjustments to reconcile net income to net cash used by operations:
Depreciation and amortization		387,068			364,922
Provision for loan losses		1,180,000			411,500
Accretion of discount on securities, net of amortization of premiums		69,066			55,943
(Gain) loss on sale of investment securities		909			(12,952	)
Changes in assets and liabilities:
Accrued income		(275,313	)		(126,954	)
Other assets		(524,944	)		(325,284	)
Accrued interest payable		279,322			(64,776	)
Other liabilities		(238,222	)		(562,180	)
Net cash provided (used) by operating activities		3,006,096			1,506,288
Cash flows from investing activities
Net (increase) decrease in federal funds sold		(5,726,000	)		10,116,000
Purchases of investment securities		(9,412,917	)		(10,314,808	)
Maturities of investment securities		5,412,987			4,227,365
Net increase in loans		(49,758,719	)		(42,834,113	)
Sales of investment securities		1,371,150			782,689
Purchases of property and equipment		(194,685	)		(352,344	)
Net cash used in investing activities		(58,308,184	)		(38,375,211	)
Cash flows from financing activities
Net increase in noninterest-bearing deposits		8,083,739			3,817,542
Net increase in interest-bearing deposits		53,337,532			25,302,612
Net increase in securities sold under agreements to repurchase		(558,000	)		272,000
(Repayments) proceeds from long-term debt		(2,000,000	)		5,000,000
Net increase (decrease) in federal funds purchased		—			1,774,000
Proceeds from exercise of stock options		80,429			197,005
Proceeds from issuance of common stock		—			121,360
Net cash provided by financing activities		58,943,700			36,484,519
Increase (decrease) in cash and cash equivalents		3,641,612			(384,404	)
Cash and cash equivalents, beginning		4,725,787			5,363,317
Cash and cash equivalents, ending	$	8,367,399		$	4,978,913
Supplemental disclosure of cash flow information
Interest paid	$	4,982,993		$	2,694,643
Taxes paid	$	1,523,480		$	1,202,517
Supplemental disclosure of non cash activity
Other real estate acquired in settlement of loans	$	117,872		$	1,631

4

WACCAMAW BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

The accompanying unaudited financial statements were prepared in accordance with instructions for Form 10-Q and therefore, do not include all disclosures required by generally accepted accounting principles for a complete presentation of financial statements. In the opinion of the 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, 2005 and December 31, 2004, and its cash flows for the nine months ended September 30, 2005 and 2004. The results of operations for the nine months and three months ended September 30, 2005 and 2004 are not necessarily indicative of the results expected for the full year. These consolidated financial statements should be read in conjunction with the Company’s 10-KSB for the year ended December 31, 2004.

Waccamaw Bankshares, Inc. is located in Whiteville, North Carolina. The accounting and reporting polices of the Company and Bank follow generally accepted accounting principles and general practices within the financial services industry.

PRESENTATION OF CASH FLOWS

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

Investment Securities

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

Investment securities classified as held to maturity are those debt securities that the Bank has the ability and intent to hold to maturity. Accordingly, these securities are carried at cost adjusted for amortization of premiums and accretion of discount, computed by the interest-method over their contractual lives. At September 30, 2005 and December 31, 2004, the Bank had no investments classified as held to maturity.

Loans

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

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

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

5

Recent Accounting Developments

In December 2004, the Financial Accounting Standards Board (“FASB”) published FASB Statement No. 123 (R), Share-Based Payments.  FAS 123 (R) requires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments such as stock options granted to employees.  In April 2005, the Securities and Exchange Commission adopted a rule that defers the compliance of FAS 123 (R) from the first reporting period beginning after June 15, 2005 to the first fiscal year beginning after June 15, 2005, January 1, 2006 for the Company.  As of the effective date, the Company will apply the statement using a modified version of prospective application.  Under that method, compensation cost is recognized for (1) all options granted after the required effective date and to awards modified, cancelled, or repurchased after that date and (2) the portion of prior awards for which the requisite service has not yet been rendered, based on the grant-date fair value of those awards calculated for pro-forma disclosures under SFAS 123.  The impact of this Statement on the Company in 2006 and beyond will depend upon various factors, including compensation strategies.

NOTE 2. EARNINGS PER SHARE

Earnings per share for the nine months ended September 30, 2005 and 2004 were calculated by dividing net income by the weighted average number of shares outstanding during the period. Diluted earnings per share for the nine months ended September 30, 2005 and 2004 were calculated by dividing net income by the weighted average number of dilutive shares outstanding.

NOTE 3. BALANCE SHEETS

The balance sheet at December 31, 2004 has been taken from the audited financial statements at that date.

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

The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments.  The Bank uses the same credit policies in making commitments and conditional obligations as for on-balance-sheet instruments.  A summary of the Bank’s commitments at September 30, 2005 and December 31, 2004 is as follows:

	September 30, 2005		December 31, 2004
Commitment to extend credit		48,998,000		47,127,000
Standby letters of credit		449,000		371,000

6

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 Waccamaw Bankshares, Inc. financial condition and results of operations for the nine months and three months ending September 30, 2005 and 2004. This discussion should be read in conjunction with the financial statements and related notes included in this report.

Waccamaw Bank is a North Carolina state chartered bank,  and is located in Whiteville, North Carolina. The Bank began operations on September 2, 1997. Waccamaw Bankshares, Inc. acquired all outstanding shares of Waccamaw Bank on July 1, 2001.

Highlights

Net income for the quarter ended September 30, 2005, was $745,591 or $.16  per average share outstanding compared to a $605,256  net profit or $.13 per share outstanding for the quarter ended September 30, 2004.

On September 30, 2005, Waccamaw Bankshares, Inc. assets totaled $319,274,867 compared to $258,412,441 on December 31, 2004. Net loans were $255,126,869 compared to $206,666,022 on December 31, 2004. Total deposits on September 30, 2005 were $269,062,965 compared to $207,641,694 at the end of 2004. Stockholders’ equity after adjustments for unrealized losses on securities available for sale as required by FASB 115 increased by  $1,958,055  resulting in a September 30, 2005 book value of $4.80 per share, up from $4.39 on December 31, 2004.

Financial Condition, Liquidity and Capital Resources

Investments

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

Held to maturity securities are bonds, notes and debentures for which the Bank has the positive intent and ability to hold to maturity and which are reported at cost, adjusted by premiums and discounts that are recognized in interest income using the interest method over the period to maturity or to call dates. The Bank had no “Held to Maturity” securities at September 30, 2005 or December 31, 2004.

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

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

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

Investments in available for sale securities of $30,534,447 consisted of corporate securities, municipal securities, U.S. Governmental agencies and mortgage backed securities (MBS) at September 30, 2005. Included in corporate securities are holdings of Ford Motor Company and General Motors Corporation, which were recently downgraded to junk status. The Company feels this is a temporary impairment and will not be written down due to the strong interest rates associated with these securities and the ability of both companies to turn around their sluggish sales in both the short and long term.

7

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 $10,255,000 and $4,529,000 on September 30, 2005 and December 31, 2004, respectively. No single loan  exceeds Waccamaw Bank’s legal lending limit. The increases were due to strong deposit growth over the past six months in which these funds were to be used to fund loan demand in the short term.

Loans

Net loans outstanding on September 30, 2005, were $255,126,869 compared to $206,666,022 on December 31, 2004.  The Bank maintains a loan portfolio dominated by real estate and commercial loans diversified among various industries. The $48,460,847 increase in loans was due to stronger real estate and commercial demand due to local economies improving in the areas covered by Waccamaw Bank.  This resulted in increased construction and development during the first nine months of 2005.

Deposits

Deposits on September 30, 2005, were $269,062,965 compared to $207,641,694 on December 31, 2004. Interest-bearing accounts represented 89.91% of total deposits at September 30, 2005 and 90.82% of total deposits at December 31, 2004. The significant increase in deposits was due to the strong loan demand  which necessitated that deposit rates be increased through advertising and aggressive marketing programs.

Liabilities

Securities sold under agreements to repurchase on September 30, 2005, was $2,710,000 compared to $3,268,000 on December 31, 2004. Long-term debt on September 30, 2005 was $16,500,000 compared to $18,500,000 on December 31, 2004. The strong increase in deposit demand enabled the Bank to pay down $2,000,000 of long-term debt. All long-term debt is funded by the Federal Home Loan Bank of Atlanta.

Stockholders’ Equity

Waccamaw Bankshares, Inc. maintains a strong capital position which exceeds all capital adequacy requirements of Federal regulatory authorities. Total stockholders’ equity at September 30, 2005 was $21,856,612 compared to $19,898,557 at December 31, 2004. This $1,958,055 increase was largely due to operating profits of $2,128,210. The Bank also exceeds all capital requirements under the leverage guidelines.

For the nine months ended September 30, 2005, the operating profit of the Bank was $2,128,210 compared to a $1,766,069  profit for the nine months ended  September 30, 2004.

There have been no cash  dividends declared during 2005.  On September 30, 2004, a 2 for 1 stock split effected in the form of a 100% stock dividend was paid to stockholders of record as of September 15, 2004. On May 14, 2004 a 6 for 5 stock split effected in the form of a 20% stock dividend was paid to shareholders of record as of April 30, 2004. As a result, all share and per share data have been adjusted to reflect the split.

Shareholders of record approved an amendment to Article II of the Company’ Articles of Incorporation to increase by 20,000,000 the number of authorized shares of the Company’s capital stock. The Company will have 25,000,000 of such shares classified as no par value common stock and 1,000,000 shares classified as preferred stock.

Asset Quality

The provision for possible loan losses charged to operations was $1,180,000 in the first nine months of 2005 and $411,500 for the same period of 2004. The reserve for loan losses on September 30, 2005, was $3,812,804  or 1.47% of period end loans.  The increase in the loan loss provision was due to stronger loan growth at the end of 2004 and the first nine months of 2005 along with a loan placed under non accrual in the amount of $1,471,000.

8

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

Management believes that its provision and reserve offer an adequate allowance for future loan losses and provide a sound reserve for the loan portfolio.

At September 30, 2005 the Bank had $1,685,042 loans in nonaccrual status as compared to $1,894,534 at September 30, 2004. There were no repossessed assets at September 30, 2005 and $40,034 at September 30, 2004.

Comparison of Results of Operations for the Three Months Ended September 30, 2005 and 2004

The Company reported net income of $745,591 or $.16 per share for the three months ended September 30, 2005, as compared with net income of $605,256 or $.13 per share for the three months ended September 30, 2004, an increase of $140,335 or 23.2% in net income. The Company had significant increases in net interest income in the third quarter of 2005 as compared to the third quarter of 2004, as these increases were due to strong growth in interest earning assets and increases in net interest margin. The Company has incurred additional non-interest expenses both as a result of growth from period to period, and also as a result of additional hiring and other costs incurred as a result of the branch expansion during 2004 and 2005.

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, 2005, the net interest income of the Bank was $2,918,588 compared to $1,945,127 for the three months ended September 30, 2004. The increase in net interest income can be attributed to strong growth in loans and increases in net interest margin. 9

Provision for Loan Losses

The Company expensed $700,000 to provision for loan losses in the third quarter of 2005, as compared to the $201,000 provision for loan losses in the third quarter of 2004. Provisions for loan losses are charged to income to bring the allowance for loan losses to a level deemed appropriate by Management. Management considers the current level of the loan loss allowance to be satisfactory based on loan volume, the current level of delinquencies, other non performing assets, prevailing economic conditions and other factors that my affect a borrower’s ability to repay. The increase in the provision for loan losses was due to the increase in real estate and commercial loan demand.

Non-Interest Income

Non-interest income totaled $590,000 for the three months ended September 30, 2005 as compared with $718,000 for the three months ended September 30, 2004. The principal reason for the decrease of $128,000 in total non-interest income for the current quarter was the loss of mortgage income from Sidus, LLC which was sold in the fourth quarter of 2004, as third quarter income from Sidus, LLC totaled $194,000 for the three months ending September 30, 2004. Increases of $23,000 in service charges on deposit accounts, $27,000 in net servicing fees from mortgage and investments and increases in other operating income of $19,000 made up the difference in the three months ending September 30, 2005 compared to the three months ending September 30, 2004.

9

Non-Interest Expenses

Non-interest expenses totaled $1.8 million for the three months ended September 30, 2005, an increase of $300,000 or 18.2% over the $1.5 million reported for the three months ended September 30, 2004. Substantially all of this increase resulted from the Bank’s growth and development, and reflects the additional expenses in the current quarter associated with new hires and the opening of a new branch. For the three months ending September 30, 2005, personnel costs increased by $140,000, or 18.0% to $921,000 as compared to $781,000 for the three months ended September 30, 2004.

Provision for Income Taxes

The Company provided $282,000 for income taxes during the three months ended September 30, 2005, at a tax rate of 27% compared to a provision for income taxes of $350,000 for the three months ended September 30, 2004 at a tax rate of 36%. The lower tax rate for the third quarter of 2005 is primarily due to a tax benefit of a nonqualified stock option exercise.

Comparison of Results of Operations for the Nine Months Ended September 30, 2005 and 2004

The Company reported net income of $2,128,210 or $.47 per share for the nine months ended September 30, 2005, as compared with net income of $1,766,069 or $.39 per share for the nine months ended September 30, 2004, an increase of $362,141 or 20.5% in net income. The Company had significant increases in net interest income in the first nine months of 2005 as compared to the first nine months of 2004, as these increases were due to strong growth in interest earning assets and increases in net interest margin. The Company has incurred additional non-interest expenses both as a result of growth from period to period, and also as a result of additional hiring and other costs incurred as a result of the branch expansion during 2004 and 2005.

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 nine months ended September 30, 2005, the net interest income of the Bank was $7,732,887 compared to $5,505,139 for the nine months ended September 30, 2004. The increase in net interest income can be attributed to strong growth in loans and increases in net interest margin.

Provision for Loan Losses

The Company expensed $1,180,000 to provision for loan losses in 2005, as compared to the $411,500 provision for loan losses in 2004. Provisions for loan losses are charged to income to bring the allowance for loan losses to a level deemed appropriate by Management. Management considers the current level of the loan loss allowance to be satisfactory based on loan volume, the current level of delinquencies, other non performing assets, prevailing economic conditions and other factors that my affect a borrower’s ability to repay. The increase in the provision for loan losses was due to the increase in real estate and commercial loan demand.

Non-Interest Income

Non-interest income totaled $1,692,000 for the nine months ended September 30, 2005 as compared with $1,788,000 for the nine months ended September 30, 2004. The principal reason for the decrease of $96,000 in total non-interest income for the nine months ending September 30, 2005 compared to the nine months ending September 30, 2004 was the loss of mortgage income from Sidus, LLC which was sold in the fourth quarter of 2004, as year to date income from Sidus, LLC totaled $274,000 for the nine months ending September 30, 2004. Increases of $90,000 in service charges on deposit accounts, $60,000 in net servicing fees from mortgage and investments and increases in other operating income of $70,000 made up the difference in the nine months ending September 30, 2005 compared to the nine months ending September 30, 2004.

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Non-Interest Expenses

Non-interest expenses totaled $5.0 million for the nine months ended September 30, 2005, an increase of $900,000 or 21.6% over the $4.1 million reported for the nine months ended September 30, 2004. Substantially all of this increase resulted from the Bank’s growth and development, and reflects the additional expenses in the current year associated with new hires and the opening of a new branch. For the nine months ending September 30, 2005, personnel costs increased by $480,000, or 21.8% to $2.7 million as compared to $2.2 million for the nine months ended September 30, 2004.

Provision for Income Taxes

The Company provided $1,070,000 for income taxes during the nine months ended September 30, 2005, at a tax rate of 33% compared to a provision for income taxes of $965,000 for the nine months ended September 30, 2004 at a tax rate of 35%. The lower tax rate for the first nine months of 2005 is primarily due to a tax benefit of a nonqualified stock option exercise.

Interest Sensitivity and Liquidity

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

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

At September 30, 2005, the liquidity position of the Bank was strong, with short-term liquid assets of $32,217,278 or 10.09% of total assets.

Stock-based Compensation

The Company accounts for its stock-based compensation plans using the accounting prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. The Company is not required to adopt the fair value based recognition provisions prescribed under SFAS No. 123, Accounting for Stock Based Compensation, but complies with the disclosure requirements set forth in the Statement (as amended by SFAS No. 148), which include disclosing pro forma net income as if the fair value based method of accounting had been applied.

Stock Option Plans

The Company has adopted both the 1998 Incentive Stock Option Plan (Incentive Plan) and the 1998 Nonstatutory Stock Option Plan (Nonstatutory Plan).  Under each plan up to 458,258 shares may be issued for a total of 916,516 shares (adjusted for stock dividends).  Options granted under both plans expire no more than 10 years from date of grant. Option exercise price, under both plans shall be set by the Board of Directors at the date of grant, but shall not be less than 100% of fair market value of the related stock at the date of the grant.  Under both plans, vesting is determined by the specific option agreements.  Information related to pro forma net income for the periods presented is as follows:

	September 30,
	2005		2004
Compensation cost recognized in income for all stock-based compensation awards	$	—	$	—
Pro forma net income, based on SFAS No. 123	$	1,434,604	$	1,727,524
Pro forma earnings per common share, based on SFAS No. 123	$	.32	$	.38
Pro forma earnings per fully dilutive common share, based on SFAS No. 123	$	.30	$	.36

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Item 3.          Quantitative and Qualitative Disclosures about Market Risk

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

The Company’s Asset/Liability Committee (“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-KSB for the year ended December 31, 2004. The Company has not had any material changes in the overall interest rate risk since December 31, 2004.

Item 4.          Controls and Procedures

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

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PART II - OTHER INFORMATION

Item 1.	Legal Proceedings
	No significant changes in legal proceedings occurred during the quarter.
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
	Not Applicable
Item 3.	Defaults Upon Senior Securities
	Not Applicable
Item 4.	Submission of Matters to a Vote of Security Holders
	Not Applicable
Item 5.	Other Information
	Not Applicable
Item 6.	Exhibits
	31.1	Section 302 Certification – CEO
	31.2	Section 302 Certification – CFO
	32	Section 906 Certfication

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SIGNATURES

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

	Waccamaw Bankshares, Inc.
Date: November 8, 2005	By:	/s/David A. Godwin
		David A. Godwin
		Chief Financial Officer
		(Principle Financial Officer)

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