TIDELANDS BANCSHARES INC - FORM 10-Q

Attached files

file	filename
EX-32 - EX-32 - TIDELANDS BANCSHARES INC	a11-9446_1ex32.htm
EX-31.2 - EX-31.2 - TIDELANDS BANCSHARES INC	a11-9446_1ex31d2.htm
EX-31.1 - EX-31.1 - TIDELANDS BANCSHARES INC	a11-9446_1ex31d1.htm

Table of Contents

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 March 31, 2011

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

For the Transition Period from to

Commission File No. 001-33065

TIDELANDS BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

South Carolina		02-0570232
(State or other jurisdiction		(I.R.S. Employer
of incorporation)		Identification No.)

875 Lowcountry Blvd.

Mount Pleasant, South Carolina 29464

(Address of principal executive offices)

(843) 388-8433

(Registrant’s telephone number, including area code)

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

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). o Yes o 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 “larger 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 o		Smaller reporting company x
(do not check if smaller reporting company)

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 4,277,176 shares of common stock, $.01 par value per share, were issued and outstanding as of May 9, 2011.

Table of Contents

INDEX

		Page No.

PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets - March 31, 2011 (Unaudited) and December 31, 2010	3

	Consolidated Statements of Operations — Three months ended March 31, 2011 and 2010 (Unaudited)	4

	Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Loss-Three months ended March 31, 2011 and 2010 (Unaudited)	5

	Consolidated Statements of Cash Flows - Three months ended March 31, 2011 and 2010 (Unaudited)	6

	Notes to Consolidated Financial Statements	7-28

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	29-54

Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	55

Item 4.	Controls and Procedures	55

PART II - OTHER INFORMATION

Item 6.	Exhibits	55

Table of Contents

TIDELANDS BANCSHARES, INC. AND SUBSIDIARY

Item 1. Financial Statements

Consolidated Balance Sheets

	March 31,			December 31,
	2011			2010
	(Unaudited)			(Audited)
Assets:

Cash and cash equivalents:
Cash and due from banks	$	3,915,120		$	3,657,977
Federal funds sold	16,645,000			24,069,000
Total cash and cash equivalents	20,560,120			27,726,977
Securities available-for-sale	56,096,924			57,955,698
Nonmarketable equity securities	5,267,750			5,267,750
Total securities	61,364,674			63,223,448
Mortgage loans held for sale	758,500			—
Loans receivable	421,156,178			437,688,015
Less allowance for loan losses	12,390,362			11,459,047
Loans, net	408,765,816			426,228,968
Premises, furniture and equipment, net	22,514,494			22,422,388
Accrued interest receivable	1,856,707			1,928,992
Bank owned life insurance	14,549,563			14,414,626
Other real estate owned	14,561,138			11,905,865
Other assets	3,131,441			3,439,207
Total assets	$	548,062,453		$	571,290,471

Liabilities:
Deposits:
Noninterest-bearing transaction accounts	$	16,102,561		$	14,573,484
Interest-bearing transaction accounts	25,477,340			26,474,037
Savings and money market accounts	132,888,509			142,644,095
Time deposits $100,000 and over	165,613,173			176,293,300
Other time deposits	114,481,570			121,008,483
Total deposits	454,563,153			480,993,399

Securities sold under agreements to repurchase	20,000,000			20,000,000
Advances from Federal Home Loan Bank	34,000,000			27,000,000
Junior subordinated debentures	14,434,000			14,434,000
ESOP borrowings	1,575,000			1,625,000
Accrued interest payable	1,961,193			1,510,282
Other liabilities	2,272,924			2,085,131
Total liabilities	528,806,270			547,647,812

Commitments and contingencies

Shareholders’ equity:
Preferred stock, $.01 par value and liquidation value per share of $1,000, 10,000,000 shares authorized, 14,448 issued and outstanding at March 31, 2011 and December 31, 2010	13,792,260			13,736,892
Common stock, $.01 par value, 10,000,000 shares authorized; 4,277,176 shares issued and outstanding at March 31, 2011 and December 31, 2010	42,772			42,772
Common stock-warrant, 571,821 shares outstanding at March 31, 2011 and December 31, 2010	1,112,248			1,112,248
Unearned ESOP shares	(1,850,797		)	(1,907,361		)
Capital surplus	43,353,371			43,404,879
Retained deficit	(36,970,613		)	(32,504,156		)
Accumulated other comprehensive loss	(223,058		)	(242,615		)
Total shareholders’ equity	19,256,183			23,642,659
Total liabilities and shareholders’ equity	$	548,062,453		$	571,290,471

The accompanying notes are an integral part of the consolidated financial statements.

Table of Contents

TIDELANDS BANCSHARES, INC. AND SUBSIDIARY

Consolidated Statements of Operations

For the three months ended March 31, 2011 and 2010

(Unaudited)

	Three Months Ended
	March 31,
	2011			2010
Interest income:
Loans, including fees	$	5,630,902		$	6,323,547
Securities available-for-sale, taxable	510,712			2,487,968
Securities available-for-sale, non-taxable	—			22,190
Federal funds sold	15,919			12,721
Other interest income	100			116
Total interest income	6,157,633			8,846,542
Interest expense:
Time deposits $100,000 and over	705,667			671,584
Other deposits	922,552			2,060,285
Other borrowings	538,334			921,125
Total interest expense	2,166,553			3,652,994
Net interest income	3,991,080			5,193,548
Provision for loan losses	4,202,000			3,600,000
Net interest income (loss) after provision for loan losses	(210,920		)	1,593,548

Noninterest income:
Service charges on deposit accounts	12,835			11,254
Residential mortgage origination income	49,486			65,966
Gain on sale of securities available-for-sale	—			138,842
Other service fees and commissions	156,119			130,679
Increase in cash surrender value of BOLI	134,937			133,385
Gain on extinguishment of debt	—			400,000
Other	6,204			12,911
Total noninterest income	359,581			893,037
Noninterest expense:
Salaries and employee benefits	1,692,214			2,039,659
Net occupancy	392,295			406,710
Furniture and equipment	203,333			211,035
Other real estate owned expense	853,277			200,162
Other operating	1,238,031			1,384,073
Total noninterest expense	4,379,150			4,241,639
Loss before income taxes	(4,230,489		)	(1,755,054		)
Income tax benefit	—			—
Net loss	$	(4,230,489	)	$	(1,755,054	)
Accretion of preferred stock to redemption value	55,368			51,808
Preferred dividends accrued	180,600			180,600
Net loss available to common shareholders	$	(4,466,457	)	$	(1,987,462	)
Loss per common share
Basic loss per share	$	(1.09	)	$	(0.49	)
Diluted loss per share	$	(1.09	)	$	(0.49	)
Weighted average common shares outstanding
Basic	4,086,245			4,090,146
Diluted	4,086,245			4,090,146

The accompanying notes are an integral part of the consolidated financial statements.

Table of Contents

TIDELANDS BANCSHARES, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Loss

For the three months ended March 31, 2011 and 2010

(Unaudited)

	Preferred Stock			Common Stock		Common Stock			Unearned ESOP			Capital			Retained Earnings			Accumulated other Compre- hensive
	Shares	Amount		Warrants		Shares	Amount		Shares			Surplus			(deficit)			income (loss)			Total
Balance, December 31, 2009	14,448	$	13,529,660	$	1,112,248	4,277,176	$	42,772	$	(2,204,073	)	$	43,584,958		$	(16,010,476	)	$	(1,130,345	)	$	38,924,744
Allocation of unearned ESOP shares												(99,876		)							(99,876		)
Stock based compensation expense												63,067									63,067
Preferred stock, dividend paid															(180,600		)				(180,600		)
Accretion of discount on preferred stock		51,808													(51,808		)				—
Repayment of Guarantee of ESOP borrowings									143,627												143,627
Net loss															(1,755,054		)				(1,755,054		)
Other comprehensive income, net of taxes of $194,761																		317,766			317,766
Comprehensive loss																					(1,437,288		)
Balance, March 31, 2010	14,448	$	13,581,468	$	1,112,248	4,277,176	$	42,772	$	(2,060,446	)	$	43,548,149		$	(17,997,938	)	$	(812,579	)	$	37,413,674

Balance, December 31, 2010	14,448	$	13,736,892	$	1,112,248	4,277,176	$	42,772	$	(1,907,361	)	$	43,404,879		$	(32,504,156	)	$	(242,615	)	$	23,642,659
Allocation of unearned ESOP shares												(51,508		)							(51,508		)
Preferred stock, dividend declared															(180,600		)				(180,600		)
Accretion of discount on preferred stock		55,368													(55,368		)				—
Repayment of Guarantee of ESOP borrowings									56,564												56,564
Net loss															(4,230,489		)				(4,230,489		)
Other comprehensive income, net of taxes of $11,986																		19,557			19,557
Comprehensive loss																					(4,210,932		)
Balance, March 31, 2011	14,448	$	13,792,260	$	1,112,248	4,277,176	$	42,772	$	(1,850,797	)	$	43,353,371		$	(36,970,613	)	$	(223,058	)	$	19,256,183

The accompanying notes are an integral part of the consolidated financial statements.

Table of Contents

TIDELANDS BANCSHARES, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

For the three months ended March 31, 2011 and 2010

(Unaudited)

	2011			2010
Cash flows from operating activities:
Net loss	$	(4,230,489	)	$	(1,755,054	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Provision for loan losses	4,202,000			3,600,000
Depreciation and amortization expense	224,595			248,581
Discount accretion and premium amortization	77,921			301,884
Stock based compensation expense	—			63,067
Proceeds from sale of residential mortgages	2,303,224			3,822,136
Disbursements for residential mortgages held-for-sale	(3,061,724		)	(3,451,044		)
Decrease in accrued interest receivable	72,285			92,472
Increase in accrued interest payable	450,911			452,969
Increase in cash surrender value of life insurance	(134,937		)	(133,385		)
Loss (gain) from sale of real estate	38,558			(232		)
Gain from sale of securities available-for-sale	—			(138,842		)
Gain from extinguishment of debt	—			(400,000		)
Decrease in carrying value of other real estate	557,872			65,100
Decrease in other assets	168,995			69,789
Increase (decrease) in other liabilities	187,793			(449,788		)
Net cash provided by operating activities	857,004			2,387,653
Cash flows from investing activities:
Purchases of securities available-for-sale	(146,931		)	(8,245,143		)
Proceeds from sales of securities available-for-sale	—			9,029,229
Proceeds from calls and maturities of securities available-for-sale	1,959,327			6,511,443
Net decrease in loans receivable	9,157,277			149,914
Purchase of premises, furniture and equipment, net	(306,701		)	(550,261		)
Proceeds from sale of other real estate owned	788,357			192,737
Net cash provided by investing activities	11,451,329			7,087,919
Cash flows from financing activities:
Net decrease in demand deposits, interest-bearing transaction accounts and savings accounts	(9,223,206		)	(4,641,946		)
Net decrease in certificates of deposit and other time deposits	(17,207,041		)	(4,755,829		)
Repayments of securities sold under agreements to repurchase	—			(25,000,000		)
Proceeds from FHLB advances	7,000,000			20,000,000
Repayment of ESOP borrowings	(50,000		)	(75,000		)
Decrease in unearned ESOP shares	5,057			43,751
Preferred stock - dividends paid	—			(180,600		)
Net cash used by financing activities	(19,475,190		)	(14,609,624		)
Net decrease in cash and cash equivalents	(7,166,857		)	(5,134,052		)
Cash and cash equivalents, beginning of period	27,726,977			14,993,227
Cash and cash equivalents, end of period	$	20,560,120		$	9,859,175

Supplemental cash flow information:
Income taxes paid	$	—		$	—
Interest paid on deposits and borrowed funds	$	1,715,642		$	3,200,025
Transfer of loans to foreclosed assets	$	4,103,875		$	2,355,289

The accompanying notes are an integral part of the consolidated financial statements.

Table of Contents

NOTE 1 - BASIS OF PRESENTATION

The accompanying financial statements have been prepared in accordance with the requirements for interim financial statements and, accordingly, they are condensed and omit disclosures, which would substantially duplicate those contained in the most recent annual report on Form 10-K. The financial statements, as of March 31, 2011 and for the interim periods ended March 31, 2011 and 2010, are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation. Operating results for the three months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. The financial information as of December 31, 2010 has been derived from the audited financial statements as of that date. For further information, refer to the financial statements and the notes included in the Company’s 2010 Annual Report on Form 10-K.

In preparing these financial statements, subsequent events were evaluated through the time the financial statements were issued. Financial statements are considered issued when they are widely distributed to all shareholders and other financial statement users, or filed with the Securities and Exchange Commission. In conjunction with applicable accounting standards, all material subsequent events have been either recognized in the financial statements or disclosed in the notes to the financial statements.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization - Tidelands Bancshares, Inc. (the “Company”) was incorporated on January 31, 2002 to serve as a bank holding company for its subsidiary, Tidelands Bank (the “Bank”). The Company operated as a development stage company from January 31, 2002 to October 5, 2003. Tidelands Bank commenced business on October 6, 2003. The principal business activity of the Bank is to provide banking services to domestic markets, principally in Charleston, Dorchester, Berkeley, Horry, Georgetown, Beaufort and Jasper counties in South Carolina. The Bank is a state-chartered commercial bank, and its deposits are insured by the Federal Deposit Insurance Corporation. The consolidated financial statements include the accounts of the parent company and its wholly-owned subsidiary after elimination of all significant intercompany balances and transactions. The Company formed Tidelands Statutory Trust I and Tidelands Statutory Trust II on February 22, 2006 and June 20, 2008, respectively, for the purpose of issuing trust preferred securities. In accordance with current accounting guidance, the Trusts are not consolidated in these financial statements. As further discussed in Note 12, on December 19, 2008, as part of the Capital Purchase Program established by the U.S. Department of the Treasury under the Emergency Economic Stabilization Act of 2008, the Company issued 14,448 preferred shares and a common stock warrant to purchase 571,821 shares in return for $14.4 million in cash, to the U.S. Department of Treasury.

Management’s Estimates - The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

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

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

Concentrations of Credit Risk - Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of loans receivable, investment securities, federal funds sold and amounts due from banks.

The Company makes loans to individuals and small businesses for various personal and commercial purposes primarily in the Charleston metropolitan area (which includes Charleston, Dorchester, and Berkeley counties), Horry, Georgetown, Jasper and Beaufort counties, and additional markets along the South Carolina coast. The Company’s loan portfolio is not concentrated in loans to any single borrower or a relatively small number of borrowers. Additionally, management is not

Table of Contents

aware of any concentrations of loans to classes of borrowers or industries that would be similarly affected by economic conditions.

In addition to monitoring potential concentrations of loans to particular borrowers or groups of borrowers, industries and geographic regions, management monitors exposure to credit risk from concentrations of lending products and practices such as loans that subject borrowers to substantial payment increases (e.g., principal deferral periods, loans with initial interest-only periods, etc.), and loans with high loan-to-value ratios. Additionally, there are industry practices that could subject the Company to increased credit risk should economic conditions change over the course of a loan’s life. For example, the Company makes variable rate loans and fixed rate principal-amortizing loans with maturities prior to the loan being fully paid (i.e., balloon payment loans). These loans are underwritten and monitored to manage the associated risks. Therefore, management believes that these particular practices do not subject the Company to unusual credit risk.

The Company’s investment portfolio consists principally of obligations of the United States and its agencies or its corporations. In the opinion of management, there is no concentration of credit risk in its investment portfolio. The Company places its deposits and correspondent accounts with and sells its federal funds to high quality institutions. Management believes credit risk associated with correspondent accounts is not significant.

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

Nonmarketable Equity Securities - Nonmarketable equity securities include the cost of the Company’s investment in the stock of the Federal Home Loan Bank and stock in community bank holding companies. The Federal Home Loan Bank stock has no quoted market value and no ready market exists. Investment in the Federal Home Loan Bank is a condition of borrowing from the Federal Home Loan Bank, and the stock is pledged to collateralize such borrowings. Dividends received on this stock are included as interest income on securities available-for-sale.

Loans Receivable - Loans are stated at their unpaid principal balance. Interest income on loans is computed based upon the unpaid principal balance. Interest income is recorded in the period earned.

The accrual of interest income is generally discontinued when a loan becomes contractually 90 days past due as to principal or interest. Management may elect to continue the accrual of interest when the estimated net realizable value of collateral exceeds the principal balance and accrued interest. A payment of interest on a loan that is classified as nonaccrual is applied against the principal balance. Nonaccrual loans may be restored to performing status when all principal and interest has been kept current for six months and full repayment of the remaining contractual principal and interest is expected.

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

Loans are defined as impaired when it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. All loans are subject to these criteria except for smaller balance homogeneous loans that are collectively evaluated for impairment and loans measured at fair value or at the lower of cost or fair value. The Company considers its consumer installment portfolio, credit card loans, and home equity lines as such exceptions.

Impairment of a loan is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. When management determines that a loan is impaired, the difference between the Company’s investment in the related loan and the present value of the expected future cash flows, or the fair value of the collateral, is generally charged off with a corresponding entry to the allowance for loan losses. The accrual of interest is discontinued on an impaired loan when management determines the borrower may be unable to meet payments as they become due.

Allowance for Loan Losses - An allowance for loan losses is maintained at a level deemed appropriate by management to provide adequately for known and inherent losses in the loan portfolio. The allowance for loan losses represents an amount which the Company believes will be adequate to absorb probable losses on existing loans that may become uncollectible in the future. The Company’s judgment as to the adequacy of the allowance for loan losses is based on a number of assumptions about future events, which the Company believes to be reasonable, but which may or may not prove to be accurate. The Company’s determination of the allowance for loan losses is based on evaluations of the collectability of

Table of Contents

loans, including consideration of factors such as the balance of impaired loans, the quality, mix, and size of the Company’s overall loan portfolio, economic conditions that may affect the borrower’s ability to repay, the amount and quality of collateral securing the loans, the Company’s historical loan loss experience, and a review of specific problem loans. The Company also considers subjective issues such as changes in the lending policies and procedures, changes in the local/national economy, changes in volume or type of credits, changes in volume/severity of problem loans, quality of loan review and board of director oversight, concentrations of credit, and peer group comparisons. Loans which are deemed to be uncollectible are charged off and deducted from the allowance. The provision for loan losses and recoveries of loans previously charged off are added to the allowance. Our analysis in accordance with generally accepted accounting principles (GAAP) indicates that the level of the allowance for loan losses is appropriate to cover estimated credit losses on individually evaluated loans as well as estimated credit losses inherent in the remainder of the portfolio.

Residential Mortgage Loans Held-for-Sale - The Company’s residential mortgage lending activities for sale in the secondary market are comprised of accepting residential mortgage loan applications, qualifying borrowers to standards established by investors, funding residential mortgage loans and selling mortgage loans to investors under pre-existing commitments. Funded residential mortgages held temporarily for sale to investors are recorded at the lower of cost or market value. Application and origination fees collected by the Company are recognized as income upon sale to the investor.

The Company issues rate lock commitments to borrowers based on prices quoted by secondary market investors. When rates are locked with borrowers, a sales commitment is immediately entered (on a best efforts basis) at a specified price with a secondary market investor. Accordingly, any potential liabilities associated with rate lock commitments are offset by sales commitments to investors.

Premises, Furniture and Equipment - Premises, furniture and equipment are stated at cost, less accumulated depreciation. The provision for depreciation is computed by the straight-line method, based on the estimated useful lives for furniture and equipment of five to 10 years and buildings of 40 years. Leasehold improvements are amortized over the life of the leases, which range up to 40 years. The cost of assets sold or otherwise disposed of and the related allowance for depreciation are eliminated from the accounts and the resulting gains or losses are reflected in the income statement when incurred. Maintenance and repairs are charged to current expense. The costs of major renewals and improvements are capitalized.

Other Real Estate Owned - Other real estate is acquired through, or in lieu of, foreclosure and is held for sale. It is initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations are included within noninterest expense as part of other operating expense.

Securities Sold Under Agreements to Repurchase - The Bank enters into sales of securities under agreements to repurchase. Fixed-coupon repurchase agreements are treated as financing, with the obligation to repurchase securities sold being reflected as a liability and the securities underlying the agreements remaining as assets.

Income Taxes - Income taxes are the sum of amounts currently payable to taxing authorities and the net changes in income taxes payable or refundable in future years. Income taxes deferred to future years are determined utilizing a liability approach. This method gives consideration to the future tax consequences associated with differences between financial accounting and tax bases of certain assets and liabilities which are principally the allowance for loan losses, depreciable premises and equipment, and the net operating loss carry forward. Deferred tax assets are reduced by a valuation allowance, if based on the weight of evidence available, it is more likely that not that some portion or all of a deferred tax asset will not be realized. The Company believes that its income tax filing positions taken or expected to be taken in its tax returns will more likely than not be sustained upon audit by the taxing authorities and does not anticipate any adjustments that will result in a material adverse impact on the Company’s financial condition, results of operations, or cash flow. Therefore, no reserves for uncertain income tax positions have been recorded.

Retirement Plan - The Company has a 401(k) profit sharing plan, which provides retirement benefits to substantially all officers and employees who meet certain age and service requirements. The plan includes a “salary reduction” feature pursuant to Section 401(k) of the Internal Revenue Code. Additionally, the Company maintains supplemental retirement plans for certain highly compensated employees designed to offset the impact of regulatory limits on benefits under qualified pension plans. There are supplemental retirement plans in place for certain current employees. Effective June 30, 2010, the executive officers agreed to cease further benefit accrual under the contracts and will only be entitled to receive benefits accrued through June 30, 2010.

Table of Contents

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

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

Employee Stock Ownership Plan - The Company established the Tidelands Bancshares, Inc. Employee Stock Ownership Plan (“ESOP”) for the exclusive benefit of all eligible employees and their beneficiaries subject to authority to amend, from time to time, or terminate, the ESOP. The ESOP is primarily designed to invest in common stock of the Company and is permitted to purchase Company common stock with contributions to the ESOP made by the Company. Also, the ESOP is permitted to borrow money and use the loan proceeds to purchase Company common stock. The money and Company common stock in the ESOP is intended to grow tax free until retirement, death, permanent disability or other severance of employment with the Company. When an employee retires, he/she will receive the value of the accounts that have been set up for the contributions to the ESOP. An employee may also be eligible for benefits in the event of death, permanent disability or other severance from employment with the Company. The employee must pay taxes when the money is paid following one of these events or any other distributable event described in the ESOP unless it is transferred to another tax-qualified retirement plan or an IRA.

Earnings (loss) per share - Basic earnings (loss) per share represent income (loss) available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Dilutive earnings (loss) per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued by the Company relate solely to outstanding stock options and warrants and are determined using the treasury stock method. Weighted average shares outstanding are reduced for shares encumbered by the ESOP borrowings.

Comprehensive Income (loss) - Accounting principles generally require that recognized income, expenses, gains, and losses be included in net income. 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 net income, are components of comprehensive income (loss).

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

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

Off-Balance Sheet Financial Instruments - In the ordinary course of business, the Company enters into off-balance sheet financial instruments consisting of commitments to extend credit and letters of credit. These financial instruments are recorded in the financial statements when they become payable by the customer.

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

In July 2010, the Receivables topic of the Accounting Standards Codification (“ASC”) was amended by Accounting Standards Update (“ASU”) 2010-20 to require expanded disclosures related to a company’s allowance for credit losses and

Table of Contents

the credit quality of its financing receivables. The amendments require the allowance disclosures to be provided on a disaggregated basis. The Company is required to include these disclosures in its interim and annual financial statements. See Note 7.

Disclosures about Troubled Debt Restructurings (“TDRs”) required by ASU 2010-20 were deferred by the Financial Accounting Standards Board (“FASB”) in ASU 2011-01 issued in January 2011. In April 2011 FASB issued ASU 2011-02 to assist creditors with their determination of when a restructuring is a TDR. The determination is based on whether the restructuring constitutes a concession and whether the debtor is experiencing financial difficulties as both events must be present.

Disclosures related to TDRs under ASU 2010-20 will be effective for reporting periods beginning after June 15, 2011.

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

Risks and Uncertainties - In the normal course of its business, the Company encounters two significant types of risks: economic and regulatory. There are three main components of economic risk: interest rate risk, credit risk and market risk. The Company is subject to interest rate risk to the degree that its interest-bearing liabilities mature or reprice at different speeds, or on different basis, than its interest-earning assets. Credit risk is the risk of default on the loan portfolio that results from borrower’s inability or unwillingness to make contractually required payments. Market risk reflects changes in the value of collateral underlying loans receivable and the valuation of real estate held by the Company.

The Company is subject to the regulations of various governmental agencies. These regulations can and do change significantly from period to period. Periodic examinations by the regulatory agencies may subject the Company to further changes with respect to asset valuations, amounts of required loss allowances and operating restrictions from the regulators’ judgments based on information available to them at the time of their examination.

Reclassifications - Certain captions and amounts in the 2010 financial statements were reclassified to conform to the 2011 presentation. These reclassifications had no effect on shareholders’ equity or results of operations as previously presented.

NOTE 3 — COMPREHENSIVE INCOME

The change in the components of other comprehensive income (loss) and related tax effects are as follows for the three months ended March 31, 2011 and 2010:

	2011			2010
Change in unrealized gains on securities available-for-sale	$	31,543		$	651,369
Reclassification adjustment for gains realized in net income during the period	—			(138,842		)
Net change in unrealized gains on securities	31,543			512,527
Tax effect	(11,986		)	(194,761		)
Net-of-tax amount	$	19,557		$	317,766

NOTE 4 - FAIR VALUE MEASUREMENTS

The current accounting literature requires the disclosure of fair value information for financial instruments, whether or not they are recognized in the consolidated balance sheets, when it is practical to estimate the fair value. The guidance defines a financial instrument as cash, evidence of an ownership interest in an entity or contractual obligations which require the exchange of cash or other financial instruments. Certain items are specifically excluded from the disclosure requirements, including the Company’s common stock, premises and equipment, accrued interest receivable and payable, and other assets and liabilities.

The fair value of a financial instrument is the amount at which the asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instruments. Because no market value exists for a significant portion of the financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors.

Table of Contents

The Company has used management’s best estimate of fair value based on the above assumptions. Thus, the fair values presented may not be the amounts, which could be realized, in an immediate sale or settlement of the instrument. In addition, any income taxes or other expenses, which would be incurred in an actual sale or settlement, are not taken into consideration in the fair values presented.

The following methods and assumptions were used to estimate the fair value of significant financial instruments:

Cash and Due from Banks - The carrying amount for cash and due from banks is a reasonable estimate of fair value.

Federal Funds Sold - Federal funds sold are for a term of one day, and the carrying amount approximates the fair value.

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 the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions.

With respect to securities available-for-sale, Level 1 includes those securities traded on an active exchange, such as the New York Stock Exchange, U.S. 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.

Nonmarketable Equity Securities - The carrying amount for nonmarketable equity securities approximates the fair value since no readily available market exists for these securities.

Mortgage Loans Held for Sale - The carrying value for mortgage loans held for sale is a reasonable estimate for fair value considering the short time these loans are carried on the books. Management determined that only minor fluctuations occurred in fixed rate mortgage loans; therefore the carrying amount approximates fair value.

Loans Receivable - For certain categories of loans, such as variable rate loans which are repriced frequently and have no significant change in credit risk, fair values are based on the carrying amounts. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. 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. 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 exceeds the recorded investments in such loans.

Deposits - The fair value of demand deposits, savings, and money market accounts is the amount payable on demand at the reporting date. The fair values of certificates of deposit are estimated using a discounted cash flow calculation that applies current interest rates to a schedule of aggregated expected maturities.

Securities Sold Under Agreements to Repurchase - These repurchase agreements have a fixed rate. Due to the minor change in interest rates, management estimated the fair value using a discounted cash flow calculation that applies the Company’s current borrowing rate for the securities sold under agreements to repurchase.

Advances from Federal Home Loan Bank - The fair values of fixed rate borrowings are estimated using a discounted cash flow calculation that applies the Company’s current borrowing rate from the Federal Home Loan Bank. The carrying amounts of variable rate borrowings are reasonable estimates of fair value because they can be repriced frequently.

Junior Subordinated Debentures - The fair values of fixed rate junior subordinated debentures are estimated using a discounted cash flow calculation that applies the Company’s current borrowing rate. The carrying amounts of variable rate borrowings are reasonable estimates of fair value because they can be repriced frequently.

Employee Stock Ownership Plan Borrowings - The carrying value of the ESOP borrowing is a reasonable estimate of fair value because they can be repriced frequently.

Table of Contents

Off-Balance Sheet Financial Instruments - Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.

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

	March 31,				December 31,
	2011				2010
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value
Financial Assets:
Cash and due from banks	$	3,915,120	$	3,915,120	$	3,657,977	$	3,657,977
Federal funds sold	16,645,000		16,645,000		24,069,000		24,069,000
Securities available-for-sale	56,096,924		56,096,924		57,955,698		57,955,698
Nonmarketable equity securities	5,267,750		5,267,750		5,267,750		5,267,750
Mortgage loans held for sale	758,500		758,500		—		—
Loans receivable	421,156,178		420,453,178		437,688,015		439,742,015

Financial Liabilities:
Demand deposit, interest-bearing transaction, and savings accounts	$	174,468,410	$	178,442,410	$	183,691,616	$	183,691,616
Certificates of deposit and other time deposits	280,094,743		280,785,743		297,301,783		298,565,783
Securities sold under agreements to repurchase	20,000,000		21,192,000		20,000,000		21,343,000
Advances from Federal Home Loan Bank	34,000,000		33,662,000		27,000,000		26,700,000
Junior subordinated debentures	14,434,000		15,202,336		14,434,000		15,291,018
ESOP borrowings	1,575,000		1,575,000		1,625,000		1,625,000

	Notional Amount		Estimated Fair Value		Notional Amount		Estimated Fair Value
Off-Balance Sheet Financial Instruments:
Commitments to extend credit	$	14,695,664	$	—	$	18,564,489	$	—
Letters of credit	587,012		—		608,604		—

Assets and liabilities that are carried at fair value are classified in one of the following three categories based on a hierarchy for ranking the quality and reliability of the information used to determine fair value:

Level 1 —	Quoted prices in active markets for identical assets or liabilities.

Level 2 —	Observable market based inputs or unobservable inputs that are corroborated by market data.

Level 3 —	Unobservable inputs that are not corroborated by market data.

In determining appropriate levels, the Company performs a detailed analysis of the assets and liabilities that are subject to fair value disclosures. At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs are classified as Level 3.

Assets measured at fair value on a recurring basis are as follows as of March 31, 2011 and December 31, 2010:

	Quoted market price in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
March 31, 2011
Government sponsored enterprises	$	—	$	2,033,434	$	—
Mortgage-backed securities	—		54,063,490		—
Available-for-sale investment securities	—		56,096,924		—
Mortgage loans held for sale	—		758,500		—
Total	$	—	$	56,855,424	$	—
December 31, 2010
Government sponsored enterprises	$	—	$	2,052,726	$	—
Mortgage-backed securities	—		55,902,972		—
Available-for-sale investment securities	—		57,955,698		—
Mortgage loans held for sale	—		—		—
Total	$	—	$	57,955,698	$	—

Table of Contents

Assets measured at fair value on a nonrecurring basis are as follows as of March 31, 2011 and December 31, 2010:

	Quoted market price in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
March 31, 2011
Impaired loans	$	—	$	27,385,452	$	—
Other real estate owned	—		14,561,138		—
Total	$	—	$	41,946,590	$	—
December 31, 2010
Impaired loans	$	—	$	33,494,811	$	—
Other real estate owned	—		11,905,865		—
Total	$	—	$	45,400,676	$	—

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

NOTE 5 - CASH AND DUE FROM BANKS

The Company maintains cash balances with its correspondent banks to meet reserve requirements determined by the Federal Reserve. At March 31, 2011, the Bank had $59,000 on deposit with the Federal Reserve Bank to meet this requirement. At December 31, 2010, the reserve requirement was met by the cash balance in the vault. At March 31, 2011, the Bank had $1.0 million in actual currency and cash on hand, $1.2 million in due from non-interest bearing balances and $1.7 million in due from interest bearing balances. At March 31, 2011, the Company had $1.3 million in interest bearing balances which are pledged as collateral against the ESOP borrowing.

NOTE 6 - INVESTMENT SECURITIES

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

	Amortized		Gross Unrealized				Estimated
	Cost		Gains		Losses		Fair Value
March 31, 2011
Government-sponsored enterprises	$	2,001,052	$	32,382	$	—	$	2,033,434
Mortgage-backed securities	54,473,607		35,908		446,025		54,063,490
Total	$	56,474,659	$	68,290	$	446,025	$	56,096,924

December 31, 2010
Government-sponsored enterprises	$	2,001,429	$	51,297	$	—	$	2,052,726
Mortgage-backed securities	56,363,546		36,494		497,068		55,902,972
Total	$	58,364,975	$	87,791	$	497,068	$	57,955,698

The amortized cost and estimated fair values of investment securities at March 31, 2011, by contractual maturity dates, are shown in the following chart. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalty. Mortgage-backed securities are presented as a separate line item since pay downs are expected before contractual maturity dates.

	Amortized Cost		Fair Value
Due within one year	$	—	$	—
Due after one year through five years	—		—
Due after five years through ten years	2,001,052		2,033,434
Due after ten years	—		—
Subtotal	2,001,052		2,033,434
Mortgage-backed securities	54,473,607		54,063,490
Total Securities	$	56,474,659	$	56,096,924

Table of Contents

At March 31, 2011 and December 31, 2010, investment securities with book values of $28,699,110 and $28,595,999 and market values of $28,572,653 and $28,365,631, respectively, were pledged as collateral for securities sold under agreements to repurchase and a fed funds line. There were no sales of investment securities for the three months ended March 31, 2011. Gross proceeds from the sale of investment securities totaled $9,029,229 for the three months ended March 31, 2010. The gross realized gain on the sale of investment securities totaled $138,842 with no gross realized losses resulting in a net realized gain of $138,842 for the three months ending March 31, 2010. The cost of investments sold is determined using the specific identification method.

The following table shows gross unrealized losses and fair value, for securities available-for-sale, and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2011 and December 31, 2010.

	Less than Twelve months				Twelve months or more				Total
	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
March 31, 2011
Government-sponsored enterprises	$	—	$	—	$	—	$	—	$	—	$	—
Mortgage-backed securities	50,668,109		446,025		—		—		50,668,109		446,025
	$	50,668,109	$	446,025	$	—	$	—	$	50,668,109	$	446,025

	Less than Twelve months				Twelve months or more				Total
	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
December 31, 2010
Government-sponsored enterprises	$	—	$	—	$	—	$	—	$	—	$	—
Mortgage-backed securities	30,982,279		497,068		—		—		30,982,279		497,068
	$	30,982,279	$	497,068	$	—	$	—	$	30,982,279	$	497,068

Securities classified as available-for-sale are recorded at fair market value. Of the securities in an unrealized loss position, there were no securities in a continuous loss position for 12 months or more at March 31, 2011 and December 31, 2010. The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell these securities before recovery of their amortized cost. The Company believes, based on industry analyst reports and credit ratings, that the deterioration in value is attributable to changes in market interest rates and not in the credit quality of the issuer and therefore, these losses are not considered other-than-temporary.

Nonmarketable equity securities include the cost of the Company’s investment in the stock of the Federal Home Loan Bank and $28,750 of stock in community bank holding companies as of March 31, 2011 and December 31, 2010. The Federal Home Loan Bank stock has no quoted market value and no ready market exists. Investment in the Federal Home Loan Bank is a condition of borrowing from the Federal Home Loan Bank, and the stock is pledged to collateralize such borrowings. At March 31, 2011 and December 31, 2010, the Company’s investment in Federal Home Loan Bank stock was $5,239,000.

The Company reviews its investment securities portfolio at least quarterly and more frequently when economic conditions warrant, assessing whether there is any indication of other-than-temporary impairment (“OTTI”). Factors considered in the review include estimated future cash flows, length of time and extent to which market value has been less than cost, the financial condition and near term prospects of the issuer, and our intent and ability to retain the security to allow for an anticipated recovery in market value. If the review determines that there is OTTI, then an impairment loss is recognized in earnings equal to the difference between the investment’s cost and its fair value at the balance sheet date of the reporting period for which the assessment is made, or a portion may be recognized in other comprehensive income. The fair value of investments on which OTTI is recognized then becomes the new cost basis of the investment.

Table of Contents

NOTE 7 - LOANS RECEIVABLE

Major classifications of loans receivable are summarized as follows for the periods ended March 31, 2011 and December 31, 2010:

	2011			2010
Real estate - construction	$	90,581,217		$	96,000,731
Real estate - mortgage	305,658,531			315,181,037
Commercial and industrial	22,273,183			23,254,691
Consumer and other	3,145,808			3,775,226
Total loans receivable, gross	421,658,739			438,211,685
Deferred origination fees, net	(502,561		)	(523,670		)
Total loans receivable, net of deferred origination fees	421,156,178			437,688,015
Less allowance for loan losses	12,390,362			11,459,047
Total loans receivable, net of allowance for loan loss	$	408,765,816		$	426,228,968

The composition of gross loans by rate type is as follows for the periods ended March 31, 2011 and December 31, 2010:

	2011		2010
Variable rate loans	$	216,170,692	$	234,664,835
Fixed rate loans	204,985,486		203,023,180
Total gross loans	$	421,156,178	$	437,688,015

The following is an analysis of our loan portfolio by credit quality indicators at March 31, 2011 and December 31, 2010:

	Commercial				Commercial Real Estate				Commercial Real Estate Construction
	2011		2010		2011		2010		2011		2010
Grade:
Pass	$	19,814,904	$	21,639,164	$	130,251,873	$	132,661,084	$	25,719,062	$	24,571,638
Special Mention	1,755,595		857,928		9,703,346		8,911,465		1,607,197		1,609,322
Substandard	702,684		757,599		23,646,857		25,046,004		6,210,670		6,648,612
Doubtful	—		—		—		—		—		—
Loss	—		—		—		—		—		—
Total	$	22,273,183	$	23,254,691	$	163,602,076	$	166,618,553	$	33,536,929	$	32,829,572

	Residential Real Estate				Real Estate Residential Construction				Consumer
	2011		2010		2011		2010		2011		2010
Grade:
Pass	$	109,879,089	$	118,213,574	$	40,826,383	$	43,456,079	$	2,782,505	$	3,470,084
Special Mention	11,959,554		11,590,966		5,645,513		4,436,972		193,417		177,537
Substandard	20,217,812		18,757,944		10,572,392		15,278,108		169,886		127,605
Doubtful	—		—		—		—		—		—
Loss	—		—		—		—		—		—
Total	$	142,056,455	$	148,562,484	$	57,044,288	$	63,171,159	$	3,145,808	$	3,775,226

Table of Contents

Loans are categorized into risk categories based on relevant information about the ability of borrowers to service their debt, such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The following definitions are utilized for risk ratings, which are consistent with the definitions used in supervisory guidance:

Special Mention - Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard - Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful - Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.

The following is an aging analysis of our loan portfolio at March 31, 2011 and December 31, 2010:

	Commercial		Commercial Real Estate		Commercial Real Estate Construction		Residential Real Estate		Residential Real Estate Construction		Consumer		Total
March 31, 2011
Accruing Loans Paid Current	$	21,224,381	$	153,282,415	$	29,264,394	$	131,158,545	$	50,569,437	$	2,907,009	$	388,406,181
Accruing Loans Past Due:
30-59 Days	747,458		788,584		—		1,625,328		611,627		163,772		3,936,769
60-89 Days	30,000		284,427		—		480,947		—		2,527		797,901
>90 Days	—		—		—		—		—		—		—
Total Loans Past Due	777,458		1,073,011		—		2,106,275		611,627		166,299		4,734,670
Loans Receivable on Nonaccrual Status	$	271,344	$	9,246,650	$	4,272,535	$	8,791,635	$	5,863,224	$	72,500	$	28,517,888
Recorded Investment >90 Days and Accruing	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Total Loans Receivable	$	22,273,183	$	163,602,076	$	33,536,929	$	142,056,455	$	57,044,288	$	3,145,808	$	421,658,739

December 31, 2010
Accruing Loans Paid Current	$	22,717,016	$	154,616,125	$	26,629,782	$	137,402,328	$	49,918,038	$	3,695,622	$	394,978,911
Accruing Loans Past Due:
30-59 Days	147,363		1,340,381		—		2,380,945		3,316,760		7,104		7,192,553
60-89 Days	—		—		—		483,410		—		—		483,410
>90 Days	—		—		—		—		—		—		—
Total Loans Past Due	147,363		1,340,381		—		2,864,355		3,316,760		7,104		7,675,963
Loans Receivable on Nonaccrual Status	$	390,312	$	10,662,047	$	6,199,790	$	8,295,801	$	9,936,361	$	72,500	$	35,556,811
Recorded Investment >90 Days and Accruing	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Total Loans Receivable	$	23,254,691	$	166,618,553	$	32,829,572	$	148,562,484	$	63,171,159	$	3,775,226	$	438,211,685

Table of Contents

The following is a summary of information pertaining to impaired and nonaccrual loans at March 31, 2011 and December 31, 2010:

	2011		2010
Impaired loans without a valuation allowance	$	26,597,653	$	28,709,423
Impaired loans with a valuation allowance	1,920,235		6,847,388
Total impaired loans	$	28,517,888	$	35,556,811

Valuation allowance related to impaired loans	$	1,132,436	$	2,062,000
Average of impaired loans during the period	$	35,149,725	$	42,433,130
Total nonaccrual loans	$	28,517,888	$	35,556,811
Total loans past due 90 days and still accruing interest	$	—	$	—

The following is an analysis of our impaired loan portfolio detailing the related allowance recorded at March 31, 2011 and December 31, 2010:

	Commercial		Commercial Real Estate		Commercial Real Estate Construction		Residential Real Estate		Residential Real Estate Construction		Consumer		Total
March 31, 2011
With no related allowance recorded:
Recorded Investment	$	15,099	$	8,746,650	$	4,272,535	$	7,753,156	$	5,737,713	$	72,500	$	26,597,653
Unpaid Principal Balance	15,099		9,980,631		4,504,262		10,047,823		8,169,983		72,500		32,790,298
Related Allowance	—		—		—		—		—		—		—
Average Recorded Investment	15,099		10,376,426		4,504,262		10,051,217		8,207,428		72,500		33,226,932
Interest Income Recognized	—		—		—		—		—		—		—
With an allowance recorded:
Recorded Investment	$	256,245	$	500,000	$	—	$	1,038,479	$	125,511	$	—	$	1,920,235
Unpaid Principal Balance	256,245		500,000		—		1,038,479		125,511		—		1,920,235
Related Allowance	155,874		500,000		—		410,901		65,661		—		1,132,436
Average Recorded Investment	258,309		500,000		—		1,038,804		125,680		—		1,922,793
Interest Income Recognized	—		—		—		—		—		—		—
Total:
Recorded Investment	$	271,344	$	9,246,650	$	4,272,535	$	8,791,635	$	5,863,224	$	72,500	$	28,517,888
Unpaid Principal Balance	271,344		10,480,631		4,504,262		11,086,302		8,295,494		72,500		34,710,533
Related Allowance	155,874		500,000		—		410,901		65,661		—		1,132,436
Average Recorded Investment	273,408		10,876,426		4,504,262		11,090,021		8,333,108		72,500		35,149,725
Interest Income Recognized	—		—		—		—		—		—		—

December 31, 2010
With no related allowance recorded:
Recorded Investment	$	146,596	$	8,686,796	$	4,691,306	$	6,773,924	$	8,338,301	$	72,500	$	28,709,423
Unpaid Principal Balance	583,700		9,100,786		6,202,434		9,760,176		9,767,450		82,588		35,497,134
Related Allowance	—		—		—		—		—		—		—
Average Recorded Investment	224,686		9,698,268		4,961,909		8,692,352		11,532,629		72,500		35,182,344
Interest Income Recognized	—		—		—		—		—		—		—
With an allowance recorded:
Recorded Investment	$	243,716	$	1,975,251	$	1,508,484	$	1,521,877	$	1,598,060	$	—	$	6,847,388
Unpaid Principal Balance	268,577		2,358,754		1,524,312		1,571,772		1,598,060		—		7,321,475
Related Allowance	154,616		710,000		9,084		483,567		704,733		—		2,062,000
Average Recorded Investment	243,716		1,976,494		1,508,484		1,905,456		1,616,636		—		7,250,786
Interest Income Recognized	—		—		—		—		—		—		—
Total:
Recorded Investment	$	390,312	$	10,662,047	$	6,199,790	$	8,295,801	$	9,936,361	$	72,500	$	35,556,811
Unpaid Principal Balance	852,277		11,459,540		7,726,746		11,331,948		11,365,510		82,588		42,818,609
Related Allowance	154,616		710,000		9,084		483,567		704,733		—		2,062,000
Average Recorded Investment	468,402		11,674,762		6,470,393		10,597,808		13,149,265		72,500		42,433,130
Interest Income Recognized	—		—		—		—		—		—		—

Table of Contents

Transactions in the allowance for loan losses are summarized below for the periods ended March 31, 2011 and 2010:

	2011			2010
Balance, beginning of period	$	11,459,047		$	10,048,015
Provision charged to operations	4,202,000			3,600,000
Gross loan charge offs	(3,310,661		)	(2,734,201		)
Gross loan recoveries	39,976			8,124
Balance, end of period	$	12,390,362		$	10,921,938
Gross loans outstanding, end of period	$	421,156,178		$	480,309,537

The following is a summary of information pertaining to our allowance for loan losses at March 31, 2011 and December 31, 2010:

	Commercial			Commercial Real Estate			Commercial Real Estate Construction			Residential Real Estate			Residential Real Estate Construction			Consumer			Unallocated			Total
March 31, 2011
Allowance for loan losses:
Beginning Balance	$	443,454		$	2,678,191		$	343,243		$	4,373,193		$	2,798,043		$	63,709		$	759,214		$	11,459,047
Charge-offs	(165,498		)	(891,715		)	(35,797		)	(1,489,569		)	(716,590		)	(11,492		)	—			(3,310,661		)
Recoveries	8,163			—			—			26,916			2,563			2,334			—			39,976
Provision	396,804			1,511,205			169,201			2,410,472			35,799			79,274			(400,755		)	4,202,000
Ending Balance	$	682,923		$	3,297,681		$	476,647		$	5,321,012		$	2,119,815		$	133,825		$	358,459		$	12,390,362
Ending Balance:
Individually evaluated	$	155,874		$	500,000		$	—		$	410,901		$	65,661		$	—		$	—		$	1,132,436
Collectively evaluated	$	527,049		$	2,797,681		$	476,647		$	4,910,111		$	2,054,154		$	133,825		$	358,459		$	11,257,926
Loans Receivable:
Ending Balance	$	22,273,183		$	163,602,076		$	33,536,929		$	142,056,455		$	57,044,288		$	3,145,808					$	421,658,739
Individually evaluated	$	271,344		$	9,246,650		$	4,272,535		$	8,791,635		$	5,863,224		$	72,500					$	28,517,888
Collectively evaluated	$	22,001,839		$	154,355,426		$	29,264,394		$	133,264,820		$	51,181,064		$	3,073,308					$	393,140,851

December 31, 2010
Allowance for loan losses:
Beginning Balance	$	380,812		$	2,015,077		$	641,226		$	3,796,115		$	3,014,068		$	170,576		$	30,141		$	10,048,015
Charge-offs	(498,225		)	(1,125,696		)	(468,715		)	(7,524,906		)	(5,230,153		)	(311,353		)	—			(15,159,048		)
Recoveries	35,547			—			—			184,296			85,837			4,400			—			310,080
Provision	525,320			1,788,810			170,732			7,917,688			4,928,291			200,086			729,073			16,260,000
Ending Balance	$	443,454		$	2,678,191		$	343,243		$	4,373,193		$	2,798,043		$	63,709		$	759,214		$	11,459,047
Ending Balance:
Individually evaluated	$	154,616		$	710,000		$	9,084		$	483,567		$	704,733		$	—		$	—		$	2,062,000
Collectively evaluated	$	288,838		$	1,968,191		$	334,159		$	3,889,626		$	2,093,310		$	63,709		$	759,214		$	9,397,047
Loans Receivable:
Ending Balance	$	23,254,691		$	166,618,553		$	32,829,572		$	148,562,484		$	63,171,159		$	3,775,226					$	438,211,685
Individually evaluated	$	390,312		$	10,662,047		$	6,199,790		$	8,295,801		$	9,936,361		$	72,500					$	35,556,811
Collectively evaluated	$	22,864,379		$	155,956,506		$	26,629,782		$	140,266,683		$	53,234,798		$	3,702,726					$	402,654,874

Table of Contents

The allowance for loan losses, as a percent of gross loans outstanding, was 2.94% and 2.27% for periods ended March 31, 2011 and 2010, respectively. At March 31, 2011, the Bank had 65 loans totaling $28,517,888, or 6.77% of gross loans, in nonaccrual status, of which $2,241,907 were deemed to be troubled debt restructurings. There were two loans totaling $1,741,291 deemed to be troubled debt restructurings not in nonaccrual status at March 31, 2011. At December 31, 2010, the Bank had 76 impaired loans totaling $35,556,811, or 8.12% of loans, net of deferred origination fees, in nonaccrual status, of which $2,968,604 were deemed to be troubled debt restructurings. There was one loan totaling $250,000 deemed to be troubled debt restructurings not in nonaccrual status at December 31, 2010. There were no loans contractually past due 90 days or more and still accruing interest at March 31, 2011 or December 31, 2010. Our analysis under generally accepted accounting principles indicates that the level of the allowance for loan losses is appropriate to cover estimated credit losses on individually evaluated loans as well as estimated credit losses inherent in the remainder of the portfolio. We do not recognize interest income on loans that are impaired. At March 31, 2011 and December 31, 2010, the Bank had $225,000 reserved for off-balance sheet credit exposure related to unfunded commitments included in other liabilities on our consolidated balance sheet.

At March 31, 2011, loans totaling $60.1 million were pledged as collateral at the Federal Home Loan Bank and $68.8 million to maintain a line of credit with the Federal Reserve Bank.

NOTE 8 - OTHER REAL ESTATE OWNED

Transactions in other real estate owned for the periods ended March 31, 2011 and December 31, 2010 are summarized below:

	2011			2010
Balance, beginning of year	$	11,905,865		$	6,865,461
Additions	4,050,060			15,518,475
Sales	(836,915		)	(9,142,992		)
Write downs	(557,872		)	(1,335,079		)
Balance, end of period	$	14,561,138		$	11,905,865

NOTE 9 - PREMISES, FURNITURE AND EQUIPMENT

Premises, furniture and equipment consist of the following for the periods ended March 31, 2011 and December 31, 2010:

	2011		2010
Land and land improvements	$	3,265,318	$	3,265,318
Building and leasehold improvements	13,313,330		13,300,833
Furniture and equipment	4,190,357		4,193,106
Software	725,168		724,274
Construction in progress	5,095,677		4,809,899
Total	26,589,850		26,293,430
Less, accumulated depreciation	4,075,356		3,871,042
Premises, furniture and equipment, net	$	22,514,494	$	22,422,388

Depreciation expense for the three months ended March 31, 2011 and 2010 amounted to $224,595 and $248,581, respectively. Construction in progress relates to the ongoing construction of an executive office building located at 830 Lowcountry Boulevard. Remaining estimated construction costs for the project are expected to be approximately $602,000. For the three months ended March 31, 2011 and 2010, the Bank capitalized $18,925 and $3,225 respectively, in interest related to the construction of the aforementioned executive offices.

Table of Contents

NOTE 10 - DEPOSITS

At March 31, 2011, the scheduled maturities of certificates of deposit were as follows:

Maturing:	Amount
Remaining through 2011	$	176,409,952
2012	83,651,674
2013	5,999,960
2014	827,990
2015	1,870,817
Thereafter	11,334,350
Total	$	280,094,743

The amount of wholesale deposits was $1,567,000, or 0.3% of total deposits, at March 31, 2011, compared to $3,505,000, or 0.7% of total deposits, at December 31, 2010.

NOTE 11 - SECURITIES SOLD UNDER REPURCHASE AGREEMENTS

The Bank has entered into sales of securities under agreements to repurchase. These obligations to repurchase securities sold are reflected as liabilities in the consolidated balance sheets and consist of two obligations totaling $20.0 million at March 31, 2011. On September 21, 2007, the Bank borrowed $10.0 million under a five-year repurchase agreement at a fixed rate of 4.01%. On November 14, 2007, the Bank borrowed $10.0 million under a nine-year repurchase agreement at a fixed rate of 3.50%. All repurchase agreements require quarterly interest only payments with principal and interest due on maturity. The dollar amounts of securities underlying the agreements are book entry securities. Available-for-sale securities with book values of $23,593,108 and $23,649,693 and fair values of $23,496,249 and $23,480,827 at March 31, 2011 and December 31, 2010, respectively, are used as collateral for the agreements.

Securities sold under repurchase agreements are summarized as follows for the periods ended March 31, 2011 and December 31, 2010:

	2011			2010
Amount outstanding at period end	$	20,000,000		$	20,000,000
Average amount outstanding during the period	20,016,246			30,513,992
Maximum outstanding at any month-end	20,000,000			60,000,000
Weighted average rate paid at period-end	3.79		%	3.76		%
Weighted average rate paid during the period	4.11		%	2.60		%

NOTE 12 - JUNIOR SUBORDINATED DEBENTURES

On February 22, 2006, Tidelands Statutory Trust (the “Trust I”), a non-consolidated subsidiary of the Company, issued and sold floating rate capital securities of the trust (the “Trust I Securities”), generating proceeds of $8.0 million. The Trust I loaned these proceeds to the Company to use for general corporate purposes, primarily to provide capital to the Bank. The debentures qualify as Tier 1 capital under Federal Reserve Board guidelines.

The Trust I Securities in the transaction accrue and pay distributions quarterly at a rate per annum equal to the three-month LIBOR plus 1.38%, which was 1.687% at the period ended March 31, 2011. The distribution rate payable on the Trust I Securities is cumulative and payable quarterly in arrears. The Company has the right, subject to events of default, to defer payments of interest on the Trust I Securities for a period not to exceed 20 consecutive quarterly periods, provided that no extension period may extend beyond the maturity date of March 30, 2036.

The Trust I Securities mature or are mandatorily redeemable upon maturity on March 30, 2036 or upon earlier optional redemption as provided in the indenture. The Company has the right to redeem the Trust I Securities in whole or in part, on or after March 30, 2011. The Company may also redeem the Trust I Securities prior to such dates upon occurrence of specified conditions and the payment of a redemption premium.

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

Table of Contents

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

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

Beginning with the scheduled payment date of December 30, 2010, the Company has deferred the payments of interest on its outstanding subordinated debentures for an indefinite period (which can be no longer than 20 consecutive quarterly periods). This and any future deferred distributions will continue to accrue interest. Distributions on the trust preferred securities are cumulative. Therefore, in accordance with generally accepted accounting principles, the Company will continue to accrue the monthly cost of the trust preferred securities as it has since issuance.

As described in Note 17 below, on March 18, 2011, the Company entered into an agreement with the Federal Reserve Bank of Richmond (“FRB”) which, among other things, prohibits the Company’s making any distributions of interest, principal or other sums on subordinated debentures or trust preferred securities without the prior approval of the FRB.

NOTE 13 — ADVANCES FROM FEDERAL HOME LOAN BANK

At March 31, 2011, advances from the Federal Home Loan Bank (“FHLB”) were comprised of three advances totaling $34.0 million. On September 21, 2007, the Bank borrowed $9.0 million under a 10-year convertible advance at a fixed rate of 3.96%. On September 22, 2010, the Bank borrowed $18.0 million under a 3-year advance at a fixed rate of 1.02%. On March 22, 2011, the Bank borrowed $7.0 million under a 2-year fixed advance at a rate of 0.86%. All advances require interest only payments with principal and interest due on maturity. The advances are collateralized by pledged FHLB stock and certain investment securities. At March 31, 2011, loans totaling $60.1 million were pledged as collateral at the Federal Home Loan Bank.

FHLB advances are summarized as follows for the periods ended March 31, 2011 and December 31, 2010:

	2011			2010
Amount outstanding at period end	$	34,000,000		$	27,000,000
Average amount outstanding during the period	27,777,778			44,430,137
Maximum outstanding at any month-end	34,000,000			85,000,000
Weighted average rate at period-end	1.76		%	2.00		%
Weighted average rate during the period	1.99		%	2.72		%

NOTE 14 - OTHER OPERATING EXPENSES

Other operating expenses for the three months ended March 31, 2011 and 2010 are summarized below:

	2011		2010
Professional fees	$	395,681	$	360,733
Telephone expenses	54,875		45,993
Office supplies, stationery, and printing	16,451		24,570
Insurance	93,945		73,127
Postage	2,677		11,256
Data processing	158,531		135,993
Advertising and marketing	14,031		190,548
FDIC Insurance	355,000		360,000
Other loan related expenses	63,476		41,877
Other	83,364		139,976
Total	$	1,238,031	$	1,384,073

Table of Contents

NOTE 15 - COMMITMENTS AND CONTINGENCIES

The Company is subject to claims and lawsuits which arise primarily in the ordinary course of business. Management is not aware of any legal proceedings which would have a material adverse effect on the financial position or operating results of the Company.

NOTE 16 - LOSS PER SHARE

Basic loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding. Diluted loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding and dilutive common share equivalents using the treasury stock method. Potentially dilutive common share equivalents include common shares issuable upon the exercise of outstanding stock options and warrants.

Table of Contents

Basic and diluted loss per share are computed below for the three months ended March 31, 2011 and 2010:

	2011			2010
Basic loss per share computation:
Net loss available to common shareholders	$	(4,466,457	)	$	(1,987,462	)
Average common shares outstanding - basic	4,086,245			4,090,146
Basic net loss per share	$	(1.09	)	$	(0.49	)
Diluted loss per share computation:
Net loss available to common shareholders	$	(4,466,457	)	$	(1,987,462	)
Average common shares outstanding - basic	4,086,245			4,090,146
Incremental shares from assumed conversions:
Stock options and warrants	—			—
Average common shares outstanding - diluted	4,086,245			4,090,146
Diluted loss per share	$	(1.09	)	$	(0.49	)

For the period ended March 31, 2011, there were no stock options that were anti-dilutive compared to 713,488 stock options outstanding that were anti-dilutive for the period ended March 31, 2010. At March 31, 2011 and 2010, there were 571,821 warrant shares outstanding that were anti-dilutive. Options and warrants are considered anti-dilutive because the exercise price exceeded the average market price for the period.

NOTE 17 - REGULATORY MATTERS

Regulatory Actions

As reported in our Current Report on Form 8-K filed on March 22, 2011, the Company entered into a written agreement (the “FRB Agreement”) with the Federal Reserve Bank of Richmond (“FRB”) on March 18, 2011. The FRB Agreement is designed to enhance the Company’s ability to act as a source of strength to the Bank. The Bank’s lending and deposit operations continue to be conducted in the usual and customary manner, and all other products, services and hours of operation remain the same. All Bank deposits will remain insured by the FDIC to the maximum extent allowed by law.

Pursuant to the FRB Agreement, the Company agreed to seek the prior written approval of the FRB before undertaking any of the following activities:

· declare or pay any dividends,

· directly or indirectly take dividends or any other form of payment representing a reduction in capital from the Bank,

· make any distributions of interest, principal or other sums on subordinated debentures or trust preferred securities,

· directly or indirectly, incur, increase or guarantee any debt, and

· directly or indirectly, purchase or redeem any shares of its stock.

Pursuant to its plans to preserve capital and to inject more capital into the Bank, the Company has no plans to undertake any of the foregoing activities.

Within 60 days of the FRB Agreement, the Company is required to submit a written plan designed to maintain sufficient capital at the Company on a consolidated basis. Although the FRB Agreement does not contain specific target capital ratios or specific timelines, the plan must address the Company’s and Bank’s current and future capital requirements, the adequacy of the Bank’s capital, the source and timing of additional funds to satisfy the Company’s and the Bank’s future capital requirements, and supervisory requests for additional capital at the Bank or the supervisory action imposed on the Bank.

Table of Contents

The Company also agreed to comply with certain notice provisions set forth in the Federal Deposit Insurance Act and Board of Governors’ Regulations in appointing any new director or senior executive officer, or changing the responsibilities of any senior executive officer so that the officer would assume a different senior executive officer position. The Company is also required to comply with certain restrictions on indemnification and severance payments pursuant to the Federal Deposit Insurance Act and FDIC regulations.

In addition to the foregoing, on June 1, 2010, the Federal Deposit Insurance Corporation (the “FDIC”) and the South Carolina State Board of Financial Institutions (the “State Board”) conducted their annual joint examination of the Bank. As a result of the examination, the Bank entered into a Consent Order, effective December 28, 2010 (the “Consent Order”), with the FDIC and the State Board. Based on information included in the FDIC’s report, the Bank’s credit risk rating at the FHLB has been negatively impacted, resulting in reduced borrowing capacity. This action also restricts the Bank’s ability to accept, renew, or roll over brokered deposits. In addition, the Bank’s ability to borrow funds from the Federal Reserve Bank Discount Window as a source of short-term liquidity is not guaranteed. The Federal Reserve Discount Window borrowing capacity has been curtailed to only overnight terms, contingent upon credit approval for each transaction.

The Consent Order requires the Bank to, among other things, take the following actions: establish a board committee to monitor and coordinate compliance with the Consent Order; ensure that the Bank has competent management in place; develop an independent assessment of the Bank’s management and staffing needs; achieve Tier 1 capital at least equal to 8% of total assets and Total Risk-Based capital at least equal to 10% of total risk-weighted assets within 150 days and establish a capital plan that includes a contingency plan to sell or merge the Bank; implement a plan addressing liquidity, contingency funding, and asset liability management; implement a program designed to reduce the Bank’s exposure in problem assets; develop a three year strategic plan; adopt an effective internal loan review and grading system; adopt a plan to reduce concentrations of credit; implement a policy to ensure the adequacy of the Bank’s allowance for loan and lease losses; implement a written plan to improve and sustain the Bank’s earnings; revise, adopt and implement a written asset/liability management policy to provide effective guidance and control over the Bank’s funds management activities; develop a written policy for managing interest rate risk; not declare or pay any dividends or bonuses or make any distributions of interest, principal, or other sums on subordinated debentures without prior regulatory approval; not accept, renew, or rollover any brokered deposits unless it is in compliance with regulatory requirements and adopt a plan to eliminate reliance on brokered deposits; limit asset growth to 10% per year; adopt an employee compensation plan after undertaking an independent review of compensation paid to all the Bank’s senior executive officers; and address various violations of law and regulation cited by the FDIC.

The Company intends to take all actions necessary to enable the Bank to comply with the requirements of the Consent Order. There can be no assurance that the Bank will be able to comply fully with the provisions of the Consent Order, and the determination of our compliance will be made by the FDIC and the State Board. Failure to meet the requirements of the Consent Order could result in additional regulatory requirements, which could ultimately lead to the Bank being taken into receivership by the FDIC.

Regulatory Capital Requirements

The Company and Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct adverse material effect on the Company’s or Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s and Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to maintain minimum ratios of Tier 1 and total capital as a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 100%. Tier 1 capital consists of common shareholders’ equity, excluding the unrealized gain or loss on securities available-for-sale, minus certain intangible assets. Tier 2 capital consists of the allowance for loan losses subject to certain limitations. Total capital for purposes of computing the capital ratios consists of the sum of Tier 1 and Tier 2 capital. The regulatory minimum requirements are 4% for Tier 1 and 8% for total risk-based capital.

The Company and Bank are also required to maintain capital at a minimum level based on total assets, which is known as the leverage ratio. Only the strongest institutions are allowed to maintain capital at the minimum requirement of 3%. All others are subject to maintaining ratios 1% to 2% above the minimum.

To be considered “well-capitalized,” generally a bank must maintain a Leverage Capital ratio of at least 5%, Tier 1 Capital

Table of Contents

of at least 6%, and Total Risk-Based Capital of at least 10%. The Consent Order, however, includes a requirement that the Bank achieves and maintain minimum capital requirements that exceed the minimum regulatory capital ratios for “well capitalized” banks.

The following table summarizes the capital amounts and ratios of the Company and the regulatory minimum requirements at March 31, 2011 and December 31, 2010:

	Actual				For Capital Adequacy Purposes				To Be Well- Capitalized Under Prompt Corrective Action Provisions
Tidelands Bancshares, Inc.	Amount		Ratio		Amount		Ratio		Amount	Ratio

March 31, 2011
Total capital (to risk-weighted assets)	$	39,427,000	9.09	%	$	34,716,720	8.00	%	N/A	N/A
Tier 1 capital (to risk-weighted assets)	25,972,000		5.99	%	17,358,360		4.00	%	N/A	N/A
Tier 1 capital (to average assets)	25,972,000		4.61	%	22,555,080		4.00	%	N/A	N/A
December 31, 2010
Total capital (to risk-weighted assets)	$	44,030,000	9.77	%	$	36,072,320	8.00	%	N/A	N/A
Tier 1 capital (to risk-weighted assets)	31,847,000		7.06	%	18,036,160		4.00	%	N/A	N/A
Tier 1 capital (to average assets)	31,847,000		5.47	%	23,300,480		4.00	%	N/A	N/A

The following table summarizes the capital amounts and ratios of the Bank and the regulatory minimum requirements at March 31, 2011 and December 31, 2010:

	Actual				For Capital Adequacy Purposes				To Be Well- Capitalized Under Prompt Corrective Action Provisions
Tidelands Bank	Amount		Ratio		Amount		Ratio		Amount		Ratio

March 31, 2011
Total capital (to risk-weighted assets)	$	38,486,000	8.88	%	$	34,654,100	8.00	%	$	43,317,620	10.00	%
Tier 1 capital (to risk-weighted assets)	32,983,000		7.61	%	17,327,050		4.00	%	25,990,570		6.00	%
Tier 1 capital (to average assets)	32,983,000		5.87	%	22,478,400		4.00	%	28,098,000		5.00	%
December 31, 2010
Total capital (to risk-weighted assets)	$	42,703,000	9.49	%	$	36,009,620	8.00	%	$	45,012,020	10.00	%
Tier 1 capital (to risk-weighted assets)	37,002,000		8.22	%	18,004,810		4.00	%	27,007,210		6.00	%
Tier 1 capital (to average assets)	37,002,000		6.38	%	23,215,640		4.00	%	29,019,550		5.00	%

To be considered “well-capitalized” per the requirements of the Consent Order, the Bank must maintain a minimum amount of $43,317,620 in total capital in order to maintain a Total Risk-Based Capital of 10%. In addition, the Bank would need to maintain $44,956,800 of Tier 1 capital in order to achieve a minimum Leverage Capital ratio of 8%. As of March 31, 2011,

Table of Contents

the Bank was deemed “adequately capitalized.” As such, the Bank was not considered in compliance with the capital requirements of the Consent Order.

NOTE 18 - UNUSED LINES OF CREDIT

As of March 31, 2011, the Bank had two unused lines of credit to purchase federal funds from unrelated banks totaling $13 million. There were no balances outstanding related to these lines of credit as of March 31, 2011. These lines of credit are available on a one to 14 day basis for general corporate purposes. In addition to these credit lines, lines of credit are available from the FHLB with a remaining credit availability of $109.3 million and an excess lendable collateral value of approximately $408,000 at March 31, 2011. In addition, we maintain a $68.8 million line of credit with the Federal Reserve Bank with a lendable collateral value of approximately $47.4 million secured by loans in our loan portfolio.

NOTE 19 - SHAREHOLDERS’ EQUITY

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

In connection with the sale of the Preferred Stock, the Company also issued to the U.S. Treasury a ten-year warrant to purchase up to 571,821 shares of the Company’s common stock (the “Warrants”), par value $0.01 per share at an initial exercise price of $3.79 per share.

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

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

Beginning with the payment date of November 15, 2010, the Company deferred dividend payments on the TARP Preferred Stock. Although the Company may defer dividend payments, the dividend is a cumulative dividend and failure to pay dividends for six dividend periods would trigger board appointment rights for the holder of the TARP Preferred Stock.

Restrictions on Dividends - A South Carolina state bank may not pay dividends from its capital. All dividends must be paid out of undivided profits then on hand, after deducting expenses, including reserves for losses and bad debts. The Bank is authorized to pay cash dividends up to 100% of net income in any calendar year without obtaining the prior approval of the State Board, provided that the Bank received a composite rating of one or two at the last federal or state regulatory examination. The Bank must obtain approval from the State Board prior to the payment of any other cash dividends. In addition, under the Federal Deposit Insurance Corporation Improvement Act, the Bank may not pay a dividend if, after paying the dividend, the Bank would be undercapitalized. As described above on December 28, 2010, the Bank entered into the Consent Order with the FDIC and the State Board which, among other things, prohibits the Bank from declaring or paying any dividends or making any distributions of interest, principal, or other sums on subordinated debentures without the prior approval of the supervisory authorities.

As described above, on March 18, 2011, the Company entered into the FRB Agreement with the FRB which, among other things, prohibits the Company’s declaring or paying any dividends or directly or indirectly take dividends or any other form of payment representing a reduction in capital from the Bank without the prior approval of the FRB.

NOTE 20 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

The Company is a 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 consist of commitments to extend credit and standby letters of credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition

Table of Contents

established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. A commitment involves, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The Company’s exposure to credit loss in the event of nonperformance by the other party to the instrument is represented by the contractual notional amount of the instrument. Since certain commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company uses the same credit policies in making commitments to extend credit as it does for on-balance-sheet instruments. Standby letters of credit are conditional commitments issued to guarantee a customer’s performance to a third party and have essentially the same credit risk as other lending facilities. At March 31, 2011, the Bank had $225,000 reserved for off-balance sheet credit exposure related to unfunded commitments included in other liabilities on our consolidated balance sheet.

Collateral held for commitments to extend credit and letters of credit varies but may include accounts receivable, inventory, property, plant, equipment and income-producing commercial properties.

The following table sets forth the length of time until maturity for unused commitments to extend credit and standby letters of credit at March 31, 2011.

	Amount
Commitments to extend credit	$	14,695,664
Standby letters of credit	587,012
Total	$	15,282,676

NOTE 21 - EMPLOYEE STOCK OWNERSHIP PLAN

On May 17, 2007, the Company announced the formation of the Tidelands Bancshares, Inc. Employee Stock Ownership Plan (“ESOP”), a non-contributory plan, for its employees. The ESOP will purchase shares of the Company’s common stock on the open market from time to time with funds borrowed from a loan from a third party lender. All employees of the Company meeting certain tenure requirements are entitled to participate in the ESOP. Compensation expense related to the ESOP was $15,001 and $75,747 for the periods ended March 31, 2011 and 2010. At March 31, 2011, the ESOP has an outstanding loan amounting to $1,575,000.

A summary of the unallocated share activity of the Company’s ESOP is presented for the periods ended March 31, 2011 and December 31, 2010:

	2011	2010
Balance, beginning of year	150,531	178,069
New share purchases	—	15,042
Shares released to participants	—	(2,180	)
Shares allocated to participants	—	(40,400	)
Balance, end of period	150,531	150,531

The aggregate fair value of the 150,531 unallocated shares was $103,866 based on the $0.69 closing price of our common stock on March 31, 2011. The aggregate fair value of the 150,531 unallocated shares was $156,552 based on the $1.04 closing price of our common stock on December 31, 2010.

NOTE 22 — RETIREMENT PLAN

The Company has a 401(k) profit sharing plan, which provides retirement benefits to a majority of officers and employees who meet certain age and service requirements. The plan includes a “salary reduction” feature pursuant to Section 401(k) of the Internal Revenue Code. Expenses charged to earnings for the 401(k) profit sharing plan were $26,114 and $30,428, for the three months ended March 31, 2011 and 2010, respectively.

The Bank has a Supplemental Executive Retirement Plan (Supplemental Plan). This plan provides an annual post-retirement cash payment beginning after a chosen retirement date for certain officers of the Bank. The officer will receive an annual payment from the Bank equal to the promised benefits. In connection with this plan, life insurance contracts were purchased on the officers. Effective June 30, 2010, the executive officers agreed to cease further benefit accrual under the contracts and will only be entitled to receive benefits accrued through June 30, 2010. As a result, there was no expense related to the plan for the three months ended March 31, 2011.

Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is a discussion of our financial condition as of March 31, 2011 compared to December 31, 2010 and the results of operations for the three months ended March 31, 2011 compared to the three months ended March 31, 2010. These comments should be read in conjunction with our consolidated financial statements and accompanying footnotes appearing in this report and in conjunction with the financial statements and related notes and disclosures in our 2010 Annual Report on Form 10-K.

This report contains statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may relate to our financial condition, results of operation, plans, objectives, or future performance. These statements are based on many assumptions and estimates and are not guarantees of future performance. Our actual results may differ materially from those projected in any forward-looking statements, as they will depend on many factors about which we are unsure, including many factors which are beyond our control. The words “may,” “would,” “could,” “will,” “expect,” “anticipate,” “believe,” “intend,” “plan,” and “estimate,” as well as similar expressions, are meant to identify such forward-looking statements. Potential risks and uncertainties include, but are not limited to those described under “Risk Factors” in Item 1A of our 2010 Annual Report on Form 10-K and the following:

· general economic conditions (both generally and in our markets) may be less favorable than expected, resulting in, among other things, a continued deterioration in credit quality, a further reduction in demand for credit and/or a further decline in real estate values;

· the general decline in the real estate and lending market, particularly in our market areas, may continue to negatively affect our financial results;

· our ability to raise additional capital may be impaired if current levels of market disruption and volatility continue or worsen;

· the results of our most recent external, independent review of our credit risk assets may not accurately predict the adverse effects on our financial condition if the economy were to continue to deteriorate;

· restrictions or conditions imposed by the Federal Reserve Bank of Richmond on our operations, including the terms of the FRB Agreement dated March 18, 2011, may make it make difficult for us to achieve our goals;

· our ability to comply with our Consent Order and potential regulatory actions if we fail to comply;

· our ability to maintain appropriate levels of capital, including the potential that the regulatory agencies may require higher levels of capital above the standard regulatory-mandated minimums;

· our ability to complete the sale of our loans held for sale, specifically at values equal or above the currently recorded loan balances which would not result in additional writedowns;

· the adequacy of the level of our allowance for loan losses and the amount of loan loss provisions required in future periods;

· increased funding costs due to market illiquidity, increased competition for funding, and / or increased regulatory requirements with regard to funding;

· changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board and the Financial Accounting Standards Board;

· legislative or regulatory changes, including changes in accounting standards and compliance requirements, may adversely affect the businesses in which we are engaged;

· competitive pressures among depository and other financial institutions may increase significantly;

· changes in the interest rate environment may reduce margins or the volumes or values of the loans we make;

Table of Contents

· competitors may have greater financial resources and develop products that enable those competitors to compete more successfully than we can;

· our ability to attract and retain key personnel can be affected by the increased competition for experienced employees in the banking industry;

· adverse changes may occur in the bond and equity markets;

· war or terrorist activities may cause further deterioration in the economy or cause instability in credit markets;

· economic, governmental or other factors may prevent the projected population, residential and commercial growth in the markets in which we operate; and

· we will or may continue to face the risk factors discussed from time to time in the periodic reports we file with the SEC.

These risks are exacerbated by the recent developments in national and international financial markets, and we are unable to predict what effect these uncertain market conditions will have on our Company. During 2009 and continuing through the first quarter of 2011, the capital and credit markets have experienced extended volatility and disruption. There can be no assurance that these unprecedented recent developments will not materially and adversely affect our business, financial condition and results of operations.

All forward-looking statements in this report are based on information available to us as of the date of this report. We undertake no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Overview

We are a South Carolina corporation organized in 2002 to serve as the holding company for Tidelands Bank, a state-chartered banking association under the laws of South Carolina headquartered in Mount Pleasant. Tidelands Bank commenced operations in October 2003 through our main office located in Mount Pleasant, South Carolina. On April 23, 2007, we opened a permanent full service banking facility in our Summerville location. We opened a permanent facility for our full service branch in Myrtle Beach on June 7, 2007. In addition, we opened a new full service branch office in the Park West area of Mount Pleasant on May 14, 2007, and converted the loan production office in the West Ashley area of Charleston to a full service branch on July 2, 2007. The Bluffton loan production office opened as a full service banking facility on May 21, 2008. On July 23, 2008, we opened a permanent full service banking facility in Murrells Inlet. We plan to focus our efforts at these branch locations on obtaining lower cost deposits that are less affected by rising rates.

The following discussion describes our results of operations for the three months ended March 31, 2011 as compared to the three months ended March 31, 2010 and also analyzes our financial condition as of March 31, 2011 as compared to December 31, 2010. Like most community banks, we derive most of our income from interest we receive on our loans and investments. In addition to earning interest on our loans and investments, we earn income through fees and other expenses we charge to our customers. We describe the various components of this noninterest income, as well as our noninterest expense, in the following discussion. Our primary source of funds for making these loans and investments is our deposits, on which we pay interest. Consequently, one of the key measures of our success is our amount of net interest income, or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits. Another key measure is the spread between the yield we earn on these interest-earning assets and the rate we pay on our interest-bearing liabilities. There are risks inherent in all loans, so we maintain an allowance for loan losses to absorb probable losses on existing loans that may become uncollectible. We establish and maintain this allowance by charging a provision for loan losses against our operating earnings. In the following section we have included a detailed discussion of this process.

We encourage you to read this discussion and analysis in conjunction with the financial statements and the related notes and the other statistical information also included in this report.

Critical Accounting Policies

We have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States and with general practices within the banking industry in the preparation of our financial

Table of Contents

statements. Our significant accounting policies are described in the footnotes to our unaudited consolidated financial statements as of March 31, 2011.

Certain accounting policies involve significant judgments and assumptions by us that have a material impact on the carrying value of certain assets and liabilities. We consider these accounting policies to be critical accounting policies. The judgment and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Because of the nature of the judgment and assumptions we make, actual results could differ from these judgments and estimates that could have a material impact on the carrying values of our assets and liabilities and our results of operations.

We believe the allowance for loan losses is the critical accounting policy that requires the most significant judgment and estimates used in preparation of our consolidated financial statements. Some of the more critical judgments supporting the amount of our allowance for loan losses include judgments about the credit worthiness of borrowers, the estimated value of the underlying collateral, the assumptions about cash flow, determination of loss factors for estimating credit losses, the impact of current events, and conditions and other factors impacting the level of probable inherent losses. Under different conditions or using different assumptions, the actual amount of credit losses incurred by us may be different from management’s estimates provided in our consolidated financial statements. Refer to the portion of this discussion that addresses our allowance for loan losses for a more complete discussion of our processes and methodology for determining our allowance for loan losses.

Recent Legislative and Regulatory Initiatives to Address Financial and Economic Crises

Markets in the United States and elsewhere have experienced extreme volatility and disruption for more than three years. These circumstances have exerted significant downward pressure on prices of equity securities and virtually all other asset classes, and have resulted in substantially increased market volatility, severely constrained credit and capital markets, particularly for financial institutions, and an overall loss of investor confidence. Loan portfolio performances have deteriorated at many institutions resulting from, among other factors, a weak economy and a decline in the value of the collateral supporting their loans. Dramatic slowdowns in the housing industry, due in part to falling home prices and increasing foreclosures and unemployment, have created strains on financial institutions. Many borrowers are now unable to repay their loans, and the collateral securing these loans has, in some cases, declined below the loan balance. In response to the challenges facing the financial services sector, several regulatory and governmental actions have recently been announced including:

· The Emergency Economic Stabilization Act of 2008 (“EESA”), approved by Congress and signed by President Bush on October 3, 2008, which, among other provisions, allowed the U.S. Treasury to purchase up to $700 billion of mortgages, mortgage-backed securities and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets. EESA also temporarily raised the basic limit of FDIC deposit insurance from $100,000 to $250,000 through December 31, 2013.

· On October 7, 2008, the FDIC approved a plan to increase the rates banks pay for deposit insurance;

· On October 14, 2008, the U.S. Treasury announced the creation of a new program, the Troubled Asset Relief Program (the “TARP”) Capital Purchase Program (the “CPP”) that encourages and allows financial institutions to build capital through the sale of senior preferred shares to the U.S. Treasury on terms that are non-negotiable.

· On October 14, 2008, the FDIC announced the creation of the Temporary Liquidity Guarantee Program (the “TLGP”), which seeks to strengthen confidence and encourage liquidity in the banking system. The TLGP has two primary components that are available on a voluntary basis to financial institutions:

· The Transaction Account Guarantee Program (“TAGP”), which provided unlimited deposit insurance coverage through December 31, 2010 for noninterest-bearing transaction accounts (typically business checking accounts) and certain funds swept into noninterest-bearing savings accounts. Institutions participating in the TAGP pay a 15 to 25 basis points fee (annualized), according to the institution’s risk category on the balance of each covered account in excess of $250,000, while the extra deposit insurance is in place; and

· The Debt Guarantee Program (“DGP”), under which the FDIC guarantees certain senior unsecured debt of FDIC-insured institutions and their holding companies. The guarantee would apply to new debt issued on or before October 31, 2009 and would provide protection until December 31, 2012. Issuers electing to

Table of Contents

participate would pay a 75 basis point fee for the guarantee. As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) described below, the voluntary TAGP program ended in December 31, 2010, and all institutions are required to provide full deposit insurance on noninterest-bearing transaction accounts until December 31, 2012. There will not be a separate assessment for this insurance as there was for institutions participating in the TAGP program.

· On February 10, 2009, the U.S. Treasury announced the Financial Stability Plan, which earmarked $350 billion of the TARP funds authorized under EESA. Among other things, the Financial Stability Plan includes:

· A capital assistance program that will invest in mandatory convertible preferred stock of certain qualifying institutions determined on a basis and through a process similar to the CPP;

· A consumer and business lending initiative to fund new consumer loans, small business loans and commercial mortgage asset-backed securities issuances;

· A new public-private investment fund that will leverage public and private capital with public financing to purchase up to $500 billion to $1 trillion of legacy “toxic assets” from financial institutions; and

· Assistance for homeowners by providing up to $75 billion to reduce mortgage payments and interest rates and establishing loan modification guidelines for government and private programs.

· On February 17, 2009, President Obama signed into law The American Recovery and Reinvestment Act of 2009 (“ARRA”), more commonly known as the economic stimulus or economic recovery package. ARRA includes a wide variety of programs intended to stimulate the economy and provide for extensive infrastructure, energy, health, and education needs. In addition, ARRA imposes certain executive compensation and corporate expenditure limits on all current and future TARP recipients that are in addition to those previously announced by the U.S. Treasury. These new limits are in place until the institution has repaid the Treasury, which is now permitted under ARRA without penalty and without the need to raise new capital, subject to the Treasury’s consultation with the recipient institution’s appropriate regulatory agency.

· On March 23, 2009, the U.S. Treasury, in conjunction with the FDIC and the Federal Reserve, announced the Public-Private Partnership Investment Program for Legacy Assets which consists of two separate plans, addressing two distinct asset groups:

· The first plan is the Legacy Loan Program, which has a primary purpose to facilitate the sale of troubled mortgage loans by eligible institutions, including FDIC-insured federal or state banks and savings associations. Eligible assets are not strictly limited to loans; however, what constitutes an eligible asset will be determined by participating banks, their primary regulators, the FDIC and the Treasury. Under the Legacy Loan Program, the FDIC has sold certain troubled assets out of an FDIC receivership in two separate transactions relating to the failed Illinois bank, Corus Bank, NA, and the failed Texas bank, Franklin Bank, S.S.B. These transactions were completed in September 2009 and October 2009, respectively.

· The second plan is the Securities Program, which is administered by the Treasury and involves the creation of public-private investment funds (“PPIFs”) to target investments in eligible residential mortgage-backed securities and commercial mortgage-backed securities issued before 2009 that originally were rated AAA or the equivalent by two or more nationally recognized statistical rating organizations, without regard to rating enhancements (collectively, “Legacy Securities”). Legacy Securities must be directly secured by actual mortgage loans, leases or other assets, and may be purchased only from financial institutions that meet TARP eligibility requirements. The U.S. Treasury received over 100 unique applications to participate in the Legacy Securities PPIP and in July 2009 selected nine PPIF managers. As of September 30, 2010, the PPIFs had completed their fundraising and have closed on approximately $7.4 billion of private sector equity capital, which was matched 100% by Treasury, representing $14.7 billion of total equity capital. The U.S. Treasury has also provided $14.7 billion of debt capital, representing $29.4 billion of total purchasing power. As of September 30, 2010, PPIFs have drawn-down approximately $18.6 billion of total capital which has been invested in eligible assets and cash equivalents pending investment.

Table of Contents

· On November 12, 2009, the FDIC issued a final rule to require banks to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012 and to increase assessment rates effective on January 1, 2011.

· In June 2010, the Federal Reserve, the FDIC and the OCC issued a comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors.

The Federal Reserve will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as the Company, that are not “large, complex banking organizations.” These reviews will be tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.

· On July 21, 2010, the U.S. President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Dodd-Frank Act will likely result in dramatic changes across the financial regulatory system, some of which become effective immediately and some of which will not become effective until various future dates. Implementation of the Dodd-Frank Act will require many new rules to be made by various federal regulatory agencies over the next several years. Uncertainty remains as to the ultimate impact of the Dodd-Frank Act until final rulemaking is complete, which could have a material adverse impact either on the financial services industry as a whole or on our business, financial condition, results of operations, and cash flows. Provisions in the legislation that affect consumer financial protection regulations, deposit insurance assessments, payment of interest on demand deposits, and interchange fees could increase the costs associated with deposits and place limitations on certain revenues those deposits may generate. The Dodd-Frank Act includes provisions that, among other things, will:

· Centralize responsibility for consumer financial protection by creating a new agency, the Bureau of Consumer Financial Protection, responsible for implementing, examining, and enforcing compliance with federal consumer financial laws.

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

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

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

· Make permanent the $250,000 limit for federal deposit insurance and provide unlimited federal deposit insurance until December 31, 2012 for noninterest-bearing demand transaction accounts at all insured depository institutions.

Table of Contents

· Implement corporate governance revisions, including with regard to executive compensation and proxy access by shareholders, which apply to all public companies, not just financial institutions.

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

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

· Internationally, both the Basel Committee on Banking Supervision (the “Basel Committee”) and the Financial Stability Board (established in April 2009 by the Group of Twenty (“G-20”) Finance Ministers and Central Bank Governors to take action to strengthen regulation and supervision of the financial system with greater international consistency, cooperation, and transparency) have committed to raise capital standards and liquidity buffers within the banking system (“Basel III”). On September 12, 2010, the Group of Governors and Heads of Supervision agreed to the calibration and phase-in of the Basel III minimum capital requirements (raising the minimum Tier 1 common equity ratio to 4.5% and minimum Tier 1 equity ratio to 6.0%, with full implementation by January 2015) and introducing a capital conservation buffer of common equity of an additional 2.5% with full implementation by January 2019. The U.S. federal banking agencies support this agreement. In December 2010, the Basel Committee issued the Basel III rules text, outlining the details and time-lines of global regulatory standards on bank capital adequacy and liquidity. According to the Basel Committee, the Framework sets out higher and better-quality capital, better risk coverage, the introduction of a leverage ratio as a backstop to the risk-based requirement, measures to promote the build-up of capital that can be drawn down in periods of stress, and the introduction of two global liquidity standards.

· On September 27, 2010, the U.S. President signed into law the Small Business Jobs Act of 2010 (the “Act”). The Small Business Lending Fund (the “SBLF”), which was enacted as part of the Act, is a $30 billion fund that encourages lending to small businesses by providing Tier 1 capital to qualified community banks with assets of less than $10 billion. On December 21, 2010, the U.S. Treasury published the application form, term sheet and other guidance for participation in the SBLF. Under the terms of the SBLF, the Treasury will purchase shares of senior preferred stock from banks, bank holding companies, and other financial institutions that will qualify as Tier 1 capital for regulatory purposes and rank senior to a participating institution’s common stock. The application deadline for participating in the SBLF is March 31, 2011. We do not currently plan to participate in the SBLF.

· In November 2010, the FDIC approved two proposals that amend the deposit insurance assessment regulations. The first proposal implements a provision in the Dodd-Frank Act that changes the assessment base from one based on domestic deposits (as it has been since 1935) to one based on assets. The assessment base changes from adjusted domestic deposits to average consolidated total assets minus average tangible equity.

The second proposal changes the deposit insurance assessment system for large institutions in conjunction with the guidance given in the Dodd-Frank Act. Since the new base would be much larger than the current base, the FDIC will lower assessment rates, which achieves the FDIC’s goal of not significantly altering the total amount of revenue collected from the industry. Risk categories and debt ratings will be eliminated from the assessment calculation for large banks which will instead use scorecards. The scorecards will include financial measures that are predictive of long-term performance. A large financial institution will continue to be defined as an insured depository institution with at least $10 billion in assets. Both changes in the assessment system will be effective as of April 1, 2011 and will be payable at the end of September.

· In December 2010, the FDIC voted to increase the required amount of reserves for the designated reserve ratio (“DRR”) to 2.0%. The ratio is higher than the 1.35% set by the Dodd-Frank Act in July 2010 and is an integral part of the FDIC’s comprehensive, long-range management plan for the DIF.

· In February 2011, the FDIC approved the final rules that, as noted above, change the assessment base from domestic deposits to average assets minus average tangible equity, adopt a new scorecard-based assessment system for financial institutions with more than $10 billion in assets, and finalize the DRR target size at 2.0% of insured deposits.

Table of Contents

On December 19, 2008, as part of the TARP CPP, we entered into a Letter Agreement and Securities Purchase Agreement (collectively, the “CPP Purchase Agreement”) with the Treasury Department, pursuant to which we sold (i) 14,448 shares of our Fixed Rate Cumulative Perpetual Preferred Stock, Series T (the “Series T Preferred Stock”) and (ii) a warrant (the “CPP Warrant”) to purchase 571,821 shares of our common stock for an aggregate purchase price of $14,448,000 in cash.

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

Although the TAGP expired on December 31, 2010, a provision of the Dodd-Frank Act requires the FDIC to provide unlimited deposit insurance for all deposits in non-interest-bearing transaction accounts. This deposit insurance mandate created by the Dodd-Frank Act took effect on December 31, 2010, and will continue through December 31, 2012. The deposit insurance mandate created by the Dodd-Frank Act is not an extension of the TAGP. Although the TAGP and the Dodd-Frank Act establish unlimited deposit insurance for certain types of non-interest-bearing deposit accounts, unlike the TAGP, the coverage provided by the Dodd-Frank Act does not apply to NOW accounts or IOLTAs and will be funded through general FDIC assessments, not special assessments.

From time to time, various legislative and regulatory initiatives are introduced in Congress and state legislatures, as well as by regulatory agencies. Such initiatives may include proposals to expand or contract the powers of bank holding companies and depository institutions or proposals to substantially change the financial institution regulatory system. Such legislation could change banking statutes and the operating environment of the Company in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. We cannot predict whether any such legislation will be enacted, and, if enacted, the effect that it, or any implementing regulations, would have on the financial condition or results of operations of the Company. A change in statutes, regulations or regulatory policies applicable to the Company or the Bank could have a material effect on the business, financial condition, and results of operations of the Company. The following discussion and analysis describes our performance in this challenging economic environment. We encourage you to read this discussion and analysis in conjunction with our financial statements and the other statistical information included in this report.

Recent Regulatory Development

Pursuant to the FRB Agreement, the Company agreed to seek the prior written approval of the FRB before undertaking any of the following activities:

· declare or pay any dividends,

· directly or indirectly take dividends or any other form of payment representing a reduction in capital from the Bank,

· make any distributions of interest, principal or other sums on subordinated debentures or trust preferred securities,

· directly or indirectly, incur, increase or guarantee any debt, and

· directly or indirectly, purchase or redeem any shares of its stock.

Pursuant to its plans to preserve capital and to inject more capital into the Bank, the Company has no plans to undertake any of the foregoing activities.

Table of Contents

In addition to the foregoing, on June 1, 2010, the FDIC and the State Board conducted their annual joint examination of the Bank. As a result of the examination, the Bank entered into a Consent Order, effective December 28, 2010 (the “Consent Order”), with the FDIC and the State Board. The Consent Order requires the Bank to, among other things, take the following actions:

· Establish, within 60 days from the effective date of the Consent Order, a board committee to monitor compliance with the Consent Order, consisting of at least four members of the board, three of whom shall not be officers of the Bank;

· Develop, within 60 days from the effective date of the Consent Order, a written management plan that addresses specific areas in the Joint Report of Examinations dated as of June 1, 2010;

· Notify the supervisory authorities in writing of the resignation or termination of any of the Bank’s directors or senior executive officers and provide prior notification and approval for any new directors or senior executive officers;

· Achieve and maintain, within 150 days from the effective date of the Consent Order, Total Risk Based capital at least equal to 10% of risk-weighted assets and Tier 1 capital at least equal to 8% of total assets;

· Establish, within 60 days from the effective date of the Consent Order, a written capital plan to include a contingency plan in the event the Bank fails to maintain minimums, submit an acceptable capital plan as required by the Consent Order, or implement or adhere to the capital plan to which supervisory authorities have taken no objections. Such contingency plan must include a plan to sell or merge the Bank. The Bank must implement the contingency plan upon written notice from the Regional Director;

· Adopt and implement, within 60 days from the effective date of the Consent Order, a written plan addressing liquidity, contingency funding, and asset liability management;

· Eliminate, within 30 days from the effective date of the Consent Order, by charge-off or collection, all assets or portions of assets classified “Loss,” and during the Consent Order, within 30 days of receipt of any Report of Examination, eliminate by collection, charge-off, or other proper entry, the remaining balance of any assets classified as “Loss” and 50% of those assets classified “Doubtful”;

· Submit, within 60 days from the effective date of the Consent Order, a written plan to reduce the Bank’s risk exposure in relationships with assets in excess of $500,000 criticized as “Substandard” in the Report of Examination. The plan must require a reduction in the aggregate balance of assets criticized as “Substandard” in accordance with the following schedule: (i) within 180 days, a reduction of 25% in the balance of assets criticized “Substandard”; (ii) within 360 days, a reduction of 45% in the balance of assets criticized “Substandard”; (iii) within 540 days, a reduction of 60% in the balance of assets criticized “Substandard”; and (iv) within 720 days, a reduction of 70% in the balance of assets criticized “Substandard.”

· Not extend any additional credit to any borrower who has a loan or other extension of credit from the Bank that has been charged off or classified, in whole or in part, “Loss,” and is uncollected. In addition, the Bank may not extend any additional credit to any borrower who has a loan or other extension of credit from the Bank that has been criticized, in whole or in part, “Substandard,” and is uncollected, unless the Bank’s board of directors determines that failure to extend further credit to a particular borrower would be detrimental to the best interests of the Bank;

Table of Contents

· Prepare and submit, within 90 days from the effective date of the Order, a plan consisting of long term goals designed to improve the condition of the Bank and its viability, and strategies for achieving those goals. The plan must cover minimum of three years and provide specific objectives for asset growth, market focus, earnings projections, capital needs, and liquidity position.

· Adopt, within 60 days from the effective date of the Consent Order, an effective internal loan review and grading system to provide for the periodic review of the Bank’s loan portfolio in order to identify and categorize the Bank’s loans, and other extensions of credit which are carried on the Bank’s books as loans, on the basis of credit quality;

· Perform, within 60 days from the effective date of the Consent Order, a risk segmentation analysis with respect to the Bank’s concentrations of credit and develop a written plan to reduce any segment of the portfolio which the supervisory authorities deem to be an undue concentration of credit in relation to Tier 1 capital;

· Review and establish, within 60 days from the effective date of the Consent Order, a policy to ensure the adequacy of the Bank’s allowance for loan and lease losses, which must provide for a review of the Bank’s allowance for loan and lease losses at least once each calendar quarter;

· Formulate and implement, within 60 days from the effective date of the Consent Order, a written plan to improve and sustain Bank earnings, which shall include (i) goals and strategies for improving and sustaining earnings; (ii) major areas and means by which to improve operating performance; (iii) realistic and comprehensive budget; (iv) budget review process to monitor income and expenses to compare with budgetary projections; (v) operating assumptions forming the basis for, and adequately support, major projected income and expense components; and (vi) coordination of the Bank’s loan, investment, and operating policies and budget and profit planning with the funds management policy. The written plan must be evaluated at the end of each calendar quarter and record results and any actions taken by the Board in minutes;

· Revise, adopt and implement, within 60 days of the effective date of the Consent Order, the Bank’s written asset/liability management policy to provide effective guidance and control over the Bank’s funds management activities, which shall also address all items of criticism set forth in the Joint Report of Examinations in June 2010;

· Develop and implement, within 60 days of the effective date of the Consent Order, a written policy for managing interest rate risk in a manner that is appropriate to the size of the Bank and the complexity of its assets. The policy shall comply with the Joint Inter-Agency Policy Statement on Interest Rate Risk;

· Eliminate or correct, within 30 days from the effective date of the Consent Order, all violations of law and regulation or contraventions of FDIC guidelines and statements of policy described in the Joint Report of Examinations in June 2010;

· Not declare or pay any dividends or bonuses or make any distributions of interest, principal, or other sums on subordinated debentures without the prior approval of the supervisory authorities;

· Not accept, renew, or rollover any brokered deposits unless it is in compliance with the requirements of 12 C.F.R. § 337.6(b), and, within 60 days of the effective date of the Consent Order, submit a written plan to the supervisory authorities for eliminating reliance on brokered deposits;

· Limit asset growth to 10% per annum;

· Adopt, within 60 days of the effective date of the Consent Order, an employee compensation plan after undertaking an independent review of compensation paid to all the Bank’s senior executive officers, as defined at Section 301.101(b) of the FDIC Rules and Regulations;

· Furnish, within 30 days from the end of the first quarter following the effective date of the Consent Order, and within 30 days of the end of each quarter thereafter, written progress reports to the supervisory authorities detailing the form and manner of any actions taken to secure compliance with the Consent Order.

Although we intend to take all actions necessary to enable the Bank to comply with the requirements of the Consent Order, there can be no assurance that the Bank will be able to comply fully with the provisions of the Consent Order.

Table of Contents

Failure to meet these requirements would result in additional regulatory requirements, which could ultimately lead to the Bank being taken into receivership by the FDIC.

Results of Operations

Income Statement Review

Summary

Three months ended March 31, 2011 and 2010

Our net loss was $4.2 million for the three months ended March 31, 2011 compared to a net loss of $1.8 million for the three months ended March 31, 2010. Net loss before income tax benefit was $4.2 million for the three months ended March 31, 2011 compared to net loss before income tax benefit of $1.8 million for the three months ended March 31, 2010. The $2.5 million increase in net loss before income tax benefit resulted primarily from a decrease of $1.2 million in net interest income before provision for loan losses, a decrease of $533,000 in noninterest income, an increase of $602,000 in credit provisions and an increase of $138,000 in noninterest expense.

Net Interest Income

Our level of net interest income is determined by the level of earning assets and the management of our net interest margin. The growth in our loan portfolio has historically been the primary driver of the increase in net interest income. During the three months ended March 31, 2011, our loan portfolio decreased $16.5 million from the year-end balance. We anticipate a growth in loans will drive the growth in assets and the growth in net interest income once economic conditions improve. However, we do not expect to sustain the same growth rate in our loan portfolio as we have experienced in the past.

Our loans typically provide higher interest yields than do other types of interest-earning assets, which is why we direct a substantial percentage of our earning assets into our loan portfolio. This strategy resulted in a significant portion of our assets being in higher earning loans rather than in lower yielding investments. At March 31, 2011, loans represented 76.8% of total assets, while securities and federal funds sold represented 14.2% of total assets. While we plan to continue our focus of maintaining the size of our loan portfolio, we also anticipate managing the size of the investment portfolio during the ongoing economic recession as loan demand remains soft and investment yields become more attractive on a relative basis.

At March 31, 2011, retail deposits represented $453.0 million, or 86.4% of total funding, which includes total deposits plus borrowings. Borrowings represented $70.0 million, or 13.3% of total funding, and wholesale deposits represented $1.6 million, or 0.3% of total funding. We plan to continue to offer competitive rates on our retail deposit accounts, including investment checking, money market accounts, savings accounts and time deposits. Our goal is to maintain a higher percentage of assets being funded by retail deposits and to increase the percentage of low-cost transaction accounts to total deposits. No assurance can be given that these objectives will be achieved. We operate seven full service banking offices located along the South Carolina coast. Although we anticipate that our full service banking offices will assist us in meeting these objectives, we believe that the current deposit strategies and the opening of new offices had a dampening effect on earnings. However, we believe that over time these two strategies will provide us with additional customers in our markets and will provide a lower alternative cost of funding.

In addition to the growth in both assets and liabilities, and the timing of the repricing of our assets and liabilities, net interest income is also affected by the ratio of interest-earning assets to interest-bearing liabilities and the changes in interest rates earned on our assets and interest rates paid on our liabilities. Net interest income decreased $1.2 million as the result of a decrease in investment portfolio revenue of $2.0 million, a decline in loan revenue of $693,000 partially offset by a decrease in funding costs of $1.5 million as compared to the prior period. For the three months ended March 31, 2011, average interest-bearing liabilities exceeded average interest-earning assets by $3.4 million compared to average interest-earning assets exceeding average interest-bearing liabilities by $13.8 million for the three months ended March 31, 2010.

The impact of the Federal Reserve’s interest rate cuts since August 2007 resulted in a decrease in both the yields on our variable rate assets and the rates that we pay for our short-term deposits and borrowings. The net interest margin increased during the three months ended March 31, 2011 when compared to the same period in 2010, as a result of the Bank having more interest-bearing liabilities than interest-earning assets that repriced as market rates decreased over the period. Our net interest margins for the three months ended March 31, 2011 and 2010 were 3.14% and 2.86%, respectively.

Table of Contents

We have included a number of unaudited tables to assist in our description of various measures of our financial performance. For example, the “Average Balances” table shows the average balance of each category of our assets and liabilities as well as the yield we earned or the rate we paid with respect to each category during the three months ended March 31, 2011 and 2010. Our loans typically provide higher interest yields than do other types of interest-earning assets, which is why we direct a substantial percentage of our earning assets into our loan portfolio. Similarly, the “Rate/Volume Analysis” tables help demonstrate the effect of changing interest rates and changing volume of assets and liabilities on our financial condition during the periods shown. We also track the sensitivity of our various categories of assets and liabilities to changes in interest rates, and we have included tables to illustrate our interest rate sensitivity with respect to interest-earning accounts and interest-bearing accounts. Finally, we have included various tables that provide detail about our investment securities, our loans, our deposits and other borrowings.

Three Months Ended March 31, 2011 and 2010

The following table sets forth information related to our average balance sheet, average yields on assets, and average costs of liabilities. We derived these yields by dividing income or expense by the average balance of the corresponding assets or liabilities. We derived average balances from the daily balances throughout the periods indicated. During the three months ended March 31, 2011 and 2010, we had no securities purchased with agreements to resell. All investments were owned at an original maturity of over one year.

Table of Contents

Average Balances, Income and Expenses, and Rates

	For the Three Months Ended March 31, 2011							For the Three Months Ended March 31, 2010
	Average Balance			Income/ Expense		Yield/ Rate(1)		Average Balance			Income/ Expense		Yield/ Rate(1)
	(dollars in thousands)
Earning assets:
Interest bearing balances	$	1,765		$	—	0.02	%	$	938		$	1	0.05	%
Federal funds sold	19,693			16		0.33	%	15,815			13		0.33	%
Taxable investment securities	61,838			511		3.35	%	232,735			2,488		4.34	%
Non-taxable investment securities	—			—		—	%	2,231			22		4.03	%
Loans receivable(2)	431,811			5,631		5.29	%	484,478			6,323		5.29	%
Total earning assets	515,107			6,158		4.85	%	736,197			8,847		4.87	%

Nonearning assets:
Cash and due from banks	3,046							4,376
Mortgages held for sale	252							353
Premises and equipment, net	22,565							19,055
Other assets	33,260							31,993
Allowance for loan losses	(10,353		)					(10,546		)
Total nonearning assets	48,770							45,231
Total assets	$	563,877						$	781,428

Interest-bearing liabilities:
Interest bearing transaction accounts	$	28,232		51		0.74	%	$	29,682		82		1.12	%
Savings & money market	137,154			308		0.91	%	246,135			903		1.49	%
Time deposits less than $100,000	118,340			563		1.93	%	200,486			1,075		2.18	%
Time deposits greater than $100,000	170,912			706		1.67	%	103,985			671		2.62	%
Securities sold under repurchase agreement	20,016			203		4.11	%	52,278			215		1.67	%
Advances from FHLB	27,778			137		1.99	%	73,222			513		2.84	%
Junior subordinated debentures	14,434			181		5.07	%	14,434			176		4.95	%
ESOP borrowings	1,625			18		4.56	%	2,112			17		3.27	%
Federal funds purchased	18			—		0.54	%	50			1		0.40	%
Total interest-bearing liabilities	518,509			2,167		1.69	%	722,384			3,653		2.05	%

Noninterest-bearing liabilities:
Demand deposits	16,598							15,169
Other liabilities	4,493							4,522
Shareholders’ equity	24,277							39,353

Total liabilities and shareholders’ equity	$	563,877						$	781,428
Net interest income				$	3,991						$	5,194
Net interest spread						3.16	%						2.82	%
Net interest margin						3.14	%						2.86	%

(1) Annualized for the three month period.

(2) Includes nonaccruing loans

During the three months ended March 31, 2011, the net interest spread and net interest margin increased in comparison to the previous period in 2010. Our net interest spread was 3.16% and 2.82% for the three months ended March 31, 2011 and 2010, respectively. Our net interest margin for the three months ended March 31, 2011 was 3.14%, compared to 2.86% for the three months ended March 31, 2010. During the first quarter of 2011, interest-earning assets averaged $515.1 million, compared to $736.2 million in the same quarter of 2010. During the same periods, average interest-bearing liabilities were $518.5 million and $722.4 million, respectively.

Interest income for the three months ended March 31, 2011 was $6.2 million, consisting of $5.6 million on loans, $511,000 on investments, and $16,000 on federal funds sold. Interest income for the three months ended March 31, 2010 was $8.8 million, consisting of $6.3 million on loans, $2.5 million on investments and interest bearing balances, and $14,000 on federal funds sold and interest bearing balances. Interest and fees on loans represented 91.4% and 71.5% of total interest income for the three months ended March 31, 2011 and 2010, respectively. Income from investments, federal funds sold, and interest bearing balances represented 8.6% and 28.5% of total interest income for the three months ended March 31, 2011 and 2010, respectively. The higher percentage of interest income from loans relates to our strategy to maintain a

Table of Contents

significant portion of our assets in higher earning loans compared to lower yielding investments. Average loans represented 83.8% and 65.8% of average interest-earning assets for the three months ended March 31, 2011 and 2010, respectively.

Interest expense for the three months ended March 31, 2011 was $2.2 million, consisting of $1.6 million related to deposits, $203,000 related to securities sold under repurchase agreements, $181,000 related to junior subordinated debentures, $137,000 related to Federal Home Loan Bank (“FHLB”) advances, and $18,000 related to ESOP borrowings. Interest expense for the three months ended March 31, 2010 was $3.7 million, consisting of $2.7 million related to deposits, $215,000 related to securities sold under repurchase agreements, $176,000 related to junior subordinated debentures, $513,000 related to Federal Home Loan Bank (“FHLB”) advances, and $18,000 related to ESOP borrowings and federal funds purchased. Interest expense on deposits for the three months ended March 31, 2011 and 2010 represented 75.1% and 74.8%, respectively, of total interest expense, while interest expense on other liabilities represented 24.9% and 25.2%, respectively, of total interest expense for the three months ended March 31, 2011 and 2010, respectively. During the three months ended March 31, 2011, average interest-bearing liabilities were lower than the comparable period ended March 31, 2010 by $203.9 million.

Net interest income, the largest component of our income, was $4.0 million and $5.2 million for the three months ended March 31, 2011 and March 31, 2010, respectively. The decrease of $1.2 million resulted from the net effect of lower levels of both average earning assets and interest-bearing liabilities resulting in a $2.7 million decrease in interest income and a $1.5 million decrease in interest expense.

Rate/Volume Analysis

Net interest income can be analyzed in terms of the impact of changing interest rates and changing volume. The following table sets forth the effect which the varying levels of interest-earning assets and interest-bearing liabilities and the applicable rates have had on changes in net interest income for the periods presented.

	Three Months Ended March 31, 2011 vs. March 31, 2010												Three Months Ended March 31, 2010 vs. March 31, 2009
	Increase (Decrease) Due to												Increase (Decrease) Due to
	Volume			Rate			Rate/ Volume			Total			Volume			Rate			Rate/ Volume			Total
	(in thousands)
Interest income
Loans	$	(687	)	$	(6	)	$	—		$	(693	)	$	267		$	(78	)	$	(3	)	$	186
Taxable investment securities	(1,827		)	(566		)	416			(1,977		)	(81		)	(419		)	11			(489		)
Non-taxable investment securities	(22		)	—			—			(22		)	(29		)	1			—			(28		)
Federal funds sold	3			—			—			3			4			2			3			9
Interest bearing balances	—			—			—			—			—			(1		)	—			(1		)
Total interest income	(2,533		)	(572		)	416			(2,689		)	161			(495		)	11			(323		)

Interest expense
Deposits	(591		)	(654		)	142			(1,103		)	259			(1,184		)	(82		)	(1,007		)
Junior subordinated debentures	—			4			—			4			—			(28		)	—			(28		)
Advances from FHLB	(318		)	(153		)	95			(376		)	(118		)	65			(13		)	(66		)
Securities sold under repurchase agreements	(133		)	316			(195		)	(12		)	43			(60		)	(11		)	(28		)
Federal funds purchased	—			—			—			—			(1		)	(1		)	1			(1		)
ESOP borrowings	(4		)	7			(2		)	1			(3		)	6			(1		)	2
Other borrowings	—			—			—			—			(2		)	(2		)	2			(2		)
Total interest expense	(1,046		)	(480		)	40			(1,486		)	178			(1,204		)	(104		)	(1,130		)

Net interest income	$	(1,487	)	$	(92	)	$	376		$	(1,203	)	$	(17	)	$	709		$	115		$	807

Provision for Loan Losses

We have established an allowance for loan losses through a provision for loan losses charged as an expense on our statement of operations. We review our loan portfolio periodically to evaluate our outstanding loans and to measure both the performance of the portfolio and the adequacy of the allowance for loan losses. Please see the discussion below under “Balance Sheet Review - Allowance for Loan Losses” for a description of the factors we consider in determining the amount of the provision we expense each period to maintain this allowance.

Table of Contents

Three Months Ended March 31, 2011 and 2010

Included in the statement of operations for the three months ended March 31, 2011 and 2010 is a noncash expense related to the provision for loan losses of $4.2 million and $3.6 million, respectively. The increase in the allowance for the three months ended March 31, 2011 relates to our decision to increase the allowance in response to the deteriorating credit environment as evidenced by the increasing level of nonperforming assets. The allowance for loan losses was approximately $12.4 million and $10.9 million as of March 31, 2011 and 2010, respectively. The allowance for loan losses as a percentage of gross loans was 2.94% at March 31, 2011 and 2.27% at March 31, 2010. At March 31, 2011, we had 65 nonperforming loans totaling approximately $28.5 million. Net charge offs amounted to approximately $3.3 million and $2.7 million for the three months ended March 31, 2011 and 2010, respectively.

Noninterest Income

The following table sets forth information related to our noninterest income during the three months ended March 31, 2011 and 2010:

	2011		2010
	(in thousands)
Service fees on deposit accounts	$	13	$	11
Residential mortgage origination fees	47		61
Origination income on mortgage loans sold	3		5
Gain on sale of investment securities	—		139
Other service fees and commissions	156		131
Bank owned life insurance	135		133
Gain on extinguishment of debt	—		400
Other	6		13
Total noninterest income	$	360	$	893

Three Months Ended March 31, 2011 and 2010

Noninterest income for the three months ended March 31, 2011 was $360,000 compared to $893,000 during the same period in 2010. The decrease was primarily attributable to the absence of gains on sale of investment securities and the extinguishment of debt related to the ESOP during the first quarter of 2010. For the three months ended March 31, 2011, we did not have any sales of investment securities in comparison to the $139,000 gains for the same period in 2010.

Residential mortgage origination income consists primarily of mortgage origination fees we receive on residential loans sold to third parties. Residential mortgage origination fees were $47,000 and $61,000 for the three months ended March 31, 2011 and 2010, respectively. The decrease of $14,000 related primarily to a decrease in origination volume in the mortgage department during the first quarter of 2011. We received $3,000 of origination income on mortgage loans sold for the three months ended March 31, 2011 compared to $5,000 for the same period in 2010.

Service fees on deposits consist primarily of service charges on our checking, money market, and savings accounts. Deposit fees were $13,000 and $11,000 for the three months ended March 31, 2011 and 2010, respectively. Other service fees, commissions, and the fee income received from customer NSF transactions increased $25,000 to $156,000 for the three months ended March 31, 2011, when compared to the same period in 2010.

An additional $2,000 in noninterest income was primarily attributable to an increase in the cash surrender value of bank owned life insurance for the three months ended March 31, 2011 when compared to the same period in 2010. Other income consists primarily of income received on fees received on debit and credit card transactions, income from sales of checks, and the fees received on wire transfers. Other income was $6,000 and $13,000 for the three months ended March 31, 2011 and 2010, respectively.

Table of Contents

Noninterest Expense

The following table sets forth information related to our noninterest expense for the three months ended March 31, 2011 and 2010:

	2011		2010
	(in thousands)
Salaries and benefits	$	1,692	$	2,040
Occupancy	392		407
Furniture and equipment expense	203		211
Other real estate owned expense	853		200
Professional fees	396		361
Advertising and marketing	14		190
Insurance	94		73
FDIC assessment	355		360
Data processing and related costs	159		136
Telephone	55		46
Postage	3		11
Office supplies, stationery and printing	16		25
Other loan related expense	64		42
Other	83		140
Total noninterest expense	$	4,379	$	4,242

Three Months Ended March 31, 2011 and 2010

We incurred noninterest expense of approximately $4.4 million for the three months ended March 31, 2011 compared to $4.2 million for the three months ended March 31, 2010. The $653,000 increase in other real estate owned expense primarily accounted for the increase in noninterest expense for the three months ended March 31, 2011 compared to the same period in 2010. The remaining differences resulted from increases of $35,000 in professional fees, $23,000 in data processing costs, $22,000 in other loan related expenses, $21,000 in insurance costs and $9,000 in telecommunications expense offset by a decrease of $348,000 in salaries and benefits, $176,000 in marketing costs, $15,000 in occupancy expense, $9,000 in office supplies, stationery and printing costs, $8,000 in furniture and equipment expense, $8,000 in postage, $5,000 in FDIC assessments, and $57,000 in other expenses.

Salaries and employee benefits expense was approximately $1.7 million and $2.0 million for the three months ended March 31, 2011 and 2010, respectively. These expenses represented 38.6% and 48.1% of our total noninterest expense for the three months ended March 31, 2011 and 2010, respectively. The $348,000 decrease in salaries and employee benefits expense resulted from decreases of $190,000 in other benefits costs, $93,000 in base compensation, $63,000 in stock based compensation related to the voluntary forfeiture of outstanding stock options by employees and directors and $2,000 in additional incentive compensation.

Data processing and related costs increased approximately $23,000, or 16.9%, for the three months ended March 31, 2011 compared to the same period in 2010. These expenses were $159,000 and $136,000 for the three months ended March 31, 2011 and 2010, respectively. During the three months ended March 31, 2011, our data processing costs for our core processing system were $146,000 compared to $122,000 for the three months ended March 31, 2010.

Income Tax Expense

Three Months Ended March 31, 2011 and 2010

Our lack of income tax expense or benefit for March 31, 2011 and 2010 is reflective of our establishing a valuation allowance for deferred tax assets previously recorded. Management has determined that is more likely than not that the deferred tax asset related to continuing operations at March 31, 2011 will not be realized, and accordingly, has established a full valuation allowance.

Table of Contents

Balance Sheet Review

General

At March 31, 2011, we had total assets of $548.1 million, consisting principally of $408.8 million in net loans, $56.1 million in investment securities, $22.5 million in net premises, furniture and equipment, $16.6 million in federal funds sold and $3.9 million in cash and due from banks. Our liabilities at March 31, 2011 totaled $528.8 million, consisting principally of $454.6 million in deposits, $20.0 million in securities sold under agreements to repurchase, $14.4 million in junior subordinated debentures, $34.0 million in FHLB advances and $1.6 million in borrowings related to the ESOP. At March 31, 2011, our shareholders’ equity was $19.3 million.

Federal Funds Sold

At March 31, 2011, our $16.6 million in short-term investments in federal funds sold on an overnight basis comprised 3.0% of total assets, compared to $24.1 million, or 4.2% of total assets, at December 31, 2010. We continue to monitor our short-term liquidity and closely manage our overnight cash positions in light of the current economic environment.

Investments

At March 31, 2011, the $56.1 million in our available-for-sale investment securities portfolio represented approximately 10.2% of our total assets compared to $58.0 million, or 10.1% of total assets, at December 31, 2010. At March 31, 2011, we held U.S. government agency securities, government sponsored enterprises, municipal and mortgage-backed securities with a fair value of $56.1 million and an amortized cost of $56.5 million for a net unrealized loss of $378,000. We utilize the investment portfolio to provide additional income and to provide liquidity. We anticipate maintaining an investment portfolio to provide both increased earnings and liquidity.

Contractual maturities and yields on our investments at March 31, 2011 are shown in the following table. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	One year or less				After one year through five years				After five years through ten years				After ten years				Total
	Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield
	(dollars in thousands)
Available for Sale:
Government- sponsored enterprises	$	—	—	%	$	—	—	%	$	2,033	4.17	%	$	—	—	%	$	2,033	4.17	%
Mortgage-backed	4,361		(19.78	)%	—		—	%	—		—	%	49,703		3.35	%	54,064		1.46	%
Total	$	4,361	(19.78	)%	$	—	—	%	$	2,033	4.17	%	$	49,703	3.35	%	$	56,097	1.55	%

At March 31, 2011, our investments included government sponsored enterprises, which consist of securities issued by the Federal Home Loan Mortgage Corporation with amortized costs of approximately $2.0 million. Mortgage-backed securities consist of securities issued by the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation and Government National Mortgage Association with amortized costs of approximately $16.6 million, $13.4 million and $24.5 million, respectively.

At March 31, 2011, the fair value of investments issued by the Federal National Mortgage Association was approximately $2.0 million. Mortgage-backed securities consist of securities issued by the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation and Government National Mortgage Association with fair value of approximately $16.4 million, $13.3 million and $24.3 million, respectively.

Other nonmarketable equity securities at March 31, 2011 consisted of Federal Home Loan Bank stock with a cost of $5.2 million and other investments of approximately $29,000.

Table of Contents

The amortized costs and the fair value of our investments at March 31, 2011 and December 31, 2010 are shown in the following table.

	March 31, 2011				December 31, 2010
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(in thousands)
Available-for-sale:
Government-sponsored enterprises	$	2,001	$	2,033	$	2,001	$	2,053
Mortgage-backed securities	54,474		54,064		56,364		55,903
Total	$	56,475	$	56,097	$	58,365	$	57,956

Loans

Since loans typically provide higher interest yields than other types of interest-earning assets, a substantial percentage of our earning assets are invested in our loan portfolio. Average loans at March 31, 2011 and December 31, 2010 were $431.8 million and $468.0 million, respectively. Gross loans outstanding at March 31, 2011 and December 31, 2010 were $421.2 million and $437.7 million, respectively.

Loans secured by real estate mortgages are the principal component of our loan portfolio. Most of our real estate loans are secured by residential or commercial property. We do not generally originate traditional long term residential mortgages for the portfolio, but we do issue traditional second mortgage residential real estate loans and home equity lines of credit. We obtain a security interest in real estate whenever possible, in addition to any other available collateral. This collateral is taken to increase the likelihood of the ultimate repayment of the loan. Generally, we limit the loan-to-value ratio on loans we make to 85%. Due to the short time our portfolio has existed, the current mix may not be indicative of our future portfolio mix. We attempt to maintain a relatively diversified loan portfolio to help reduce the risk inherent in concentration in certain types of collateral.

The following table summarizes the composition of our loan portfolio at March 31, 2011 and December 31, 2010.

	March 31, 2011					December 31, 2010
	Amount			% of Total		Amount			% of Total
	(dollars in thousands)
Commercial
Commercial and industrial	$	22,273		5.3	%	$	23,255		5.3	%

Real Estate
Mortgage	305,659			72.6	%	315,181			72.0	%
Construction	90,581			21.5	%	96,001			21.9	%
Total real estate	396,240			94.1	%	411,182			93.9	%

Consumer
Consumer	3,146			0.7	%	3,775			0.9	%
Total Gross Loans	421,659			100.1	%	438,212			100.1	%
Deferred origination fees, net	(503		)	(0.1	)%	(524		)	(0.1	)%

Total gross loans, net of deferred fees	421,156			100.0	%	437,688			100.0	%
Less — allowance for loan losses	(12,390		)			(11,459		)
Total loans, net	$	408,766				$	426,229

Table of Contents

Maturities and Sensitivity of Loans to Changes in Interest Rates

The information in the following table is based on the contractual maturities of individual loans, including loans that may be subject to renewal at their contractual maturity. Renewal of such loans is subject to review and credit approval, as well as modification of terms upon maturity. Actual repayments of loans may differ from the maturities reflected below because borrowers have the right to prepay obligations with or without prepayment penalties.

The following table summarizes the loan maturity distribution by type and related interest rate characteristics at March 31, 2011:

	One year or less			After one but within five years		After five years		Total
	(in thousands)
Commercial	$	10,312		$	11,327	$	634	$	22,273
Real estate	146,847			208,174		41,219		396,240
Consumer	670			2,086		390		3,146
Deferred origination fees, net	(509		)	3		3		(503		)
Total gross loans, net of deferred fees	$	157,320		$	221,590	$	42,246	$	421,156

Gross loans maturing after one year with:
Fixed interest rates								$	142,968
Floating interest rates								120,862
Total								$	263,830

Allowance for Loan Losses and Provisions

We have established an allowance for loan losses through a provision for loan losses charged to expense on our statement of operations. The allowance is maintained at a level deemed appropriate by management to provide adequately for known and inherent losses in the portfolio. The allowance for loan losses represents an amount which we believe will be adequate to absorb probable losses on existing loans that may become uncollectible. Our judgment as to the adequacy of the allowance for loan losses is based on a number of assumptions about future events, which we believe to be reasonable, but which may or may not prove to be accurate. Our determination of the allowance for loan losses is based on evaluations of the collectability of loans, including consideration of factors such as the balance of impaired loans, the quality, mix, and size of our overall loan portfolio, economic conditions that may affect the borrower’s ability to repay, the amount and quality of collateral securing the loans, our historical loan loss experience, and a review of specific problem loans. We also consider subjective issues such as changes in the lending policies and procedures, changes in the local/national economy, changes in volume or type of credits, changes in volume/severity of problem loans, quality of loan review and board of director oversight, concentrations of credit, and peer group comparisons.

More specifically, in determining our allowance for loan losses, we review loans for specific and impaired reserves based on current appraisals less estimated closing costs. General and unallocated reserves are determined using historical loss trends applied to risk rated loans grouped by FDIC call report classification code. The general and unallocated reserves are calculated by applying the appropriate historical loss ratio to the loan categories grouped by risk rating (pass, special mention, substandard and doubtful). The quantitative value of the qualitative factors, as described below, is then applied to this amount to estimate the general and unallocated reserve for the specific loans within this rating category and particular loan category. Impaired loans are excluded from this analysis as they are individually reviewed for valuation. The sum of all such amounts determines our general and unallocated reserves.

We also track our portfolio and analyze loans grouped by call report categories. The first step in this process is to risk grade each and every loan in the portfolio based on a common set of parameters. These parameters include debt to worth, liquidity of the borrower, net worth, experience in a particular field and other factors. Weight is also given to the relative strength of any guarantors on the loan. We have retained an independent consultant to review the loan files on a test basis to confirm the loan grade assigned to the loan.

After risk grading each loan, we then use fourteen qualitative factors to analyze the trends in the portfolio. These fourteen factors include both internal and external factors. The internal factors considered are the concentration of credit across the portfolio, current delinquency ratios and trends, the experience level of management and staff, our adherence to

Table of Contents

lending policies and procedures, current loss and recovery trends, the nature and volume of the portfolio’s categories, current nonaccrual and problem loan trends, the quality of our loan review system, policy exceptions, value of underlying collateral and other factors which include insurance shortfalls, loan fraud and unpaid tax risk. The external factors considered are regulatory and legal factors and the current economic and business environment, which includes indicators such as national GDP, pricing indicators, employment statistics, housing statistics, market indicators, financial regulatory economic analysis, and economic forecasts from reputable sources. A quantitative value is assigned to each of the fourteen internal and external factors, which, when added together, creates a net qualitative weight. The net qualitative weight is then added to the minimum loss ratio. Negative trends in the loan portfolio increase the quantitative values assigned to each of the qualitative factors and, therefore, increase the loss ratio. As a result, an increased loss ratio will result in a higher allowance for loan loss. For example, as general economic and business conditions decline, this qualitative factor’s quantitative value will increase, which will increase the net qualitative weight and the loss ratio (assuming all other qualitative factors remain constant). Similarly, positive trends in the loan portfolio, such as improvement in general economic and business conditions, will decrease the quantitative value assigned to this qualitative factor, thereby decreasing the net qualitative weight (assuming all other qualitative factors remain constant). These factors are reviewed and updated by the Bank’s Senior Risk Committee on a quarterly basis to arrive at a consensus for our qualitative adjustments.

Our methodology for determining our historical loss ratio is to analyze the most recent four quarters’ losses because we believe this period encompasses the most severe economic downturn and resulting credit losses in recent history. The resulting historical loss factor is used as a beginning point upon which we add our quantitative adjustments based on the qualitative factors discussed above. Once the qualitative adjustments are made, we refer to the final amount as the total factor. The total factor is then multiplied by the loans outstanding for the period ended, except for any loans classified as non-performing which are addressed specifically as discussed below, to estimate the general and unallocated reserves.

Separately, we review all impaired loans individually to determine a specific allocation for each. In our assessment of impaired loans, we consider the primary source of repayment when determining whether or not loans are collateral dependent. Impairment of a loan is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. When management determines that a loan is impaired, the difference between our investment in the related loan and the present value of the expected future cash flows, or the fair value of the collateral, is generally charged against the allowance for loan losses.

Periodically, we adjust the amount of the allowance based on changing circumstances. We recognize loan losses to the allowance and add back subsequent recoveries. In addition, on a quarterly basis we informally compare our allowance for loan losses to various peer institutions; however, we recognize that allowances will vary as financial institutions are unique in the make-up of their loan portfolios and customers, which necessarily creates different risk profiles for the institutions. We would only consider further adjustments to our allowance for loan losses based on this review of peers if our allowance was significantly different from our peer group. To date, we have not made any such adjustment. There can be no assurance that loan charge-offs of loans in future periods will not exceed the allowance for loan losses as estimated at any point in time or that provisions for loan losses will not be significant to a particular accounting period, especially considering the overall weakness in the commercial and residential real estate markets in our market areas.

Table of Contents

The following table summarizes the activity related to our allowance for loan losses for the three months ended March 31, 2011 and 2010.

	2011			2010
	(dollars in thousands)
Balance, beginning of year	$	11,459		$	10,048
Charge offs, Commercial and Industrial	(166		)	(229		)
Charge offs, Real Estate Mortgage	(2,381		)	(1,071		)
Charge offs, Real Estate Construction	(752		)	(1,260		)
Charge offs, Consumer	(12		)	(174		)
Recoveries, Commercial and Industrial	8			5
Recoveries, Real Estate Mortgage	27			2
Recoveries, Real Estate Construction	3			1
Recoveries, Consumer	2			—
Provision for loan losses	4,202			3,600
Balance, end of period	$	12,390		$	10,922

Total loans outstanding at end of period	$	421,156		$	480,309
Allowance for loan losses to gross loans	2.94		%	2.27		%
Net charge-offs to average loans	0.76		%	0.56		%

Nonperforming Assets

The following table sets forth our nonperforming assets at March 31, 2011 and December 31, 2010:

	2011			2010
	(dollars in thousands)
Nonaccrual loans	$	28,518		$	35,556
Loans 90 days or more past due and still accruing interest	—			—
Loans restructured or otherwise impaired	—			—
Total impaired loans	28,518			35,556
Other real estate owned	14,561			11,906
Total nonperforming assets	$	43,079		$	47,462

Nonperforming assets to total assets	7.86		%	8.31		%

The Bank had 65 nonperforming loans at March 31, 2011, totaling $28.5 million and 76 nonperforming loans totaling $35.6 million at December 31, 2010, all of which were considered impaired. Of the 65 nonperforming loans at March 31, 2011, it is anticipated that 50 loans totaling approximately $22.0 million will move to other real estate owned through foreclosure or through the Bank’s acceptance of a deed in lieu of foreclosure. An additional seven loans amounting to approximately $5.3 million are expected to be paid in full, and eight loans totaling approximately $1.2 million will be refinanced either through the Bank or elsewhere. At March 31, 2011 and December 31, 2010, the allowance for loan losses was $12.4 million and $11.5 million, respectively, or 2.94% and 2.62%, respectively, of outstanding loans. We remain committed to working with borrowers to help them overcome their difficulties and will review loans on a loan by loan basis. However, despite our commitment, resolution across the portfolio is dependent on improvements in employment, housing, and overall economic conditions at the local, regional and national levels.

Included in nonperforming loans at March 31, 2011 are $12.4 million in residential properties, representing approximately 63.3% of the Bank’s nonperforming loan total. As a result of the current economic environment, the collateral value of these residential properties may have declined. To determine current collateral values, we obtain new appraisals on nonperforming loans. In the process of estimating collateral values for nonperforming loans, management evaluates markets for stagnation or distress and discounts appraised values on a property by property basis. Currently, management does not review collateral values for properties located in stagnant or distressed residential areas if the loan is performing and not up for renewal.

As of March 31, 2011, we had 81 loans with a current principal balance of $30.9 million on the watch list compared to 76 loans with a current principal balance of $27.6 million at December 31, 2010. The watch list is the classification utilized by us when we have an initial concern about the financial health of a borrower. We then gather current financial information about the borrower and evaluate our current risk in the credit. We will then either reclassify it as “substandard”

Table of Contents

or back to its original risk rating after a review of the information. There are times when we may leave the loan on the “watch list,” if, in management’s opinion, there are risks that cannot be fully evaluated without the passage of time, and we want to review it on a more regular basis. Loans on the watch list are not considered “potential problem loans” until they are determined by management to be classified as substandard.

Loans past due 30-89 days amounted to $4.7 million at March 31, 2011, compared to $7.7 million at December 31, 2010. At March 31, 2011, we did not have any loans past due greater than 90 days that were not already placed on nonaccrual. Generally, a loan is placed on nonaccrual status when it becomes 90 days past due as to principal or interest, or when we believe, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of the loan is doubtful. A payment of interest on a loan that is classified as nonaccrual is applied against the principal balance. During the periods ended March 31, 2011 and December 31, 2010, we received approximately $6,000 and $735,000, respectively, in interest income in relation to loans that were on nonaccrual status at the respective period end prior to them being placed on nonaccrual status. In addition, the Bank held approximately $14.6 million and $11.9 million in other real estate owned at the period ending March 31, 2011 and December 31, 2010, respectively.

Deposits

Our primary source of funds for loans and investments is our deposits. National and local market trends over the past several years suggest that consumers have moved an increasing percentage of discretionary savings funds into investments such as annuities, stocks and mutual funds. Accordingly, it has become more difficult to attract local deposits. In the past, we have chosen to obtain a portion of certificates of deposits from outside of our market. The deposits obtained outside of our market areas generally have lower rates and maturities than those being offered for similar deposit products in our local market. Due to the Consent Order, we may not accept brokered deposits unless a waiver is granted by the FDIC. We anticipate that our remaining $1.6 million of wholesale deposits will runoff as they mature during 2011. The amount of wholesale deposits was $1.6 million, or 0.3% of total deposits, at March 31, 2011, compared to $3.5 million, or 0.7% of total deposits, at December 31, 2010. Our loan-to-deposit ratio was 92.7% and 91.0% at March 31, 2011 and December 31, 2010, respectively. Although we currently do not utilize brokered deposits as a funding source, if we were to seek to begin using such funding source, there is no assurance that the FDIC will grant the approval. These restrictions could have a substantial negative impact on our liquidity. Additionally, we are restricted from offering an effective yield on deposits of more than 75 basis points over the national rates published by the FDIC weekly on their website.

The following table shows the average balance amounts and the average rates paid on deposits held by us for the three months ended March 31, 2011 and the year ended December 31, 2010.

	March 31, 2011				December 31, 2010
	Average Balance		Rate		Average Balance		Rate
	(dollars in thousands)
Noninterest bearing demand deposits	$	16,598	—	%	$	14,988	—	%
Interest bearing demand deposits	28,232		0.74	%	29,044		0.98	%
Savings and money market accounts money	137,154		0.91	%	193,512		1.36	%
Time deposits less than $100,000	118,340		1.93	%	166,797		1.89	%
Time deposits greater than $100,000	170,912		1.67	%	135,009		2.05	%
Total deposits	$	471,236	1.40	%	$	539,350	1.64	%

All of our time deposits are certificates of deposits. The maturity distribution of our time deposits of $100,000 or more at March 31, 2011 and December 31, 2010 was as follows:

	March 31, 2011		December 31, 2010
	(in thousands)
Three months or less	$	58,907	$	40,831
Over three through six months	22,395		54,009
Over six though twelve months	37,547		43,885
Over twelve months	46,764		37,568
Total	$	165,613	$	176,293

Table of Contents

Borrowings and Other Interest-Bearing Liabilities

The following table outlines our various sources of borrowed funds during the three months ended March 31, 2011 and the year ended December 31, 2010, the amounts outstanding at the end of each period, at the maximum point for each component during the periods, on average for each period, and the average and period end interest rate that we paid for each borrowing source. The maximum month-end balance represents the high indebtedness for each component of borrowed funds at any time during each of the periods shown.

	Ending		Period End		Maximum Month End		Average for the Period
	Balance		Rate		Balance		Balance		Rate
	(dollars in thousands)
At or for the three months ended March 31, 2011:
Securities sold under agreement to repurchase	$	20,000	3.79	%	$	20,000	$	20,016	4.11	%
Advances from FHLB	34,000		1.76	%	34,000		27,778		1.99	%
Junior subordinated debentures	14,434		5.00	%	14,434		14,434		5.07	%
ESOP borrowings	1,575		4.50	%	1,625		1,625		4.56	%
Federal funds purchased	—		—	%	—		18		0.54	%

At or for the year ended December 31, 2010:
Securities sold under agreement to repurchase	$	20,000	3.76	%	$	60,000	$	30,514	2.60	%
Advances from FHLB	27,000		2.00	%	85,000		44,430		2.72	%
Junior subordinated debentures	14,434		4.92	%	14,434		14,434		5.06	%
ESOP borrowings	1,625		4.50	%	2,300		1,839		4.20	%
Federal funds purchased	—		—	%	—		34		0.58	%

We have exercised our right to defer distributions on the junior subordinated debentures (and the related trust preferred securities), during which time we cannot pay any dividends on our common stock. In addition, the Consent Order and the FRB Agreement prohibits us from declaring or paying any dividends or making any distributions of interest, principal, or other sums on subordinated debentures without the prior approval of the supervisory authorities.

Federal Home Loan Bank Advances, Fed Funds Lines of Credit and Federal Reserve Discount Window.

Our other borrowings have traditionally included proceeds from FHLB advances and federal funds lines of credit from correspondent banks. At March 31, 2011, we had $34.0 million in total advances and lines from the FHLB with a remaining credit availability of $109.3 million and an excess lendable collateral value of approximately $408,000. At March 31, 2011, we had two federal funds lines of credit with an unrelated bank totaling $13.0 million. These lines are available for general corporate purposes. These lines may be terminated at any time based on our financial condition. We also have credit availability through the Federal Reserve Discount Window. As of March 31, 2011, $68.8 million was available, based on qualifying collateral. The Federal Reserve Discount Window borrowing capacity has been curtailed to only overnight terms, contingent upon credit approval for each transaction. Availability of the Federal Reserve Discount Window may be terminated at any time by the Federal Reserve, and we can make no assurances that this funding source will continue to be available to us.

Capital Resources

Total shareholders’ equity was $19.3 million at March 31, 2011 and $23.6 million at December 31, 2010. The difference is attributable to the amount of preferred stock dividend accrued of $181,000, additional paid in capital related to the ESOP of $52,000, an increase in the guarantee of ESOP borrowings of $55,000, net of current year reductions, and an increase of $20,000 in the fair value of available-for-sale securities, net of the loss of $4.2 million for the three month period ended March 31, 2011. Since our inception, we have not paid any cash dividends on our common shares.

The following table shows the annualized return on average assets (net income (loss) divided by average total assets), annualized return on average equity (net income (loss) divided by average equity), and average equity to average assets ratio (average equity divided by average total assets) for the three months ended March 31, 2011 and the year ended December 31, 2010.

Table of Contents

	March 31, 2011		December 31, 2010
Return on average assets	(3.04	)%	(2.33	)%
Return on average equity	(70.67	)%	(45.63	)%
Equity to assets ratio	4.31	%	5.10	%

The Federal Reserve and bank regulatory agencies require bank holding companies and financial institutions to maintain capital at adequate levels based on a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 100%. Under the capital adequacy guidelines, regulatory capital is classified into two tiers. These guidelines require an institution to maintain a certain level of Tier 1 and Tier 2 capital to risk-weighted assets. Tier 1 capital consists of common shareholders’ equity, excluding the unrealized gain or loss on securities available for sale, minus certain intangible assets. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100% based on the risks believed to be inherent in the type of asset. Tier 2 capital consists of Tier 1 capital plus the general reserve for loan losses, subject to certain limitations. Our Bank is required to maintain capital at a minimum level based on total average assets, which is known as the Tier 1 leverage ratio.

To be considered “well-capitalized,” banks must maintain total risk-based capital of at least 10%, Tier 1 capital of at least 6%, and a leverage ratio of at least 5%. To be considered “adequately capitalized” under capital guidelines, we must maintain a minimum total risk-based capital of 8%, with at least 4% being Tier 1 capital. Banking regulators have established a minimum Tier 1 leverage ratio of at least 4%. In addition, the Consent Order requires us to achieve and maintain Tier 1 capital at least equal to 8% of total assets and Total Risk-Based capital at least equal to 10% of total risk-weighted assets by May 27, 2011. As of March 31, 2011, the Bank is not in compliance with the capital requirements established in the Consent Order.

The following table sets forth the Company’s various capital ratios at March 31, 2011 and December 31, 2010. For all periods, the Company was in compliance with regulatory capital requirements established by the Federal Reserve Board’s Capital Adequacy Guidelines for Bank Holding Companies.

Tidelands Bancshares, Inc.

	March 31,		December 31,
	2011		2010
Leverage ratio	4.61	%	5.47	%
Tier 1 risk-based capital ratio	5.99	%	7.06	%
Total risk-based capital ratio	9.09	%	9.77	%

The following table sets forth the Bank’s various capital ratios at March 31, 2011 and December 31, 2010.

Tidelands Bank

	March 31,		December 31,
	2011		2010
Leverage ratio	5.87	%	6.38	%
Tier 1 risk-based capital ratio	7.61	%	8.22	%
Total risk-based capital ratio	8.88	%	9.49	%

To provide the additional capital needed to support our Bank’s growth in assets, during the first quarter of 2005 we borrowed $2.1 million under a short-term holding company line of credit. On March 31, 2005, we completed a private placement of 1,712,000 shares at $9.35 to increase the capital of the Company and the Bank. Net proceeds from the offering were approximately $14.9 million. Upon closing the transaction, the holding company line of credit was repaid in full. On February 22, 2006, Tidelands Statutory Trust, a non-consolidated subsidiary of the Company, issued and sold floating rate capital securities of the trust, generating net proceeds of $8.0 million. The trust loaned these proceeds to the Company to use for general corporate purposes, primarily to provide capital to the Bank. The junior subordinated debentures qualify as Tier 1 capital under Federal Reserve Board guidelines. On October 10, 2006, we closed a public offering in which 1,200,000 shares of our common stock were issued at a purchase price of $15.00 per share. Net proceeds after deducting the underwriter’s discount and expenses were $16.4 million.

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

Table of Contents

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

Effect of Inflation and Changing Prices

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

Unlike most industrial companies, our assets and liabilities are primarily monetary in nature. Therefore, the effect of changes in interest rates will have a more significant impact on our performance than will the effect of changing prices and inflation in general. In addition, interest rates may generally increase as the rate of inflation increases, although not necessarily in the same magnitude. As discussed previously, we seek to manage the relationships between interest sensitive assets and liabilities in order to protect against wide rate fluctuations, including those resulting from inflation.

Off-Balance Sheet Risk

Commitments to extend credit are agreements to lend to a customer as long as the customer has not violated any material condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. At March 31, 2011, unfunded commitments to extend credit were $14.7 million. A significant portion of the unfunded commitments related to consumer equity lines of credit. Based on historical experience, we anticipate that a significant portion of these lines of credit will not be funded. We evaluate each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on our credit evaluation of the borrower. The type of collateral varies but may include accounts receivable, inventory, property, plant and equipment, and commercial and residential real estate.

At March 31, 2011, there were commitments totaling approximately $587,000 under letters of credit. The credit risk and collateral involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Since most of the letters of credit are expected to expire without being drawn upon, they do not necessarily represent future cash requirements.

Except as disclosed in this report, we are not involved in off-balance sheet contractual relationships, unconsolidated related entities that have off-balance sheet arrangements, or transactions that could result in liquidity needs or other commitments that significantly impact earnings.

Market Risk

Market risk is the risk of loss from adverse changes in market prices and rates, which principally arises from interest rate risk inherent in our lending, investing, deposit gathering, and borrowing activities. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not generally arise in the normal course of our business.

We actively monitor and manage our interest rate risk exposure principally by measuring our interest sensitivity “gap,” and net interest income simulations. Interest sensitivity gap is the positive or negative dollar difference between assets and liabilities that are subject to interest rate repricing within a given period of time. Interest rate sensitivity can be managed by repricing assets or liabilities, selling securities available for sale, replacing an asset or liability at maturity, or adjusting the interest rate during the life of an asset or liability. Managing the amount of assets and liabilities repricing in this same time interval helps to hedge the risk and minimize the impact on net interest income of rising or falling interest rates. We generally would benefit from increasing market rates of interest when we have an asset-sensitive gap position and generally would benefit from decreasing market rates of interest when we are liability-sensitive. We are currently liability sensitive on a cumulative basis over the one year, five year and over five year horizon.

Approximately 51.3% of our loans were variable rate loans at March 31, 2011 and 72.0% of interest-bearing liabilities reprice within one year. However, interest rate movements typically result in changes in interest rates on assets that are different in magnitude from the corresponding changes in rates paid on liabilities. While a substantial portion of our loans reprice within the first three months of the year, a larger majority of our deposits will reprice within a 12-month period. However, our gap analysis is not a precise indicator of our interest sensitivity position. The analysis presents only a

Table of Contents

static view of the timing of maturities and repricing opportunities, without taking into consideration that changes in interest rates do not affect all assets and liabilities equally. For example, rates paid on a substantial portion of core deposits may change contractually within a relatively short time frame, but those rates are viewed by us as significantly less interest-sensitive than market-based rates such as those paid on noncore deposits. Net interest income may be affected by other significant factors in a given interest rate environment, including changes in the volume and mix of interest-earning assets and interest-bearing liabilities.

Liquidity and Interest Rate Sensitivity

Liquidity represents the ability of a company to convert assets into cash or cash equivalents without significant loss, and the ability to raise additional funds by increasing liabilities. Liquidity management involves monitoring our sources and uses of funds in order to meet our day-to-day cash flow requirements while maximizing profits. Liquidity management is made more complicated because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of our investment portfolio is fairly predictable and subject to a high degree of control at the time investment decisions are made. However, net deposit inflows and outflows are far less predictable and are not subject to the same degree of control.

At March 31, 2011 and December 31, 2010, our liquid assets, which consist of cash and due from banks, amounted to $20.6 million and $27.7 million, or 3.8% and 4.9% of total assets, respectively. Our available-for-sale securities at March 31, 2011 and December 31, 2010 amounted to $56.1 million and $58.0 million, or 10.2% and 10.1% of total assets, respectively. Investment securities traditionally provide a secondary source of liquidity since they can be converted into cash in a timely manner. However, approximately $28.6 million of these securities are pledged against outstanding debt or borrowing lines of credit. Therefore, the related debt would need to be repaid prior to the securities being sold in order for these securities to be converted to cash.

Our ability to maintain and expand our deposit base and borrowing capabilities serves as our primary source of liquidity. We plan to meet our future cash needs through the generation of deposits. In addition, we receive cash upon the maturity and sale of loans and the maturity of investment securities. We maintain two federal funds purchased lines of credit with correspondent banks totaling $13.0 million. We are also a member of the Federal Home Loan Bank of Atlanta, from which applications for borrowings can be made for leverage or liquidity purposes. The FHLB requires that securities, qualifying mortgage loans, and stock of the FHLB owned by the Bank be pledged to secure any advances. At March 31, 2011, we had $34.0 million in total advances and lines from the FHLB with a remaining credit availability of $109.3 million and an excess lendable collateral value of approximately $408,000. In addition, we maintain a line of credit with the Federal Reserve Bank of $68.8 million secured by certain loans in our loan portfolio.

Asset/liability management is the process by which we monitor and control the mix and maturities of our assets and liabilities. The essential purposes of asset/liability management are to ensure adequate liquidity and to maintain an appropriate balance between interest sensitive assets and liabilities in order to minimize potentially adverse impacts on earnings from changes in market interest rates. Our risk management committee monitors and considers methods of managing exposure to interest rate risk. The risk management committee is responsible for maintaining the level of interest rate sensitivity of our interest sensitive assets and liabilities within board-approved limits.

Table of Contents

The following table sets forth information regarding our rate sensitivity, as of March 31, 2011, at each of the time intervals. The information in the table may not be indicative of our rate sensitivity position at other points in time. In addition, the maturity distribution implied in the table may differ from the contractual maturities of the earning assets and interest-bearing liabilities presented due to consideration of prepayment speeds under various interest rate change scenarios in the application of the interest rate sensitivity methods described above.

	Within three months			After three but within twelve months			After one but within five years			After five years			Total
	(dollars in thousands)
Interest-earning assets:
Federal funds sold	$	16,645		$	—		$	—		$	—		$	16,645
Investment securities	5,866			4,290			13,586			32,355			56,097
Loans	78,183			87,806			191,410			63,757			421,156
Total interest-earning assets	$	100,694		$	92,096		$	204,996		$	96,112		$	493,898

Interest-bearing liabilities:
Money market and NOW	$	58,514		$	—		$	—		$	—		$	58,514
Regular savings	99,852			—			—			—			99,852
Time deposits	91,200			106,584			70,255			12,055			280,094
Junior subordinated debentures	8,248			—			—			6,186			14,434
Securities sold under agreements to repurchase	—			—			10,000			10,000			20,000
Advances from Federal Home Loan Bank	—			—			25,000			9,000			34,000
ESOP borrowings	1,575			—			—			—			1,575
Total interest-bearing liabilities	$	259,389		$	106,584		$	105,255		$	37,241		$	508,469

Period gap	$	(158,695	)	$	(14,488	)	$	99,741		$	58,871		$	(14,571	)
Cumulative gap	$	(158,695	)	$	(173,183	)	$	(73,442	)	$	(14,571	)	$	(14,571	)

Ratio of cumulative gap to total earning assets	(32.13		)%	(35.06		)%	(14.87		)%	(2.95		)%	(2.95		)%

Table of Contents

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

Item 4. Controls and Procedures.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our current disclosure controls and procedures are effective as of March 31, 2011. There have been no significant changes in our internal controls over financial reporting during the fiscal quarter ended March 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

PART II — OTHER INFORMATION

Item 6. Exhibits

31.1	Rule 13a-14(a) Certification of the Principal Executive Officer.

31.2	Rule 13a-14(a) Certification of the Principal Financial Officer.

32	Section 1350 Certifications.

Table of Contents

SIGNATURES

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

Date: May 13, 2011	By:	/s/ Thomas H. Lyles
		Thomas H. Lyles
		Interim Chief Executive Officer
		(Principal Executive Officer)


Date: May 13, 2011	By:	/s/ Alan W. Jackson
		Alan W. Jackson
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

Table of Contents

EXHIBIT INDEX

Exhibit Number		Description

31.1		Rule 13a-14(a) Certification of the Principal Executive Officer.

31.2		Rule 13a-14(a) Certification of the Principal Financial Officer.

32		Section 1350 Certifications.

Attached files

TIDELANDS BANCSHARES INC Reports

Also read