The following is a discussion of our financial condition as of September 30, 2008 compared to December 31, 2007 and the results of operations for the nine and three months ended September 30, 2008 compared to the nine and three months ended September 30, 2007. 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 2007 Annual Report on Form 10-KSB.

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 anticipated 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 1 of our 2007 Annual Report on Form 10-KSB and the following:

† significant increases in competitive pressure in the banking and financial services industries;

† changes in the interest rate environment which could reduce anticipated or actual margins;

† changes in political conditions or the legislative or regulatory environment;

† general economic conditions, either nationally or regionally and especially in our primary service area, becoming less favorable than expected resulting in, among other things, a deterioration in credit quality;

†          changes occurring in business conditions and inflation;

†          changes in technology;

†          changes in monetary and tax policies;

†          the level of allowance for loan loss;

†          the rate of delinquencies and amounts of charge-offs;

†          the rates of loan growth;

†          adverse changes in asset quality and resulting credit risk-related
losses and expenses;

†          loss of consumer confidence and economic disruptions resulting from
terrorist activities;

†          changes in the securities markets; and

†          other risks and uncertainties detailed from time to time in our
filings with the Securities and Exchange Commission.

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 2008, the capital and credit markets have experienced extended volatility and disruption. In the last 90 days, the volatility and disruption have reached unprecedented levels. There can be no assurance that these unprecedented recent developments will not materially and adversely affect our business, financial condition and results of operations.

Overview

Our bank subsidiary, Tidelands Bank, commenced operations in October 2003 through our main office located in Mount Pleasant, South Carolina. In April 2007, we opened a permanent full service banking office in our Summerville location. We opened a new full service banking office in the Park West area of Mount Pleasant in May 2007. In addition, we opened a permanent facility for our full service banking office in Myrtle Beach in June 2007, and converted the loan production office in the West Ashley area of Charleston to a full service banking office in July 2007. The Bluffton loan production office opened as a full service banking office in May 2008. In July 2008, we opened a permanent full service banking office 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. We have grown rapidly since our inception, with a focus on growing our loan portfolio.

The following discussion describes our results of operations for the nine and three months ended September 30, 2008 as compared to the nine and three months ended September 30, 2007 and also analyzes our financial condition as of September 30, 2008 as compared to December 31, 2007. Like most community banks, we derive the majority 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 success is 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.

Recent Developments

In response to financial conditions affecting the banking system and financial markets and the potential threats to the solvency of investment banks and other financial institutions, the United States government has taken unprecedented actions. On October 3, 2008, President Bush signed into law the Emergency Economic Stabilization Act of 2008 (the "EESA"). Pursuant to the EESA, the U.S. Treasury will have the authority to, among other things, purchase mortgages, mortgage-backed securities, and other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets. On October 14, 2008, the U.S. Department of Treasury announced the Capital Purchase Program ("CPP") under the EESA, pursuant to which the Treasury intends to make senior preferred stock investments in participating financial institutions. The CPP is voluntary and requires an institution to comply with a number of restrictions and provisions, including limits on executive compensation, stock redemptions and declaration of dividends. Applications must be submitted by November 14, 2008 and are subject to approval by the Treasury. The CPP provides for a minimum investment of 1% of Risk-Weighted Assets, with a maximum investment equal to the lesser of 3% of Total Risk-Weighted Assets or $25 billion. The perpetual preferred stock investment will have a dividend rate of 5% per year, until the fifth anniversary of the Treasury investment, and a dividend of 9%, thereafter. The CPP also requires the Treasury to receive warrants for common stock equal to 15% of the capital invested by the Treasury. The term of this Treasury preferred stock program could reduce investment returns to participating banks' shareholders by restricting dividends to common shareholders, diluting existing shareholders' interests, and restricting capital management practices.

Although both the company and our subsidiary, Tidelands Bank, meet all applicable regulatory capital requirements and remain well capitalized, we are evaluating whether to participate in the CPP. Participation in the program is not automatic and is subject to approval by the Treasury. Regardless of our participation, governmental intervention and new regulations under these programs could materially and adversely affect our business, financial condition and results of operations.

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 statements. A description of other accounting policies are summarized in Note 1, Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements of the Company's Annual Report on Form 10-KSB for the year ended December 31, 2007. The Company has followed those policies in preparing this report.

Results of Operations

Income Statement Review

Summary

Nine months ended September 30, 2008 and 2007

Our net loss was approximately $2.9 million for the nine months ended September 30, 2008 compared to net income of $175,000 for the same period in 2007. Net loss before income tax benefit was $4.7 million for the nine months ended September 30, 2008 compared to net income before income tax expense of $282,000 for the nine months ended

September 30, 2007. The $5.0 million decrease in net income before income tax effect resulted from a $4.6 million loss in impairment on available for sale securities which was partially offset by a $506,000 gain on the sale of securities in other income and a $2.3 million increase in noninterest expense offset by an increase of $1.8 million in net interest income before provision for loan losses. We recorded provisions for loan losses of $1.5 million and $1.0 million for the nine months ended September 30, 2008 and 2007, respectively.

Three months ended September 30, 2008 and 2007

Our net loss was approximately $2.4 million for the three months ended September 30, 2008 compared to net income of $47,000 for the same period in 2007. Net loss before income tax benefit was $3.9 million for the three months ended September 30, 2008 compared to net income before income tax expense of $75,000 for the three months ended September 30, 2007. The $4.0 million decrease in net income before income tax effect resulted primarily from a $4.6 million loss in impairment on available for sale securities in other income offset by an increase of $898,000 in net interest income before provision for loan losses. Additionally, we recorded provisions for loan losses of $696,000 for the three months ended September 30, 2008 while we did not record any provisions for loan losses during the three months ended September 30, 2007.

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. Our loan portfolio is the primary driver of net interest income. During the nine months ended September 30, 2008, our loan portfolio increased $65.4 million from the year end balance. We anticipate the growth in loans will continue to drive the growth in assets and the growth in net interest income. However, we do not expect to maintain the same growth rate in our loan portfolio as we have experienced in the past.

Our decision to grow the loan portfolio at its historical pace has created the need for a higher level of capital and the need to increase deposits and borrowings. This loan growth strategy also resulted in a significant portion of our assets being in higher earning loans rather than in lower yielding investments. At September 30, 2008, loans represented 68.4% of total assets, while securities and federal funds sold represented 25.1% of total assets. While we plan to continue our focus on increasing the loan portfolio, we also anticipate proportionately increasing the size of the investment portfolio.

The current interest rate environment, which is relatively low by historical measures, has allowed us to obtain short-term borrowings and wholesale certificates of deposit at rates that were typically lower than certificate of deposit rates being offered in our local market. This funding strategy allowed us to continue to operate in a branch expansion environment, which in turn allowed us to focus on growing our loan portfolio. At September 30, 2008, retail deposits represented $269.3 million, or 43.0% of total funding, which includes total deposits plus securities sold under agreements to repurchase plus other borrowings. Wholesale deposits represented $249.0 million, or 39.7% of total funding.

We plan to continue to offer aggressive rates on investment checking and money market accounts. 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. Although we anticipate that our new full service banking offices will assist us in meeting these objectives, we also 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 new markets and will provide a lower alternative cost of funding.

In addition to the growth in both assets and liabilities, and the timing of 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. Our net interest income for the nine months ended September 30, 2008 increased primarily because we had more interest-earning assets than interest-bearing liabilities. For the nine months ended September 30, 2008 and 2007, average interest-earning assets exceeded average interest-bearing liabilities by $19.2 million and $27.9 million, respectively.

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 spread and net interest margin decreased during the nine months ended September 30, 2008 when compared to the same period in 2007, as a result of the bank having less interest-bearing liabilities than interest-earning assets that repriced as market

rates decreased over the period. Our net interest margins for the nine months ended September 30, 2008 and 2007 were 2.64% and 3.14%, respectively.

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 nine and three months ended September 30, 2008 and 2007. 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.

Nine Months Ended September 30, 2008 and 2007

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 nine months ended September 30, 2008 and 2007, we had no securities purchased with agreements to resell. All investments were owned at an original maturity of over one year.

                Average Balances, Income and Expenses, and Rates



                               For the Nine Months Ended             For the Nine Months Ended
                                  September 30, 2008                    September 30, 2007
                            Average      Income/     Yield/       Average       Income/     Yield/
                            Balance      Expense     Rate(1)      Balance       Expense     Rate(1)
                                                    (dollars in thousands)
Earning assets:
Interest bearing
balances                   $      194    $      4       2.71 %  $       280    $      12       5.82 %
Federal funds sold             15,170         246       2.17 %       15,817          614       5.19 %
Taxable investment
securities                    105,964       4,552       5.74 %       35,054        1,526       5.82 %
Non-taxable investment
securities                      7,432         220       3.96 %       10,037          301       4.01 %
Loans receivable(2)           424,439      20,689       6.51 %      326,648       20,338       8.32 %
Total earning assets          553,199      25,711       6.21 %      387,836       22,791       7.86 %

Nonearning assets:
Cash and due from banks         3,747                                 1,115
Mortgages held for sale           649                                 2,037
Premises and equipment,
net                            18,970                                14,074
Other assets                   17,458                                12,101
Allowance for loan
losses                         (4,671 )                              (4,071 )
Total nonearning assets        36,153                                25,256
Total assets               $  589,352                           $   413,092

Interest-bearing
liabilities:
Interest bearing
transaction accounts       $   22,202         432       2.60 %  $     6,085          173       3.79 %
Savings & money market        175,419       3,894       2.97 %      178,159        6,649       4.99 %
Time deposits less than
$100,000                      195,054       6,134       4.20 %      130,648        4,959       5.07 %
Time deposits greater
than $100,000                  54,738       1,726       4.21 %        6,294          267       5.67 %
Junior subordinated
debentures                     10,506         471       5.99 %        8,248          423       6.86 %
Advances from FHLB             34,238         980       3.82 %       18,879          741       5.25 %
Securities sold under
repurchase agreement           38,717       1,034       3.57 %       10,366          417       5.38 %
Federal funds purchased           250           8       4.25 %          744           31       5.62 %
ESOP borrowings                 2,807          95       4.51 %          476           28          - %
Other borrowings                   87           4       5.94 %            -            -          - %
Total interest-bearing
liabilities                   534,018      14,778       3.70 %      359,899       13,688       5.08 %
Noninterest-bearing
liabilities:
Demand deposits                12,336                                10,299
Other liabilities               3,049                                 1,495
Shareholders' equity           39,949                                41,399

Total liabilities and
shareholders' equity       $  589,352                           $   413,092
Net interest income                      $ 10,933                              $   9,103
Net interest spread                                     2.51 %                                 2.78 %
Net interest margin                                     2.64 %                                 3.14 %

(2) Includes nonaccruing loans.

Net interest spread and net interest margin decreased during the nine months ended September 30, 2008 primarily as a result of the bank having more interest-bearing assets than interest-earning liabilities that repriced as market rates began to decrease over the period.

Interest income for the nine months ended September 30, 2008 was $25.7 million, consisting of $20.7 million on loans, $4.8 million on investments, and $250,000 on federal funds sold and interest bearing balances. Interest income for the nine months ended September 30, 2007 was $22.8 million, consisting of $20.3 million on loans, $1.8 million on investments, and $626,000 on federal funds sold and interest bearing balances. Interest and fees on loans represented 80.5% and 89.2% of total interest income for the nine months ended September 30, 2008 and 2007, respectively. Income from investments, federal funds sold and interest bearing balances represented 19.5% and 10.8% of total interest income for the nine months ended September 30, 2008 and 2007, respectively. The high percentage of interest income from loans related to our strategy to maintain a significant portion of our assets in higher earning loans compared to lower yielding investments. Average loans represented 76.7% and 84.2% of average interest-earning assets for the nine months ended September 30, 2008 and 2007, respectively. The slight decrease in average loans as a percentage to average interest-earnings assets is a result of the slowing loan growth in the market and a focus on generating retail deposits.

Interest expense for the nine months ended September 30, 2008 was $14.8 million, consisting of $12.2 million related to deposits, $1.0 million related to securities sold under a repurchase agreement, $471,000 related to junior subordinated debentures, $980,000 related to advances from the Federal Home Loan Bank ("FHLB") and $107,000 related to other borrowings and federal funds purchased. Interest expense for the nine months ended September 30, 2007 was $13.7 million, consisting of $12.0 million related to deposits, $417,000 related to securities sold under repurchase agreements and fed funds purchased, $423,000 related to junior subordinated debentures, $741,000 related to FHLB advances and $59,000 related to other borrowings. Interest expense on deposits for the nine months ended September 30, 2008 and 2007 represented 82.5% and 88.0% of total interest expense, respectively, while interest expense on borrowings represented 17.5% and 12.0%, respectively, of total interest expense. During the nine months ended September 30, 2008, average interest-bearing liabilities were higher by $174.1 million than for the same period in 2007.

Net interest income, the largest component of our income, was $10.9 million and $9.1 million for the nine months ended September 30, 2008 and September 30, 2007, respectively. The $1.8 million increase in net interest income for the nine months ended September 30, 2008 compared to the same period in 2007 resulted from a $2.9 million increase in interest income offset by a $1.1 million increase in interest expense. The significant increase in 2008 resulted from the net effect of higher levels of both average earning assets and interest-bearing liabilities.

Our net interest spread was 2.51% for the nine months ended September 30, 2008, compared to 2.78% for the nine months ended September 30, 2007. The net interest spread is the difference between the yield we earn on our interest-earning assets and the rate we pay on our interest-bearing liabilities. The net interest margin is calculated as net interest income divided by average interest-earning assets. Our net interest margin for the nine months ended September 30, 2008 was 2.64%, compared to 3.14% for the nine months ended September 30, 2007. For the nine months ended September 30, 2008, interest-earning assets averaged $553.2 million compared to $387.8 million in the same quarter of 2007. During the same periods, average interest-bearing liabilities were $534.0 million and $359.9 million, respectively.

Three Months Ended September 30, 2008 and 2007

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 September 30, 2008 and 2007, we had no securities purchased with agreements to resell. All investments were owned at an original maturity of over one year.

                Average Balances, Income and Expenses, and Rates



                               For the Three Months Ended             For the Three Months Ended
                                   September 30, 2008                     September 30, 2007
                             Average       Income/     Yield/       Average       Income/     Yield/
                             Balance       Expense     Rate(1)      Balance       Expense     Rate(1)
                                                     (dollars in thousands)
Earning assets:
Interest bearing
balances                   $       376    $       2       2.13 %  $       534    $       8       5.98 %
Federal funds sold              11,738           58       1.98 %       14,256          182       5.07 %
Taxable investment
securities                     144,729        2,070       5.69 %       37,623          558       5.88 %
Non-taxable investment
securities                       7,073           71       3.98 %       14,015          142       4.01 %
Loans receivable(2)            447,294        6,905       6.14 %      354,891        7,354       8.22 %
Total earning assets           611,210        9,106       5.93 %      421,319        8,244       7.76 %

Nonearning assets:
Cash and due from banks          3,829                                  1,803
Mortgages held for sale            454                                  2,393
Premises and equipment,
net                             19,553                                 16,894
Other assets                    18,639                                 12,518
Allowance for loan
losses                          (4,950 )                               (4,365 )
Total nonearning assets         37,525                                 29,243
Total assets               $   648,735                            $   450,562

Interest-bearing
liabilities:
Interest bearing
transaction accounts       $    41,280          299       2.88 %  $     7,004           63       3.55 %
Savings & money market         156,027          949       2.42 %      203,817        2,575       5.01 %
. . .