**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-K**

** **

**(Mark One)**
| **x**                                                | ** ** | **Annual Report under  Section 13 or 15(d) of the Securities Exchange Act of 1934**     |
|------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------|
| **For the fiscal year ended December 31, 2008** |
| ** **                                           | ** ** | ** **                                                                                        |
| **or**                                               |
| ** **                                           | ** ** | ** **                                                                                        |
| **o**                                                | ** ** | **Transition Report under  Section 13 or 15(d) of the Securities Exchange Act of 1934** |

**For the transition period from                    to                    **

 

**Commission file number 000-52592**

 

**Congaree Bancshares, Inc.**

(Exact name of small business issuer as specifiedin its charter)

 

| **South Carolina**                       | ** ** | **20-1734180**                       |
|------------------------------------------|------------|--------------------------------------|
| (State of Incorporation)                 |       | (I.R.S. Employer Identification No.) |
|                                     |       |                                 |
| **1201 Knox Abbott Drive, Cayce, SC**    | ** ** | **29033**                            |
| (Address of principal executive offices) |       | (Zip Code)                           |

 

**(803) 794-2265**

(Issuer’s Telephone Number)

 

Securities registeredpursuant to Section 12(b) of the Exchange Act:

 
| **Title of each class:**  | ** ** | **Name of each exchange on which registered:** | ** ** |
|------------------------------------------|------------|------------------------------------------------------------------------------|------------|
| Common  Stock, $0.01 par value per share |       | None.                                                                        |       |

 

Securities registered under Section 12(g) of the ExchangeAct:  **None**

 

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act. 

Yes o                            No  x

 

Indicateby check mark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Exchange Act.

Yes o                            No  x

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.                                                  Yesx                            No  o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.     o

 

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

Yes o                            No  x

 

Theestimated aggregate market value of the Common Stock held by non-affiliates ofthe Company on June 30, 2008 was $14,839,040.**** This calculation isbased upon an estimate of the fair market value of the Common Stock of $10.00per share, which was the price of the last several trades of which managementis aware prior to this date. 

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reportingcompany.  See the definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.  (Check one):

 
| Large  accelerated filer  o                                               | Accelerated  filer  o         |
|-------------------------------------------------------------------------------------|-----------------------------------------|
|                                                                                |                                    |
| Non-accelerated  filer  o

(Do  not check if a smaller reporting company) | Smaller  reporting company  x |

 

Indicatethe number of shares outstanding of each of the registrant’s classes of commonstock, as of the latest practicable date.

 
| **Class**                               | ** ** | **Outstanding at March 26, 2009** | ** ** |
|-----------------------------------------|------------|-------------------------------------------------------|------------|
| Common  Stock, $.01 par value per share |       | 1,764,439 shares                                      |       |

 

**DOCUMENTS INCORPORATED BY REFERENCE**

** **

ProxyStatement for the Annual Meeting of Shareholders to be held on June 18,2009   Part III (Items 10-13, 14)

 

 

 

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** **

**Part I**

** **

**Item 1.  Business**

** **

ThisReport contains statements which constitute forward-looking statements withinthe meaning of Section 27A of the Securities Act of 1933 and theSecurities 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 assumptionsand estimates and are not guarantees of future performance.  Our actual results may differ materially fromthose anticipated in any forward-looking statements, as they will depend onmany factors about which we are unsure, including many factors which are beyondour 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 below under “Risk Factors” and thefollowing:

 

  · significant increases in competitive pressure in the banking andfinancial services industries;

  · changes in the interest rate environment which could reduce anticipatedor actual margins;

  · changes in political conditions or the legislative or regulatoryenvironment;

  · general economic conditions, either nationally or regionally andespecially 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;

  ·  thelevel of allowance for loan loss;

  ·  therate of delinquencies and amounts of charge-offs;

  ·  therates of loan growth;

  ·  adversechanges in asset quality and resulting credit risk-related losses and expenses;

  ·  lossof consumer confidence and economic disruptions resulting from terroristactivities;

  · changes in the securities markets; and

  ·  otherrisks and uncertainties detailed from time to time in our filings with theSecurities and Exchange Commission (“SEC”).

 

Weundertake no obligation to publicly update or revise any forward-lookingstatements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties,and assumptions, the forward-looking events discussed in this report might notoccur.

** **

**General**

 

CongareeBancshares, Inc. (the “Company”) is a South Carolina corporation organizedin November 2005 to operate as a bank holding company pursuant to theFederal Bank Holding Company Act of 1956 and the South Carolina Bank HoldingCompany Act, and to own and control all of the capital stock of Congaree StateBank (the “Bank”).  The Bank opened forbusiness on October 16, 2006.  TheBank currently maintains a main office at 1201 Knox Abbott Drive, Cayce, SouthCarolina. We also have a second office located at 2023 Sunset Boulevard, WestColumbia, South Carolina.

 

Ourassets consist primarily of our investment in the Bank and liquid investments.Our primary activities are conducted through the Bank. As of December 31,2008, our consolidated total assets were $132,004,104 our consolidated totalloans were $107,547,656, our consolidated total deposits were $118,534,560, andour total shareholders’ equity was approximately $10,063,099.

 

Ournet income is dependent primarily on our net interest income, which is thedifference between the interest income earned on loans, investments, and otherinterest-earning assets and the interest paid on deposits and otherinterest-bearing liabilities.  To alesser extent, our net income also is affected by our noninterest incomederived principally from service charges and fees and income from the sale and/orservicing of financial assets such as loans and investments, as well as thelevel of noninterest expenses such as salaries, employee benefits and occupancycosts.

 

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Ouroperations are significantly affected by prevailing economic conditions, competition,and the monetary, fiscal, and regulatory policies of governmental agencies.Lending activities are influenced by a number of factors, including the generalcredit needs of individuals and small and medium-sized businesses in our marketareas, competition among lenders, the level of interest rates, and theavailability of funds. Deposit flows and costs of funds are influenced byprevailing market rates of interest, primarily the rates paid on competinginvestments, account maturities, and the levels of personal income and savingsin our market areas.

 

**Marketing Focus**

** **

CongareeState Bank is a locally-owned and operated bank organized to serve consumersand small- to mid-size businesses and professional concerns.  A primary reason for operating the Bank liesin our belief that a community-based bank, with a personal focus, can betteridentify and serve local relationship banking needs than can a branch orsubsidiary of larger outside banking organizations.  We believe that we can be successful by offeringa higher level of customer service and a management team more focused on theneeds of the community than most of our competitors.  We believe that this approach will beenthusiastically supported by the community.

 

**BankingServices**

 

The Bank is primarily engagedin the business of accepting demand and time deposits and providing commercial,consumer and mortgage loans to the general public.  Deposits of the Bank are insured up to$100,000 by the Federal Deposit Insurance Corporation (“FDIC”).  Other services which the Bank offers includeonline banking, commercial cash management, remote deposit capture, safedeposit boxes, bank official checks, traveler’s checks, and wire transfercapabilities.

 

**Location and Service Area**

** **

Ourprimary service area consists of Lexington and Richland Counties, with aprimary focus on an area within a 15 mile radius of our main office in WestColumbia, South Carolina.  Our Sunsetoffice is located in West Columbia on a major artery that connects Columbiawith Lexington.  We opened the Sunsetoffice in January, 2008.  The site islocated approximately one mile east of the Lexington Medical Center andprovides excellent visibility for the Bank.

 

Our primary service area consists of Lexington andRichland Counties, South Carolina.  Withits central location in the state and convenient access to I-20, I-26, andI-77, this area is considered one of the fastest growing areas in SouthCarolina.  Home to the state capital, theUniversity of South Carolina, and a variety of service-based and lightmanufacturing companies, this area provides a growing and diverse economy.  Lexington Medical Center, Lexington County’slargest employer, has approximately 3,800 employees and continues toexpand.  The other top employers inLexington County include Michelin Tire Corporation, Allied-Signal Corporation,United Parcel Service, and NCR Corporation. The amenities and opportunities that our primary service area offers arewide-ranging from housing, education, healthcare, shopping, recreation, andculture.  We believe these factors makethe quality of life in the area attractive.

 

Ourprimary service area has also experienced solid population growth.  Since 1950, the population in LexingtonCounty has increased over 380%.  Based onU.S. Census data, West Columbia is the largest city in Lexington County withapproximately 13,000 residents in 2000, representing a growth rate ofapproximately 23% from 1990 to 2000. This significantly outpaced the rates of population growth of the Stateof South Carolina and the United States during this period which wereapproximately 15% and 13%, respectively. Lexington County shared similar population growth.  From 1990 to 2000, Lexington County’s growthrate of approximately 29% ranked in the top five of all counties in SouthCarolina.  Together, Lexington andRichland Counties had a population of over 536,000 as of the 2000 census, whichis expected to increase to approximately 600,000 by 2010, or 12%.  Within a 15 mile radius of our proposed mainbank, the population grew at a rate of approximately 14% between 1990 and2000.  We believe that the demographicfactors in Lexington and Richland Counties make it a desirable market in whichto grow our Bank. As of June 30, 2008, the Bank maintained a 3.50% depositmarket share in Lexington County.

 

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** **

**Lending Activities**

 

Weemphasize a range of lending services, including real estate, commercial, andequity-line and consumer loans to individuals, small- to medium-sized businesses,and professional concerns that are located in or conduct a substantial portionof their business in our Bank’s primary service area.  We compete for these loans with competitorswho are well established in our service area and have greater resources andlending limits.  As a result, we may haveto charge lower interest rates to attract borrowers.

 

Thewell established banks in our service area will likely make proportionatelymore loans to medium- to large-sized businesses than we will.  Many of the Bank’s anticipated commercialloans will likely be made to small- to medium-sized businesses which may beless able to withstand competitive, economic, and financial conditions thanlarger borrowers.

 

*Loan Approval and Review.*  Certain credit risks are inherent in making loans.  These include prepayment risks, risksresulting from uncertainties in the future value of collateral, risks resultingfrom changes in economic and industry conditions, and risks inherent in dealingwith individual borrowers.  We attempt tomitigate repayment risks by adhering to internal credit policies andprocedures.  The Bank’sloan approval policies provide for various levels of officer lendingauthority.  When the amount of aggregateloans to a single borrower exceeds any individual officer’s lending authority,the loan request is considered and approved by an officer with a higher lendinglimit or the board of directors’ loan committee.  The Bank does not make any loans to anydirector of the Bank unless the loan is approved by the board of directors ofthe Bank and is made on terms not more favorable to the person than would beavailable to a person not affiliated with the Bank.  The Bank currently adheres to FederalNational Mortgage Association and Federal Home Loan Mortgage Corporationguidelines in its mortgage loan review process, but may choose to alter thispolicy in the future.  The Bank sellsresidential mortgage loans that it originates in the secondary market.

 

*Allowance for Loan Losses.*  We maintain an allowance forloan losses, which we establish through a provision for loan losses chargedagainst income.  We charge loans againstthis allowance when we believe that the collectibility of the principal isunlikely.  The allowance is an estimatedamount that we believe is adequate to absorb losses inherent in the loanportfolio based on evaluations of its collectibility.  Our allowance for loan losses isapproximately 1.57% of the average outstanding balance of our loans, based onour consideration of several factors, including regulatory guidelines, mix ofour loan portfolio, and evaluations of local economic conditions as well aspeer data.  Over time, we willperiodically determine the amount of the allowance based on our considerationof several factors, including:

 

·                  an ongoing review of the quality, mix, andsize of our overall loan portfolio;

·                  our historical loan loss experience;

·                  evaluation of economic conditions;

·                  specific problem loans and commitments thatmay affect the borrower’s ability to pay;

·                  regular reviews of loan delinquencies andloan portfolio quality by our internal auditors and our bank regulators; and

·                  the amount and quality of collateral,including guarantees, securing the loans.

 

*Lending Limits.*  The Bank’s lending activities are subject toa variety of lending limits imposed by federal law.  In general, the Bank is subject to a legallimit on loans to a single borrower equal to 15% of the Bank’s capital andunimpaired surplus.  Different limits mayapply based on the type of loan or the nature of the borrower, including theborrower’s relationship to the Bank. These limits will increase or decrease as the Bank’s capital increasesor decreases.  Unless the Bank is able tosell participations in its loans to other financial institutions, the Bank willnot be able to meet all of the lending needs of loan customers requiringaggregate extensions of credit above these limits.

 

*Credit Risk*.  The principal credit risk associated witheach category of loans is the creditworthiness of the borrower.  Borrower creditworthiness is affected bygeneral economic conditions and the strength of the manufacturing, services,and retail market segments.  Generaleconomic factors affecting a borrower’s ability to repay include interest,inflation, and employment rates and the strength of local and national economy,as well as other factors affecting a borrower’s customers, suppliers, andemployees.

 

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* *

*Real Estate Loans. *One of the primary components of our loanportfolio is loans secured by first or second mortgages on real estate.  As of December 31, 2008, loans securedby first or second mortgages on real estate made up approximately $75,599,845,or 70.3% of our loan portfolio. These loans will generally fall into one of twocategories: real estate — mortgage and real estate — construction.  These categories are discussed in more detailbelow, including their specific risks. Interest rates for all categories may be fixed or adjustable, and willmore likely be fixed for shorter-term loans. The Bank will generally charge an origination fee for each loan.

 

Real estate loansare subject to the same general risks as other loans.  Real estate loans are also sensitive tofluctuations in the value of the real estate securing the loan.  On first and second mortgage loans wetypically do not advance more than regulatory limits.  We will require a valid mortgage lien on allreal property loans along with a title lien policy which insures the validityand priority of the lien.  We will alsorequire borrowers to obtain hazard insurance policies and flood insurance, ifapplicable.  Additionally, certain typesof real estate loans have specific risk characteristics that vary according tothe collateral type securing the loan and the terms and repayment sources forthe loan.

 

Wewill have the ability to originate some real estate loans for sale into thesecondary market.  We can limit ourinterest rate and credit risk on these loans by locking the interest rate foreach loan with the secondary investor and receiving the investor’s underwritingapproval prior to originating the loan.

 

·                  *Real Estate - Mortgage*. Loans secured by real estate mortgages are the principal component ofloan portfolio. These loans generally fall into one of two categories:residential real estate loans and commercial real estate loans.

 

·                  *Residential Real EstateLoans. *At December 31, 2008, our individualresidential real estate loans ranged in size from $65,000 to $875,000, with anaverage loan size of approximately $240.000. These loans generally have longer terms of up to 30 years.  We offer fixed and adjustable rate mortgages,and we intend to sell most, if not all, of the residential real estate loansthat we generate in the secondary market soon after we originate them.  We do not intend to retain servicing rights forthese loans.  Inherent in residentialreal estate loans’ credit risk is the risk that the primary source ofrepayment, the residential borrower, will be insufficient to service thedebt.  If a real estate loan is indefault, we also run the risk that the value of a residential real estate loan’ssecured real estate will decrease, and thereby be insufficient to satisfy theloan.  To mitigate these risks, we willevaluate each borrower on an individual basis and attempt to determine itscredit profile.  By selling these loansin the secondary market, we can significantly reduce our exposure to creditrisk because the loans will be underwritten through a third party agent withoutany recourse against the Bank.  At December 31,2008, residential real estate loans (other than construction loans) totaled$46,060,422, or 42.8% of our loan portfolio.

 

·                  *Commercial Real Estate Loans*.  At December 31,2008, our individual commercial real estate loans ranged in size from $30,000to $1,400,000, with an average loan size of approximately $295,000.  Commercial real estate loans generally haveterms of five years or less, although payments may be structured on a longeramortization basis.  Inherent incommercial real estate loans’ credit risk is the risk that the primary sourceof repayment, the operating commercial real estate company, will beinsufficient to service the debt.  If areal estate loan is in default, we also run the risk that the value of acommercial real estate loan’s secured real estate will decrease, and thereby beinsufficient to satisfy the loan.  Tomitigate these risks, we evaluate each borrower on an individual basis andattempt to determine its business risks and credit profile.  We attempt to reduce credit risk in thecommercial real estate portfolio by emphasizing loans on owner-occupied officeand retail buildings where the loan-to-value ratio is established byindependent appraisals.  We typicallyreview the personal financial statements of the principal owners and requiretheir personal guarantees.  These reviewsoften reveal secondary sources of payment and liquidity to support a loanrequest.  At December 31, 2008,commercial real estate loans (other than construction loans) totaled$29,539,423, or 27.5% of our loan portfolio.

 

·                  *Real Estate - Construction. *We offer adjustable and fixed rate residential and commercialconstruction loans to builders and developers and to consumers who wish tobuild their own home.  The term ofconstruction and development loans will generally be limited to 18 months,although payments may be 

 

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structured on a longeramortization basis.  Most loans willmature and require payment in full upon the sale of the property.  Construction and development loans generallycarry a higher degree of risk than long term financing of existingproperties.  Repayment usually depends onthe ultimate completion of the project within cost estimates and on the sale ofthe property.  Specific risks include:

 

·                  cost overruns;

·                  mismanaged construction;

·                  inferior or improper construction techniques;

·                  economic changes or downturns duringconstruction;

·                  a downturn in the real estate market;

·                  rising interest rates which may prevent saleof the property; and

·                  failure to sell completed projects in atimely manner.

 

We attempt to reduce risk by obtaining personalguarantees where possible, and by keeping the loan-to-value ratio of thecompleted project below specified percentages. We may also reduce risk by selling participations in larger loans toother institutions when possible.  At December 31,2008, total construction loans amounted to $17,150,969, or 15.9% of our loanportfolio.

 

*Commercial Loans*.  The Bank makes loans for commercial purposesin various lines of businesses. We focus our efforts on commercial loans ofless than $1,000,000.  Equipment loanswill typically be made for a term of five years or less at fixed or variablerates, with the loan fully amortized over the term and secured by the financedequipment.  Working capital loanstypically have terms not exceeding one year and are usually secured by accountsreceivable, inventory, or personal guarantees of the principals of thebusiness.  For loans secured by accountsreceivable or inventory, principal is typically repaid as the assets securingthe loan are converted into cash, and in other cases principal is typically dueat maturity.  Trade letters of credit,standby letters of credit, and foreign exchange are handled through acorrespondent bank as agent for the Bank. Commercial loans primarily have riskthat the primary source of repayment, the borrowing business, will beinsufficient to service the debt.  Oftenthis occurs as the result of changes in local economic conditions or in theindustry in which the borrower operates which impact cash flow or collateralvalue.

 

We also offer small business loans utilizinggovernment enhancements such as the Small Business Administration’s 7(a) andSBA’s 504 programs.  These loans aretypically partially guaranteed by the government which may help to reduce theBank’s risk.  Government guarantees ofSBA loans will not exceed 80% of the loan value, and will generally beless.  At December 31, 2008,commercial loans amounted to $11,870,971, or 11.0% of our loan portfolio.

 

*Equity and Consumer Loans*.  The Bank makes a variety ofloans to individuals for personal and household purposes, including secured andunsecured installment loans and revolving lines of credit such as creditcards.  Installment loans typically carrybalances of less than $50,000 and are amortized over periods up to 60 or moremonths.  Consumer loans may be offered ona single maturity basis where a specific source of repayment is available.  Revolving loan products typically requiremonthly payments of interest and a portion of the principal.

 

Consumerloans are generally considered to have greater risk than first or secondmortgages on real estate because the value of the secured property maydepreciate rapidly, they are often dependent on the borrower’s employmentstatus as the sole source of repayment, and some of them are unsecured.  To mitigate these risks, we analyze selectiveunderwriting criteria for each prospective borrower, which may include theborrower’s employment history, income history, credit bureau reports, or debtto income ratios.  If the consumer loanis secured by property, such as an automobile loan, we also attempt to offsetthe risk of rapid depreciation of the collateral with a shorter loanamortization period.  Despite theseefforts to mitigate our risks, consumer loans have a higher rate of defaultthan real estate loans.  For this reason,we also attempt to reduce our loss exposure to these types of loans by limitingtheir sizes relative to other types of loans.

 

We also offer home equity loans.  Our underwriting criteria for and the risksassociated with home equity loans and lines of credit will generally be thesame as those for first mortgage loans. Home equity lines of credit typically have terms of 15 years or less,typically carry balances less than $125,000, and may extend up to 90% of 

 

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theavailable equity of each property. At December 31, 2008, individual homeequity lines of credit, which are secured by real estate, amounted to$25,414,399, or 23.6% of our loan portfolio. Consumer loans which are notsecured by real estate amounted to $2,925,871, or 2.7% of our loan portfolio.

 

*Relative Risks of Loans*.  Each category of loan has adifferent level of credit risk.  Realestate loans are generally safer than loans secured by other assets because thevalue of the underlying security, real estate, is generally ascertainable anddoes not fluctuate as much as some other assets.  Certain real estate loans are less risky thanothers.  Residential real estate loansare generally the least risky type of real estate loan, followed by commercialreal estate loans and construction and development loans.  Commercial loans, which can be secured byreal estate or other assets, or which can be unsecured, are generally morerisky than real estate loans, but less risky than consumer loans.  Finally, consumer loans, which can also besecured by real estate or other assets, or which can also be unsecured, aregenerally considered to be the most risky of these categories of loans.  Any type of loan which is unsecured isgenerally more risky than secured loans. These levels of risk are general in nature, and many factors includingthe creditworthiness of the borrower or the particular nature of the securedasset may cause any type of loan to be more or less risky than another.  Additionally, these levels of risk arelimited to an analysis of credit risk, and they do not take into account otherrisk factors associated with making loans such as the interest rate riskinherent in long-term, fixed-rate loans.

 

**Deposit Services**

 

We offer a full range ofdeposit services that are typically available in most banks and savings andloan associations, including checking accounts, NOW accounts, commercialaccounts, savings accounts, and other time deposits of various types, rangingfrom daily money market accounts to longer-term certificates of deposit.  The transaction accounts and timecertificates are typically tailored to our primary service area at competitiverates.  In addition, we offer certainretirement account services, including IRAs. We solicit these accounts from individuals, businesses, and otherorganizations.

 

**Other Banking Services**

** **

Weoffer safe deposit boxes, cashier’s checks, banking by mail, direct deposit ofpayroll and social security checks, U.S. Savings Bonds, and traveler’schecks.  The Bank is associated****with the InterceptSwitch, Pulse, MasterCard, Cirrus and Plus ATM networks that may be usedby the Bank’s customers throughout the country. We believe that by being associated with a shared network of ATMs, weare better able to serve our customers and will be able to attract customerswho are accustomed to the convenience of using ATMs.  We also offer adebit card and credit card services through a correspondent bank as an agentfor the Bank.  We anticipate that theBank eventually may offer other bank services including, lines of credit,24-hour telephone banking, and online banking. We do not expect the Bank to exercise trust powers during its initialyears of operation.

 

**Competition**

** **

The Columbia/West Columbia/Lexington market is highlycompetitive, with all of the largest banks in the state, as well as superregional banks, represented.  Thecompetition among the various financial institutions is based upon a variety offactors, including interest rates offered on deposit accounts, interest ratescharged on loans, credit and service charges, the quality of services rendered,the convenience of banking facilities and, in the case of loans to largecommercial borrowers, relative lending limits. In addition to banks and savings associations, we compete with otherfinancial institutions including securities firms, insurance companies, creditunions, leasing companies and finance companies.  Size gives larger banks certain advantages incompeting for business from large corporations. These advantages include higher lending limits and the ability to offerservices in other areas of South Carolina. As a result, we do not generally attempt to compete for the bankingrelationships of large corporations, but concentrate our efforts on small- tomedium-sized businesses and individuals. We believe we will compete effectively in this market by offeringquality and personal service.

 

**Employees**

 

As of December 31, 2008, we had 38 full-timeemployees and 4 part-time employees.

 

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**SUPERVISIONAND REGULATION**

** **

Both Congaree Bancshares, Inc. and Congaree StateBank are subject to extensive state and federal banking regulations that imposerestrictions on and provide for general regulatory oversight of theiroperations.  These laws generally areintended to protect depositors and not shareholders.  The following summary is qualified by reference to thestatutory and regulatory provisions discussed. Changes in applicable laws or regulations may have a material effect onour business and prospects.  Ouroperations may be affected by legislative changes and the policies of variousregulatory authorities.  We cannotpredict the effect that fiscal or monetary policies, economic control, or newfederal or state legislation may have on our business and earnings in thefuture.

 

Thefollowing discussion is not intended to be a complete list of all theactivities regulated by the banking laws or of the impact of such laws andregulations on our operations.  It isintended only to briefly summarize some material provisions.

 

**RecentLegislative and Regulatory Initiatives to Address Financial and Economic Crisis**

** **

TheCongress, Treasury Department and the federal banking regulators, including theFDIC, have taken broad action since early September 2008 to addressvolatility in the U.S. banking system.

 

InOctober 2008, the Emergency Economic Stabilization Act of 2008 (“EESA”) wasenacted. The EESA authorizes the Treasury Department to purchase fromfinancial institutions and their holding companies up to $700 billion inmortgage loans, mortgage-related securities and certain other financialinstruments, including debt and equity securities issued by financialinstitutions and their holding companies in a troubled asset relief program (“TARP”).  Thepurpose of TARP is to restore confidence and stability to the U.S. bankingsystem and to encourage financial institutions to increase their lending tocustomers and to each other.  The Treasury Department has allocated$250 billion towards the TARP Capital Purchase Program (“CPP”).  Underthe CPP, Treasury will purchase debt or equity securities from participatinginstitutions.  The TARP also will include direct purchases orguarantees of troubled assets of financial institutions. Participants inthe CPP are subject to executive compensation limits and are encouraged toexpand their lending and mortgage loan modifications.

 

OnJanuary 9, 2009, as part of the TARP CPP, we entered into a LetterAgreement and Securities Purchase Agreement (collectively, the “CPP PurchaseAgreement”) with the Treasury Department, pursuant to which we sold (i) 3,285shares of our Fixed Rate Cumulative Perpetual Preferred Stock, Series A(the “Series S Preferred Stock”) and (ii) a warrant (the “CPP Warrant”)to purchase 164 shares of our Fixed Rate Cumulative Perpetual Preferred Stock, Series B(the “Series B Preferred Stock”) for an aggregate purchase price of$3,285,000 million in cash.  The CPPWarrant was immediately exercised.

 

TheSeries A Preferred Stock will qualify as Tier 1 capital and will beentitled to cumulative dividends at a rate of 5% per annum for the first fiveyears, and 9% per annum thereafter.  The Series BPreferred Stock will qualify as Tier 1 capital and will be entitled tocumulative dividends at a rate of 9% per annum. We must consult with the Commission before we may redeem the Series Aand Series B Preferred Stock but, contrary to the original restrictions inthe EESA, will not necessarily be required to raise additional equity capitalin order to redeem this stock.  Pleasesee the Form 8-K we filed with the SEC on January 12, 2009, foradditional information about the Series A Preferred Stock and the CPPWarrant.

 

EESAalso increased FDIC deposit insurance on most accounts from $100,000 to$250,000.  This increase is in place until the end of 2009 and is notcovered by deposit insurance premiums paid by the banking industry.

 

Following a systemic risk determination, the FDIC established theTemporary Liquidity Guarantee Program (“TLGP”) on October 14,2008.  The TLGP includes the Transaction Account Guarantee Program (“TAGP”),which provides unlimited deposit insurance coverage through December 31,2009 for noninterest-bearing transaction accounts (typically business checkingaccounts) and certain funds swept into noninterest-bearing savingsaccounts.  Institutions participating in the TLGP pay a 10 basispoints fee (annualized) on the balance of each covered account in excess of$250,000, while the extra deposit insurance is in place.  The TLGPalso includes the Debt Guarantee Program (“DGP”), under which the FDICguarantees certain senior unsecured debt of FDIC-insured institutions and theirholding companies.  The unsecured debt must be issued on or after October 14,2008 and not 

 

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later than June 30, 2009, andthe guarantee is effective through the earlier of the maturity date or June 30,2012.  On March 17, 2009, the FDICadopted an interim rule that extends the DGP and imposes surcharges on existingrates for certain debt issuances.  Thisextension allows institutions that have issued guaranteed debt before April 1,2009 to issue guaranteed debt during the extended issuance period that ends onOctober 31, 2009. For such institutions, the guarantee on debt issued on orafter April 1, 2009, will expire no later than December 31, 2012.  The DGP coverage limit is generally 125% ofthe eligible entity’s eligible debt outstanding on September 30, 2008 andscheduled to mature on or before June 30, 2009 or, for certain insuredinstitutions, 2% of their liabilities as of September 30, 2008.  Depending on the term of the debt maturity,the nonrefundable DGP fee ranges from 60 to 110 basis points (annualized) forcovered debt outstanding until the earlier of maturity or June 30, 2012 and 75to 125 basis points (annualized) for covered debt outstanding until after June30, 2012.  We will participate in theTAGP and have not opted out of the DGP.

 

On February17, 2009, the American Recovery and Reinvestment Act (the “Recovery Act”) wassigned into law in an effort to, among other things, create jobs and stimulategrowth in the United States economy.  TheRecovery Act specifies appropriations of approximately $787 billion for a widerange of Federal programs and will increase or extend certain benefits payableunder the Medicaid, unemployment compensation, and nutrition assistanceprograms.  The Recovery Act also reducesindividual and corporate income tax collections and makes a variety of otherchanges to tax laws.  The Recovery Actalso imposes certain limitations on compensation paid by TARP participants,which includes programs under TARP such as the CPP in which we participate.

 

**CongareeBancshares, Inc.**

 

We own 100% ofthe outstanding capital stock of the Bank, and therefore we are considered tobe a bank holding company under the federal Bank Holding Company Act of 1956(the “Bank Holding Company Act”).  As aresult, we are primarily subject to the supervision, examination and reportingrequirements of the Board of Governors of the Federal Reserve (the “FederalReserve”) under the Bank Holding Company Act and its regulations promulgatedthereunder.  As a bank holding companylocated in South Carolina, the South Carolina Board of Financial Institutionsalso regulates and monitors all significant aspects of our operations.

 

***Permitted Activities.***Under the Bank Holding Company Act, a bank holding company is generallypermitted to engage in, or acquire direct or indirect control of more than 5%of the voting shares of any company engaged in, the following activities:

 

·                  bankingor managing or controlling banks;

 

·                  furnishingservices to or performing services for our subsidiaries; and

 

·                  any activitythat the Federal Reserve determines to be so closely related to banking as tobe a proper incident to the business of banking.

 

Activitiesthat the Federal Reserve has found to be so closely related to banking as to bea proper incident to the business of banking include:

 

·                  factoringaccounts receivable;

 

·                  making, acquiring, brokering orservicing loans and usual related activities;

 

·                  leasing personal or real property;

 

·                  operating a non-bank depositoryinstitution, such as a savings association;

 

·                  trust company functions;

 

·                  financial and investment advisoryactivities;

 

·      conducting discount securities brokerageactivities;

 

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·                  underwriting and dealing in governmentobligations and money market instruments;

 

·                  providing specified management consulting andcounseling activities;

 

·                  performing selected data processing servicesand support services;

 

·                  acting as agent or broker in selling creditlife insurance and other types of insurance in connection with credittransactions; and

 

·                  performing selected insuranceunderwriting activities.

 

As a bank holding company we also can elect to be treated as a “financialholding company,” which would allow us to engage in a broader array ofactivities.  In sum, a financial holdingcompany can engage in activities that are financial in nature or incidental orcomplementary to financial activities, including insurance underwriting, salesand brokerage activities, providing financial and investment advisory services,underwriting services and limited merchant banking activities.  We have not sought financial holding companystatus, but may elect such status in the future as our business matures.  If we were to elect in writing for financialholding company status, each insured depository institution we control wouldhave to be well capitalized, well managed and have at least a satisfactoryrating under the CRA (discussed below).

 

The Federal Reserve has the authority to order a bank holding companyor its subsidiaries to terminate any of these activities or to terminate itsownership or control of any subsidiary when it has reasonable cause to believethat the bank holding company’s continued ownership, activity or controlconstitutes a serious risk to the financial safety, soundness or stability ofit or any of its bank subsidiaries.

 

***Change in Control.***  Inaddition, and subject to certain exceptions, the Bank Holding Company Act andthe Change in Bank Control Act, together with regulations promulgated thereunder, require Federal Reserve approval prior to any person or companyacquiring “control” of a bank holding company. Control is conclusively presumed to exist if an individual or companyacquires 25% or more of any class of voting securities of a bank holdingcompany.  Following the relaxing of theserestrictions by the Federal Reserve in September 2008, control will berebuttably presumed to exist if a person acquires more than 33% of the totalequity of a bank or bank holding company, of which it may own, control or havethe power to vote not more than 15% of any class of voting securities.

 

***Source of Strength****.*  Inaccordance with Federal Reserve Board policy, we are expected to act as a sourceof financial strength to the Bank and to commit resources to support the Bankin circumstances in which we might not otherwise do so.  If the Bank were to become “under-capitalized”(see below “Congaree State Bank—Prompt Corrective Action”), we would berequired to provide a guarantee of the Bank’s plan to return to capitaladequacy.  Additionally, under the BankHolding Company Act, the Federal Reserve Board may require a bank holdingcompany to terminate any activity or relinquish control of a nonbanksubsidiary, other than a nonbank subsidiary of a bank, upon the Federal ReserveBoard’s determination that such activity or control constitutes a serious riskto the financial soundness or stability of any depository institutionsubsidiary of the bank holding company. Further, federal bank regulatory authorities have additional discretionto require a bank holding company to divest itself of any bank or nonbanksubsidiaries if the agency determines that divestiture may aid the depositoryinstitution’s financial condition. Further, any loans by a bank holding company to a subsidiary bank aresubordinate in right of payment to deposits and certain other indebtedness ofthe subsidiary bank.  In the event of abank holding company’s bankruptcy, any commitment by the bank holding companyto a federal bank regulatory agency to maintain the capital of a subsidiarybank at a certain level would be assumed by the bankruptcy trustee and entitledto priority payment.

 

***Capital Requirements.***  TheFederal Reserve Board imposes certain capital requirements on the bank holdingcompany under the Bank Holding Company Act, including a minimum leverage ratioand a minimum ratio of “qualifying” capital to risk-weighted assets.  These requirements are essentially the sameas those that apply to the Bank and are described below under “Congaree StateBank - Capital Regulations.”  Subject toour capital requirements and certain other restrictions, we are able to borrowmoney to make a capital contribution to the Bank, 

 

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andthese loans may be repaid from dividends paid from the Bank to theCompany.  Our ability to pay dividendsdepends on the Bank’s ability to pay dividends to us, which is subject toregulatory restrictions as described below in “Congaree State Bank— Dividends.”  We are also able to raise capital forcontribution to the Bank by issuing securities without having to receiveregulatory approval, subject to compliance with federal and state securitieslaws.

 

***South Carolina State Regulation.***  As aSouth Carolina bank holding company under the South Carolina Banking andBranching Efficiency Act, we are subject to limitations on sale or merger andto regulation by the South Carolina Board of Financial Institutions, includinga restriction on the ability to sell our Bank for at least five years from thedate of its formation.  We are notrequired to obtain the approval of the South Carolina Board of FinancialInstitutions prior to acquiring the capital stock of a national bank, but wemust notify them at least 15 days prior to doing so.  We must receive the Board’s approval prior toengaging in the acquisition of a South Carolina state chartered bank or anotherSouth Carolina bank holding company.

 

**CongareeState Bank**

 

TheBank operates as a state bank incorporated under the laws of the State of SouthCarolina and is subject to examination by the South Carolina Board of FinancialInstitutions.  Deposits in the bank areinsured by the FDIC up to a maximum amount, which is currently $100,000 foreach non-retirement depositor and $250,000 for certain retirement-accountdepositors.  However, the FDIC hasincreased the coverage up to $250,000 for each non-retirement depositor throughDecember 31, 2009, and the bank is participating in the FDIC’s TemporaryLiquidity Guarantee Program (discussed below in greater detail) which, in part,fully insures non-interest bearing transaction accounts.

 

The South Carolina Board of Financial Institutionsand the FDIC regulate or monitor virtually all areas of the Bank’s operations,including:

 

·                  security devices and procedures;

 

·                  adequacy of capitalization and loss reserves;

 

·                  loans;

 

·                  investments;

 

·                  borrowings;

 

·                  deposits;

 

·                  mergers;

 

·                  issuances of securities;

 

·                  payment of dividends;

 

·                  interest rates payable on deposits;

 

·                  interest rates or fees chargeable on loans;

 

·                  establishment of branches;

 

·                  corporate reorganizations;

 

·                  maintenance of books and records; and

 

·                  adequacy of staff training to carry on safelending and deposit gathering practices.

 

The South Carolina Board of Financial Institutionsrequires the Bank to maintain specified capital ratios and imposes limitationson the Bank’s aggregate investment in real estate, bank premises, and furnitureand fixtures.  The South Carolina Boardof Financial Institutions also requires the Bank to prepare quarterly reportson the Bank’s 

 

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financialcondition in compliance with its minimum standards and procedures.

 

All insured institutions must undergo regular onsite examinations by their appropriate banking agency.  The cost of examinations of insureddepository institutions and any affiliates may be assessed by the appropriateagency against each institution or affiliate as it deems necessary orappropriate.  Insured institutions arerequired to submit annual reports to the FDIC, their federal regulatory agency,and their state supervisor when applicable. The FDIC has developed a method for insured depository institutions toprovide supplemental disclosure of the estimated fair market value of assetsand liabilities, to the extent feasible and practicable, in any balance sheet,financial statement, report of condition or any other report of any insureddepository institution.  The FDIC ImprovementAct also requires the federal banking regulatory agencies to prescribe, byregulation, standards for all insured depository institutions and depositoryinstitution holding companies relating, among other things, to the following:

 

·                  internal controls;

 

·                  information systems and audit systems;

 

·                  loan documentation;

 

·                  credit underwriting;

 

·                  interest rate risk exposure; and

 

·                  asset quality.

 

***PromptCorrective Action. ***As an insured depository institution, theBank is required to comply with the capital requirements promulgated under theFederal Deposit Insurance Act and the regulations thereunder, which set forth****five capital categories, each with specific regulatoryconsequences.  Under these regulations,the categories are:

 

·                                          Well Capitalized - The institution exceedsthe required minimum level for each relevant capital measure.  A well capitalized institution is one (i) havinga total capital ratio of 10% or greater, (ii) having a tier 1 capitalratio of 6% or greater, (iii) having a leverage capital ratio of 5% orgreater and (iv) that is not subject to any order or written directive tomeet and maintain a specific capital level for any capital measure.

 

·                                          Adequately Capitalized - The institutionmeets the required minimum level for each relevant capital measure.  No capital distribution may be made thatwould result in the institution becoming undercapitalized.  An adequately capitalized institution is one (i) havinga total capital ratio of 8% or greater, (ii) having a tier 1 capital ratioof 4% or greater and (iii) having a leverage capital ratio of 4% orgreater or a leverage capital ratio of 3% or greater if the institution israted composite 1 under the CAMELS (Capital, Assets, Management, Earnings,Liquidity and Sensitivity to market risk) rating system.

 

·                                          Undercapitalized - The institution fails tomeet the required minimum level for any relevant capital measure.  An undercapitalized institution is one (i) havinga total capital ratio of less than 8% or (ii) having a tier 1 capitalratio of less than 4% or (iii) having a leverage capital ratio of lessthan 4%, or if the institution is rated a composite 1 under the CAMELS ratingsystem, a leverage capital ratio of less than 3%.

 

·                                          Significantly Undercapitalized - The institutionis significantly below the required minimum level for any relevant capitalmeasure.  A significantlyundercapitalized institution is one (i) having a total capital ratio ofless than 6% or (ii) having a tier 1 capital ratio of less than 3% or (iii) havinga leverage capital ratio of less than 3%.

 

·                                          Critically Undercapitalized - The institutionfails to meet a critical capital level set by the appropriate federal bankingagency.  A critically undercapitalizedinstitution is one having a ratio of tangible equity to total assets that isequal to or less than 2%.

 

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If the FDIC determines, after notice and an opportunity for hearing,that the Bank is in an unsafe or unsound condition, the regulator is authorizedto reclassify the Bank to the next lower capital category (other thancritically undercapitalized) and require the submission of a plan to correctthe unsafe or unsound condition.

 

If the Bank is not well capitalized, it cannot accept brokered depositswithout prior FDIC approval and, if approval is granted, cannot offer aneffective yield in excess of 75 basis points on interests paid on deposits ofcomparable size and maturity in such institution’s normal market area fordeposits accepted from within its normal market area, or national rate paid ondeposits of comparable size and maturity for deposits accepted outside the Bank’snormal market area.  Moreover, if theBank becomes less than adequately capitalized, it must adopt a capitalrestoration plan acceptable to the FDIC. The Bank also would become subject to increased regulatory oversight,and is increasingly restricted in the scope of its permissible activities.  Each company having control over anundercapitalized institution also must provide a limited guarantee that theinstitution will comply with its capital restoration plan.  Except under limited circumstances consistentwith an accepted capital restoration plan, an undercapitalized institution maynot grow.  An undercapitalizedinstitution may not acquire another institution, establish additional branchoffices or engage in any new line of business unless determined by theappropriate Federal banking agency to be consistent with an accepted capitalrestoration plan, or unless the FDIC determines that the proposed action willfurther the purpose of prompt corrective action.  The appropriate federal banking agency maytake any action authorized for a significantly undercapitalized institution ifan undercapitalized institution fails to submit an acceptable capitalrestoration plan or fails in any material respect to implement a plan acceptedby the agency.  A criticallyundercapitalized institution is subject to having a receiver or conservatorappointed to manage its affairs and for loss of its charter to conduct bankingactivities.

 

An insured depository institution may not pay a management fee to abank holding company controlling that institution or any other person havingcontrol of the institution if, after making the payment, the institution, wouldbe undercapitalized.  In addition, aninstitution cannot make a capital distribution, such as a dividend or otherdistribution that is in substance a distribution of capital to the owners ofthe institution if following such a distribution the institution would beundercapitalized.  Thus, if payment ofsuch a management fee or the making of such would cause the Bank to becomeundercapitalized, it could not pay a management fee or dividend to us.

 

As of December 31, 2008, the Bank was deemed to be “adequatelycapitalized.” After receiving $3,285,000 under the TARP CPP on January 9,2009, the Company subsequently made an investment of $3,000,000 in the Bankwhich was then considered “well capitalized.”

 

***Standards for Safety andSoundness.    *** The Federal Deposit Insurance Act also requires the federal bankingregulatory agencies to prescribe, by regulation or guideline, operational andmanagerial standards for all insured depository institutions relating to: (i) internalcontrols, information systems and internal audit systems; (ii) loandocumentation; (iii) credit underwriting; (iv) interest rate riskexposure; and (v) asset growth. The agencies also must prescribe standardsfor asset quality, earnings, and stock valuation, as well as standards for compensation,fees and benefits.  The federal bankingagencies have adopted regulations and Interagency Guidelines PrescribingStandards for Safety and Soundness to implement these required standards. Theseguidelines set forth the safety and soundness standards that the federalbanking agencies use to identify and address problems at insured depositoryinstitutions before capital becomes impaired. Under the regulations, if the FDIC determines that the Bank fails to meetany standards prescribed by the guidelines, the agency may require the Bank tosubmit to the agency an acceptable plan to achieve compliance with thestandard, as required by the FDIC.  Thefinal regulations establish deadlines for the submission and review of suchsafety and soundness compliance plans.

 

***Insurance of Accounts and Regulation by the FDIC.*****  The Bank’s deposits are insuredup to applicable limits by the Deposit Insurance Fund of theFDIC.  The Deposit Insurance Fund is the successor to the BankInsurance Fund and the Savings Association Insurance Fund, which were mergedeffective March 31, 2006.  As insurer, the FDIC imposes depositinsurance premiums and is authorized to conduct examinations of and to requirereporting by FDIC insured institutions.  It also may prohibit anyFDIC insured institution from engaging in any activity the FDIC determines byregulation or order to pose a serious risk to the insurancefund.  The FDIC also has the authority to initiate enforcementactions against savings institutions, after giving the Office of ThriftSupervision an opportunity to take such action, and may terminate the depositinsurance if it determines that the institution has engaged in unsafe orunsound practices or is in an unsafe or unsound condition.

 

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Underregulations effective January 1, 2007, the FDIC adopted a new risk-basedpremium system that provides for quarterly assessments based on an insuredinstitution’s ranking in one of four risk categories based upon supervisory andcapital evaluations.   For deposits held as of March 31,2009, institutions are assessed at annual rates ranging from 12 to 50basis points, depending on each institution’s risk of default as measuredby regulatory capital ratios and other supervisory measures.   EffectiveApril 1, 2009, assessments will take into account eachinstitution’s reliance on secured liabilities and brokereddeposits.   This will result in assessments ranging from 7 to 77.5basis points.  We anticipate our future insurance costs to be higher thanin previous periods.  However, we are notcurrently able to accurately determine the amount of additional cost.

 

FDICinsured institutions are required to pay a Financing Corporation assessment, inorder to fund the interest on bonds issued to resolve thrift failures in the1980s.  For the first quarter of 2009, the Financing Corporationassessment equaled 1.14 basis points for domesticdeposits.  These assessments, which may be revised based upon thelevel of deposits, will continue until the bonds mature in the years 2017through 2019.

 

TheFDIC may terminate the deposit insurance of any insured depository institution,including the Bank, if it determines after a hearing that the institution hasengaged in unsafe or unsound practices, is in an unsafe or unsound condition tocontinue operations or has violated any applicable law, regulation, rule, orderor condition imposed by the FDIC.  It also may suspend depositinsurance temporarily during the hearing process for the permanent termination ofinsurance, if the institution has no tangible capital.  If insurance ofaccounts is terminated, the accounts at the institution at the time of thetermination, less subsequent withdrawals, shall continue to be insured for aperiod of six months to two years, as determined by theFDIC.  Management of the Bank is not aware of any practice, conditionor violation that might lead to termination of the Bank’s deposit insurance.

 

***Transactions with Affiliates and Insiders.***  TheCompany is a legal entity separate and distinct from the Bank and its othersubsidiaries.  Various legal limitationsrestrict the Bank from lending or otherwise supplying funds to the Company orits non-bank subsidiaries.  The Companyand the Bank are subject to Sections 23A and 23B of the Federal Reserve Act andFederal Reserve Regulation W.  Section 23Aof the Federal Reserve Act places limits on the amount of loans or extensionsof credit to, or investments in, or certain other transactions with, affiliatesand on the amount of advances to third parties collateralized by the securitiesor obligations of affiliates.  Theaggregate of all covered transactions is limited in amount, as to any oneaffiliate, to 10% of the Bank’s capital and surplus and, as to all affiliatescombined, to 20% of the Bank’s capital and surplus.  Furthermore, within the foregoing limitationsas to amount, each covered transaction must meet specified collateralrequirements.  The Bank is forbidden topurchase low quality assets from an affiliate.

 

Section 23Bof the Federal Reserve Act, among other things, prohibits an institution fromengaging in certain transactions with certain affiliates unless thetransactions are on terms substantially the same, or at least as favorable tosuch institution or its subsidiaries, as those prevailing at the time forcomparable transactions with nonaffiliated companies.  The Bank is also subject to certainrestrictions on extensions of credit to executive officers, directors, certainprincipal shareholders, and their related interests.  Such extensions of credit (i) must bemade on substantially the same terms, including interest rates and collateral,as those prevailing at the time for comparable transactions with third partiesand (ii) must not involve more than the normal risk of repayment orpresent other unfavorable features.

 

RegulationW generally excludes all non-bank and non-savings association subsidiaries ofbanks from treatment as affiliates, except to the extent that the FederalReserve Board decides to treat these subsidiaries as affiliates. The regulationalso limits the amount of loans that can be purchased by a bank from anaffiliate to not more than 100% of the bank’s capital and surplus.

 

***Branching****.*  Under current South Carolina law, we may openbranch offices throughout South Carolina with the prior approval of the SouthCarolina Board of Financial Institutions.  In addition, with prior regulatory approval, the Bank will be able toacquire existing banking operations in South Carolina.  Furthermore, federal legislation has beenpassed that permits interstate branching by banks if allowed by state law, andinterstate merging by banks.  However,South Carolina law, with limited exceptions, currently permits branching acrossstate lines only through interstate mergers.

 

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***Anti-Tying Restrictions. ***Under amendments to the Bank Holding Company Act and Federal Reserveregulations, a bank is prohibited from engaging in certain tying or reciprocityarrangements with its customers.  Ingeneral, a bank may not extend credit, lease, sell property, or furnish anyservices or fix or vary the consideration for these on the condition that (i) thecustomer obtain or provide some additional credit, property, or services fromor to the bank, the bank holding company or subsidiaries thereof or (ii) thecustomer may not obtain some other credit, property, or services from acompetitor, except to the extent reasonable conditions are imposed to assurethe soundness of the credit extended.  Certainarrangements are permissible: a bank may offer combined-balance products andmay otherwise offer more favorable terms if a customer obtains two or moretraditional bank products; and certain foreign transactions are exempt from thegeneral rule.  A bank holding company orany bank affiliate also is subject to anti-tying requirements in connectionwith electronic benefit transfer services.

 

***Community Reinvestment Act****.*  TheCommunity Reinvestment Act requires that, in connection with examinations offinancial institutions within their respective jurisdictions, a financialinstitution’s primary regulator, which is the FDIC for the bank, shall evaluatethe record of each financial institution in meeting the credit needs of itslocal community, including low and moderate income neighborhoods.  These factors are also considered inevaluating mergers, acquisitions, and applications to open a branch orfacility.  Failure to adequately meetthese criteria could impose additional requirements and limitations on ourBank.  Additionally, we must publiclydisclose the terms of various Community Reinvestment Act-related agreements.

 

***Finance Subsidiaries.***  Underthe Gramm-Leach-Bliley Act (the “GLBA”), subject to certain conditions imposedby their respective banking regulators, national and state-chartered banks arepermitted to form “financial subsidiaries” that may conduct financial orincidental activities, thereby permitting bank subsidiaries to engage incertain activities that previously were impermissible.  The GLBA imposes several safeguards andrestrictions on financial subsidiaries, including that the parent bank’s equityinvestment in the financial subsidiary be deducted from the bank’s assets andtangible equity for purposes of calculating the bank’s capital adequacy.  In addition, the GLBA imposes newrestrictions on transactions between a bank and its financial subsidiariessimilar to restrictions applicable to transactions between banks and non-bankaffiliates.

 

***Consumer Protection Regulations.*** Activities of the Bank are subject to avariety of statutes and regulations designed to protect consumers.  Interest and other charges collected orcontracted for by the Bank are subject to state usury laws and federal laws concerninginterest rates.  The Bank’s loanoperations are also subject to federal laws applicable to credit transactions,such as the:

 

·                  The federal Truth-In-Lending Act, governingdisclosures of credit terms to consumer borrowers;

 

·                  The Home Mortgage Disclosure Act of 1975,requiring financial institutions to provide information to enable the publicofficials to determine whether a financial institution is fulfilling itsobligation to help meet the housing needs of the community it serves;

 

·                  The Equal Credit Opportunity Act, prohibitingdiscrimination on the basis of race, creed or other prohibited factors inextending credit;

 

·                  The Fair Credit Reporting Act of 1978, asamended by the Fair and Accurate Credit Transactions Act, governing the use andprovision of information to credit reporting agencies, certain identity theftprotections and certain credit and other disclosures;

 

·                  The Fair Debt Collection Act, governing themanner in which consumer debts may be collected by collection agencies; and

 

·                  The Rules and regulations of the variousfederal agencies charged with the responsibility of implementing these federallaws.

 

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The deposit operations of the Bank also are subjectto:

 

·                  theRight to Financial Privacy Act, which imposes a duty to maintainconfidentiality of consumer financial records and prescribes procedures forcomplying with administrative subpoenas of financial records; and

 

·                  theElectronic Funds Transfer Act and Regulation E issued by the Federal ReserveBoard to implement that Act, which governs automatic deposits to andwithdrawals from deposit accounts and customers’ rights and liabilities arisingfrom the use of automated teller machines and other electronic bankingservices.

 

***Enforcement Powers.***  TheBank and its “institution-affiliated parties,” including its management,employees, agents, independent contractors, and consultants such as attorneysand accountants and others who participate in the conduct of the financialinstitution’s affairs, are subject to potential civil and criminal penaltiesfor violations of law, regulations or written orders of a government agency.These practices can include the failure of an institution to timely filerequired reports or the filing of false or misleading information or thesubmission of inaccurate reports.  Civilpenalties may be as high as $1,000,000 a day for such violations.  Criminal penalties for some financialinstitution crimes have been increased to twenty years.  In addition, regulators are provided withgreater flexibility to commence enforcement actions against institutions andinstitution-affiliated parties.  Possibleenforcement actions include the termination of deposit insurance.  Furthermore, banking agencies’ power to issuecease-and-desist orders were expanded. Such orders may, among other things, require affirmative action tocorrect any harm resulting from a violation or practice, including restitution,reimbursement, indemnifications or guarantees against loss.  A financial institution may also be orderedto restrict its growth, dispose of certain assets, rescind agreements orcontracts, or take other actions as determined by the ordering agency to beappropriate.

 

***Anti-Money Laundering. ***Financial institutions must maintain anti-money laundering programsthat include established internal policies, procedures, and controls; adesignated compliance officer; an ongoing employee training program; andtesting of the program by an independent audit function. The Company and theBank are also prohibited from entering into specified financial transactionsand account relationships and must meet enhanced standards for due diligenceand “knowing your customer” in their dealings with foreign financialinstitutions and foreign customers. Financial institutions must take reasonable steps to conduct enhancedscrutiny of account relationships to guard against money laundering and toreport any suspicious transactions, and recent laws provide law enforcementauthorities with increased access to financial information maintained bybanks.  Anti-money laundering obligationshave been substantially strengthened as a result of the USA Patriot Act,enacted in 2001 and renewed in 2006. Bank regulators routinely examine institutions for compliance with theseobligations and are required to consider compliance in connection with theregulatory review of applications.  Theregulatory authorities have been active in imposing “cease and desist” ordersand money penalty sanctions against institutions found to be violating theseobligations.

 

## ***USA PATRIOT Act.***** The USA PATRIOT Act becameeffective on October 26, 2001, amended, in part, the Bank Secrecy Act, andprovides, in part, for the facilitation of information sharing amonggovernmental entities and financial institutions for the purpose of combatingterrorism and money laundering by enhancing anti-money laundering and financialtransparency laws, as well as enhanced information collection tools andenforcement mechanics for the U.S. government, including: (i) requiringstandards for verifying customer identification at account opening; (ii) rules topromote cooperation among financial institutions, regulators, and lawenforcement entities in identifying parties that may be involved in terrorismor money laundering; (iii) reports by nonfinancial trades and businessesfiled with the Treasury Department’s Financial Crimes Enforcement Network fortransactions exceeding $10,000; and (iv) filing suspicious activitiesreports by brokers and dealers if they believe a customer may be violating U.S.laws and regulations and requires enhanced due diligence requirements forfinancial institutions that administer, maintain, or manage private bankaccounts or correspondent accounts for non-U.S. persons.  Bank regulators routinely examineinstitutions for compliance with these obligations and are required to considercompliance in connection with the regulatory review of applications.

## ** **

Under the USA PATRIOT Act, the Federal Bureau of Investigation (“FBI”)can send our banking regulatory agencies lists of the names of personssuspected of involvement in terrorist activities.  The Bank can be requested, to search itsrecords for any relationships or transactions with persons on those lists.  If the Bank finds any relationships ortransactions, it must file a suspicious activity report and contact the FBI.

 

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The Office of Foreign Assets Control (“OFAC”), which is a division ofthe U.S. Department of the Treasury, is responsible for helping to insure thatUnited States entities do not engage in transactions with “enemies” of theUnited States, as defined by various Executive Orders and Acts ofCongress.  OFAC has sent, and will send,our banking regulatory agencies lists of names of persons and organizationssuspected of aiding, harboring or engaging in terrorist acts.  If the Bank finds a name on any transaction,account or wire transfer that is on an OFAC list, it must freeze such account,file a suspicious activity report and notify the FBI.  The Bank has appointed an OFAC complianceofficer to oversee the inspection of its accounts and the filing of any notifications.  The Bank actively checks high-risk OFAC areassuch as new accounts, wire transfers and customer files.  The Bank performs these checks utilizingsoftware, which is updated each time a modification is made to the listsprovided by OFAC and other agencies of Specially Designated Nationals andBlocked Persons.

 

***Privacy andCredit Reporting*****. **Financialinstitutions are required to disclose their policies for collecting andprotecting confidential information. Customers generally may prevent financial institutions from sharingnonpublic personal financial information with nonaffiliated third partiesexcept under narrow circumstances, such as the processing of transactionsrequested by the consumer or when the financial institution is jointly sponsoringa product or service with a nonaffiliated third party.  Additionally, financial institutionsgenerally may not disclose consumer account numbers to any nonaffiliated thirdparty for use in telemarketing, direct mail marketing or other marketing toconsumers.  It is the Bank’s policy notto disclose any personal information unless required by law.

 

Likeother lending institutions, the Bank utilizes credit bureau data in itsunderwriting activities.  Use of suchdata is regulated under the Federal Credit Reporting Act on a uniform,nationwide basis, including credit reporting, prescreening, sharing ofinformation between affiliates, and the use of credit data.  The Fair and Accurate Credit Transactions Actof 2003 (the “FACT Act”) authorizes states to enact identity theft laws thatare not inconsistent with the conduct required by the provisions of the FACTAct.

 

***Payment ofDividends.*** A South Carolina state bank may not pay dividends fromits capital.  All dividends must be paidout of undivided profits then on hand, after deducting expenses, includingreserves for losses and bad debts.  TheBank is authorized to pay cash dividends up to 100% of net income in anycalendar year without obtaining the prior approval of the South Carolina Boardof Financial Institutions, provided that the Bank received a composite ratingof one or two at the last federal or state regulatory examination.  The Bank must obtain approval from the SouthCarolina Board of Financial Institutions prior to the payment of any other cashdividends.  In addition, under theFederal Deposit Insurance Corporation Improvement Act, the Bank may not pay adividend if, after paying the dividend, the Bank would be undercapitalized.

** **

***Check 21.***  TheCheck Clearing for the 21st Century Act gives “substitute checks,” such as adigital image of a check and copies made from that image, the same legalstanding as the original paper check. Some of the major provisions include:

 

·                                          allowing check truncation without making itmandatory;

 

·                                          demanding that every financial institutioncommunicate to account holders in writing a description of its substitute checkprocessing program and their rights under the law;

 

·                                          legalizing substitutions for and replacementsof paper checks without agreement from consumers;

 

·                                          retaining in place the previously mandatedelectronic collection and return of checks between financial institutions onlywhen individual agreements are in place;

 

·                                          requiring that when accountholders requestverification, financial institutions produce the original check (or a copy thataccurately represents the original) and demonstrate that the account debit wasaccurate and valid; and

 

·                                          requiring the re-crediting of funds to anindividual’s account on the next business day after a consumer proves that thefinancial institution has erred.

 

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***Effect of Governmental Monetary Policies*****.**  Ourearnings are affected by domestic economic conditions and the monetary andfiscal policies of the United States government and its agencies.  The Federal Reserve bank’s monetary policieshave had, and are likely to continue to have, an important impact on theoperating results of commercial banks through its power to implement nationalmonetary policy in order, among other things, to curb inflation or combat arecession.  The monetary policies of theFederal Reserve Board have major effects upon the levels of bank loans,investments and deposits through its open market operations in United Statesgovernment securities and through its regulation of the discount rate onborrowings of member banks and the reserve requirements against member bankdeposits.  It is not possible to predictthe nature or impact of future changes in monetary and fiscal policies.

 

***Proposed Legislation and Regulatory Action*****.**  Newregulations and statutes are regularly proposed that contain wide-rangingproposals for altering the structures, regulations, and competitiverelationships of the nation’s financial institutions.  We cannot predict whether or in what form anyproposed regulation or statute will be adopted or the extent to which ourbusiness may be affected by any new regulation or statute.

 

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**Item 1A.  Risk Factors.**

** **

***We expect to incur losses for atleast our first three years, and there is a risk we may never becomeprofitable.***

*** ***

Our Bank is a de novo bank that began operations in October 2006.  As is typical with most new banks, weincurred substantial start-up expenses and are still operating with anaccumulated deficit.  In order for us tobecome profitable, we will need to attract a large number of customers todeposit and borrow money.  This will taketime.  Our future profitability isdependent on numerous factors including the success of the economy of thecommunity and favorable government regulation. While the economy in this area has been strong in recent years, theeconomic downturn in the area could hurt our business.  We are also a highly regulatedinstitution.  Our ability to grow andachieve profitability may be adversely affected by state and federalregulations that limit a bank’s right to make loans, purchase securities, andpay dividends.  Although we expect tobecome profitable in our third year, there is a risk that a deterioration ofthe local economy or adverse government regulation and other factors couldaffect our plans.

 

***Our decisions regarding credit riskand reserves for loan losses may materially and adversely affect our business.***

*** ***

Making loans and other extensions of credit is anessential element of our business. Although we seek to mitigate risks inherent in lending by adhering tospecific underwriting practices, our loans and other extensions of credit maynot be repaid.  The risk of nonpayment isaffected by a number of factors, including:

 

·                  the duration of the credit;

·                  credit risks of a particular customer;

·                  changes in economic and industry conditions;and

·                  in the case of a collateralized loan, risksresulting from uncertainties about the future value of the collateral.

 

We attempt to maintain an appropriate allowance forloan losses to provide for potential losses in our loan portfolio.  We periodically determine the amount of theallowance based on consideration of several factors, including:

 

·                  an ongoing review of the quality, mix, andsize of our overall loan portfolio;

·                  our historical loan loss experience;

·                  evaluation of economic conditions;

·                  regular reviews of loan delinquencies andloan portfolio quality; and

·                  the amount and quality of collateral,including guarantees, securing the loans.

 

There is no precise method of predicting creditlosses since any estimate of loan losses is necessarily subjective and theaccuracy of the estimate depends on the outcome of future events.  Therefore, we face the risk that charge-offsin future periods will exceed our allowance for loan losses and that additionalincreases in the allowance for loan losses will be required.  Additions to the allowance for loan losseswould result in an increase of our net loss, and possibly a decrease in ourcapital.

 

While we generally underwrite the loans in ourportfolio in accordance with our own internal underwriting guidelines andregulatory supervisory guidelines, in certain circumstances we have made loanswhich exceed either our internal underwriting guidelines, supervisoryguidelines, or both.  As of December 31,2008, we had $6,626,872 in loans that had loan-to-value ratios that exceededregulatory supervisory guidelines.  Inaddition, supervisory limits on commercial loan to value exceptions are set at30% of our Bank’s capital.  At December 31,2008, we had $2,458,814 in commercial loans that exceeded the supervisory loanto value ratio.  The number of loans inour portfolio with loan-to-value ratios in excess of supervisory guidelines,our internal guidelines, or both could increase the risk of delinquencies anddefaults in our portfolio.

 

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***Lack of seasoning of our loanportfolio may increase the risk of credit defaults in the future.***

 

Due to our short operatinghistory, all of the loans in our loan portfolio and of our lendingrelationships are of relatively recent origin. In general, loans do not begin to show signs of credit deterioration ordefault until they have been outstanding for some period of time, a process werefer to as “seasoning.”  As a result, aportfolio of older loans will usually behave more predictably than a newerportfolio.  Because our loan portfolio isrelatively new, the current level of delinquencies and defaults may not berepresentative of the level that will prevail when the portfolio becomes moreseasoned, which may be higher than current levels.  If delinquencies and defaults increase, wemay be required to increase our provision for loan losses, which wouldadversely affect our results of operations and financial condition.

*** ***

***Our real estate portfolios are exposed toweakness in the U.S. housing markets and the overall state of the economy.***

 

Thedeclines in home prices in many markets across the U.S., along with the reducedavailability of mortgage credit, have resulted in sharp increases indelinquencies and losses in our portfolios of broker-originated, out-of-footprinthome equity lines and loans, nonprime mortgages, and loans related toresidential real estate construction and development. Further declines in homeprices coupled with an economic recession and associated rises in unemploymentlevels could drive losses beyond that which is provided for in the allowancefor loan losses. In that event, our earnings and capital could be adverselyaffected.

 

***Changes in interest rates may reduce our profitability.***

*** ***

Ourprofitability depends in large part on our net interest income, which is thedifference between interest income from interest-earning assets, such as loansand investment securities, and interest expense on interest-bearingliabilities, such as deposits and other borrowings.  Approximately 56.45% of our loans werevariable rate loans at December 31, 2008, which means that our interestincome will generally decrease in lower interest rate environments and rise inhigher interest rate environments.  Ournet interest income will be adversely affected if market interest rates changesuch that the interest we earn on loans and investments decreases faster thanthe interest we pay on deposits and borrowings. Many factors cause changes in interest rates, including governmentalmonetary policies and domestic and international economic and politicalconditions.  While we intend to managethe effects of changes in interest rates by adjusting the terms, maturities andpricing of our assets and liabilities, our efforts may not be effective and ourfinancial condition and results of operations could suffer.

 

***We may have higher loan losses than we have allowedfor in our allowance for loan losses.***

*** ***

Our loan losses could exceedour allowance for loan losses.  Ouraverage loan size continues to increase and reliance on our historic allowancefor loan losses may not be adequate. Approximately 39.82% of our loan portfolio is composed of construction,commercial mortgage and commercial loans. Repayment of such loans is generallyconsidered riskier than residential mortgage loans.  Industry experience shows that a portion ofloans will become delinquent and a portion of loans will require partial orentire charge-off.  Regardless of theunderwriting criteria used, losses may be experienced as a result of variousfactors beyond our control, including among other things, changes in marketconditions affecting the value of loan collateral and problems affecting thecredit of our borrowers.

 

***Recent negative developments in the financial industry and the domesticand international credit markets may adversely affect our operations andresults.***

*** ***

Negativedevelopments in the latter half of 2007 and during 2008 in the global creditand securitization markets have resulted in uncertainty in the financialmarkets in general with the expectation of the general economic downturncontinuing during 2009.  As a result ofthis “credit crunch,” commercial as well as consumer loan portfolioperformances have deteriorated at many institutions and the competition fordeposits and quality loans has increased significantly.  In addition, the values of real estatecollateral supporting many commercial loans and home mortgages have declinedand may continue to decline.  Bank andbank holding company stock prices have been negatively affected, as has the abilityof banks and bank holding companies to raise capital or borrow in the debtmarkets.  As a result, significant newfederal laws and regulations relating to financial institutions, including, 

 

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withoutlimitation, the EESA and the U.S. Treasury Department’s Capital PurchaseProgram, have been adopted. Furthermore, the potential exists for new federalor state laws and regulations regarding lending and funding practices andliquidity standards, and bank regulatory agencies are expected to be active inresponding to concerns and trends identified in examinations, including theexpected issuance of many formal enforcement orders.  Negative developments in the financialindustry and the domestic and international credit markets, and the impact ofnew legislation in response to those developments, may negatively impact ouroperations by restricting our business operations, including our ability tooriginate or sell loans, and adversely impact our financial performance.

 

***There can be no assurance that recently enacted legislation will helpstabilize the U.S. financial system.***

*** ***

TheEESA was signed into law on October 3, 2008 in response to the financialcrises affecting the banking system and financial markets and going concernthreats to investment banks and other financial institutions.  Pursuant to EESA, the Treasury has theauthority to, among other things, purchase up to $700 billion of mortgages,mortgage-backed securities and certain other financial instruments fromfinancial institutions for the purpose of stabilizing and providing liquidityto the U.S. financial markets.  TheTreasury announced the Capital Purchase Program under EESA pursuant to which ithas purchased and may continue to purchase senior preferred stock inparticipating financial institutions.  OnJanuary 9, 2009, we entered into the CPP Purchase Agreement with theTreasury providing for our issuance of the Series A Preferred Stock andthe CPP Warrant to the Treasury.

 

In addition, the FDICcreated the Temporary Liquidity Guarantee Program (“TLGP”) as part of a largergovernment effort to strengthen confidence and encourage liquidity in thenation’s banking system.  The TLGP hastwo components. First, the TLGP includes the Transaction Account GuaranteeProgram (“TAGP”), which provides unlimited deposit insurance coverage through December 31,2009 for noninterest-bearing transaction accounts (typically business checkingaccounts) and certain funds swept into noninterest-bearing savings accounts.  Institutions participating in the TLGP pay a10 basis points fee (annualized) on the balance of each covered account inexcess of $250,000, while the extra deposit insurance is in place.  Second, the TLGP includes the Debt GuaranteeProgram (“DGP”), under which the FDIC guarantees certain senior unsecured debtof FDIC-insured institutions and their holding companies.  The unsecured debt must be issued on or afterOctober 14, 2008 and not later than June 30, 2009, and the guaranteeis effective through the earlier of the maturity date or June 30,2012.  On March 17, 2009, theFDIC adopted an interim rule that extends the DGP and imposes surchargeson existing rates for certain debt issuances.  This extension allowsinstitutions that have issued guaranteed debt before April 1, 2009 toissue guaranteed debt during the extended issuance period that ends on October 31,2009. For such institutions, the guarantee on debt issued on or after April 1,2009, will expire no later than December 31, 2012.  The DGP coverage limit isgenerally 125% of the eligible entity’s eligible debt outstanding on September 30,2008 and scheduled to mature on or before June 30, 2009 or, for certaininsured institutions, 2% of their liabilities as of September 30,2008.  Depending on the term of the debtmaturity, the nonrefundable DGP fee ranges from 60 to 110 basis points(annualized) for covered debt outstanding until the earlier of maturity or June 30,2012 and 75 to 125 basis points (annualized) for covered debt outstanding untilafter June 30, 2012.  TheTAGP and DGP are in effect for all eligible entities, unless the entity optedout on or before December 5, 2008. We opted to participate in the TAGP and did not opt out of the DGP.

 

OnFebruary 17, 2009, the American Recovery and Reinvestment Act (the“Recovery Act”) was signed into law in an effort to, among other things, createjobs and stimulate growth in the United States economy.  The Recovery Act specifies appropriations ofapproximately $787 billion for a wide range of Federal programs and willincrease or extend certain benefits payable under the Medicaid, unemploymentcompensation, and nutrition assistance programs.  The Recovery Act also reduces individual andcorporate income tax collections and makes a variety of other changes to taxlaws.  The Recovery Act also imposescertain limitations on compensation paid by TARP participants, which includesprograms under TARP such as the Capital Purchase Program in which weparticipate.

 

Therecan be no assurance that these government actions will achieve theirpurpose.  The failure of the financialmarkets to stabilize, or a continuation or worsening of the current financialmarket conditions, could have a material adverse affect on our business, ourfinancial condition, the financial condition of our customers, our common stocktrading price, as well as our ability to access credit.  It couldalso result in declines in our investment portfolio which could be“other-than-temporary impairments.”

 

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***We could experience an unexpected inability to obtain needed liquidity.***

 

Liquiditymeasures the ability to meet current and future cash flow needs as they becomedue.  The liquidity of a financialinstitution reflects its ability to meet loan requests, to accommodate possibleoutflows in deposits, and to take advantage of interest rate marketopportunities.  The ability of afinancial institution to meet its current financial obligations is a functionof its balance sheet structure, its ability to liquidate assets and its accessto alternative sources of funds.  We seekto ensure our funding needs are met by maintaining a level of liquidity throughasset/liability management as well as through, among other things, our abilityto borrow funds from the Federal Home Loan Bank and the Federal ReserveBank.  As of March 31, 2009, ourborrowing capacity with the Federal Home Loan Bank was $13,170,000 of which$10,170,000 is available.  As of March 31,2009, our borrowing capacity through the Federal Reserve Bank’s discount windowwas $0.  If we are unable to obtain fundswhen needed, it could materially adversely affect our business, financialcondition and results of operations.

 

Asa result of the operating losses we have experienced, for the year ended December 31,2008, the Bank was considered “adequately capitalized.” After receiving$3,285,000 under the TARP CPP on January 9, 2009, the Bank was deemed tobe “well capitalized.”  If were to fallbelow the “well-capitalized” level in the future, we would be required, amongother things, to obtain the approval of the FDIC before participating furtherin the brokered deposit market, which could materially adversely affect ourbusiness, financial condition and results of operations.  Because of our participation in the TreasuryDepartment’s Capital Purchase Program, we are subject to several restrictionsincluding restrictions on compensation paid to our executives.

 

***Because of our participation in the Treasury Department’s CapitalPurchase Program, we are subject to several restrictions including restrictionson compensation paid to our executives.***

*** ***

Pursuantto the terms of the CPP Purchase Agreement between us and the Treasury, weadopted certain standards for executive compensation and corporate governancefor the period during which the Treasury holds the equity issued pursuant tothe CPP Purchase Agreement, including the common stock which may be issuedpursuant to the CPP Warrant.  Thesestandards generally apply to our Chief Executive Officer, Chief FinancialOfficer and the three next most highly compensated senior executive officers.The standards include (1) ensuring that incentive compensation for seniorexecutives does not encourage unnecessary and excessive risks that threaten thevalue of the financial institution; (2) required clawback of any bonus orincentive compensation paid to a senior executive based on statements ofearnings, gains or other criteria that are later proven to be materiallyinaccurate; (3) prohibition on making golden parachute payments to seniorexecutives; and (4) agreement not to deduct for tax purposes executivecompensation in excess of $500,000 for each senior executive.  In particular, the change to thedeductibility limit on executive compensation will likely increase the overallcost of our compensation programs in future periods and may make it moredifficult to attract suitable candidates to serve as executive officers.

 

***Legislation or regulatory changes couldcause us to seek to repurchase the preferred stock that we sold to the U.S.Treasury pursuant to the Capital Purchase Program.***

*** ***

Legislation that has beenadopted after we closed on our sale of Series A and Series BPreferred Stock to the Treasury for approximately $3.3 million pursuant to theCPP on January 9, 2009, or any legislation or regulations that may beimplemented in the future, may have a material impact on the terms of ourCPP transaction with the Treasury.   Ifwe determine that any such legislation or any regulations, in whole or in part,alter the terms of our CPP transaction with the Treasury in ways that webelieve are adverse to our ability to effectively manage our business, then itis possible that we may seek to unwind, in whole or in part, the CPPtransaction by repurchasing some or all of the preferred stock that we sold tothe Treasury pursuant to the CPP.  If wewere to repurchase all or a portion of such preferred stock, then our capitallevels could be materially reduced.

 

***The securities purchase agreement between us and the Treasury limitsour ability to pay dividends on and repurchase our common stock.***

*** ***

The securities purchaseagreement between us and the Treasury provides that prior to January 9,2012, unless we have redeemed the Series A Preferred Stock and Series BPreferred Stock or the Treasury has transferred the Series A PreferredStock or Series B Preferred Stock to a third party, the consent of theTreasury will be required

 

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for us to declare or pay any dividend or makeany distribution on our common stock. The purchase agreement further provides that prior to January 9,2019, unless we have redeemed the Series A Preferred Stock and Series BPreferred Stock or the Treasury has transferred the Series A PreferredStock or Series B Preferred Stock to a third party, the consent of theTreasury will be required for us to redeem, purchase or acquire any shares ofour common stock or other equity or capital securities, other than inconnection with benefit plans consistent with past practice and certain othercircumstances specified in the purchase agreement.  These restrictions could have a negativeeffect on the value of our common stock.

 

***A prolonged economic downturn,especially one affecting the Lexington and Richland County areas, could reduceour customer base, our level of deposits, and demand for financial productssuch as loans.***

*** ***

We are in uncertain economic times, includinguncertainty with respect to financial markets that have been volatile as aresult of sub-prime mortgage related and other matters. Our successsignificantly depends upon the growth in population, income levels, deposits,and housing starts in our markets, especially in Lexington and RichlandCounties.  If the communities in which weoperate do not grow, or if prevailing economic conditions locally or nationallyare unfavorable, our business may not succeed. A prolonged economic downturn would likely contribute to thedeterioration of the quality of our loan portfolio and reduce our level ofdeposits, which in turn would hurt our business.  Interest received on loans represented 87.7%of our interest income for the year ended December 31, 2008.  If the current economic downturn in theeconomy as a whole, or especially in the Lexington or Richland County area,continues for a prolonged period, borrowers may be less likely to repay theirloans as scheduled.  Moreover, the valueof real estate or other collateral that may secure our loans could be adverselyaffected.  Unlike many largerinstitutions, we are not able to spread the risks of unfavorable local economicconditions across a large number of diversified economies.  A prolonged economic downturn could,therefore, result in losses that materially and adversely affect our business.

 

***We are exposed to changes in the regulation of financial servicescompanies.***

*** ***

Proposals for furtherregulation of the financial services industry are continually being introducedin the Congress of the United States of America and the General Assembly of theState of South Carolina.  The agenciesregulating the financial services industry also periodically adopt changes totheir regulations.  On September 7,2008, the U.S. Treasury Department announced that Fannie Mae (along withFreddie Mac) has been placed into conservatorship under the control of thenewly created Federal Housing Finance Agency. On October 3, 2008, EESA was signed into law, and on October 14,2008 the U.S. Treasury Department announced its Capital Purchase Program underEESA.  It is possible that additional legislativeproposals may be adopted or regulatory changes may be made that would have anadverse effect on our business.  See “*Risk Factors — We are subject to extensive regulation that couldrestrict our activities*” below.

 

***The FDIC Deposit Insurance assessments thatwe are required to pay may materially increase in the future, which would havean adverse effect on our earnings and our ability to pay our liabilities asthey come due.***

*** ***

As a memberinstitution of the FDIC, we are required to pay quarterly deposit insurancepremium assessments to the FDIC.  Duringthe year ended December 31, 2008, we paid $67,246 in deposit insuranceassessments.  Due to the recent failureof several unaffiliated FDIC insurance depository institutions, and the FDIC’snew Temporary Liquidity Guarantee Program, the deposit insurance premiumassessments paid by all banks will likely increase.  In addition, new FDICrequirements shift a greater share of any increase in such assessments ontoinstitutions with higher risk profiles, including banks with heavy reliance onbrokered deposits, such as our Bank.

 

***Our small to medium-sized business target markets may have fewerfinancial resources to weather a downturn in the economy.***

*** ***

We target the banking andfinancial services needs of small and medium-sized business.  These businesses generally have fewerfinancial resources in terms of capital borrowing capacity than largerentities.  If general economic conditionscontinue to negatively impact these businesses in the markets in which weoperate, our business, financial condition and results of operations may beadversely affected.

 

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***We expect that a significant portion of our loanportfolio will be secured by real estate, and events that negatively impact thereal estate market could hurt our business.***

*** ***

A significant portion of our loan portfolio issecured by real estate.  As of December 31,2008, 86.9% of our loans had real estate as a primary or secondary component ofcollateral.  The real estate collateralin each case provides an alternate source of repayment in the event of defaultby the borrower and may deteriorate in value during the time the credit isextended.  A further weakening of the realestate market in our primary market area could result in an increase in thenumber of borrowers who default on their loans and a reduction in the value ofthe collateral securing their loans, which in turn could have an adverse effecton our profitability and asset quality. If we are required to liquidate the collateral securing a loan tosatisfy the debt during a period of reduced real estate values, our earningsand capital could be adversely affected. Acts of nature, including hurricanes, tornados, earthquakes, fires andfloods, which may cause uninsured damage and other loss of value to real estatethat secures these loans, may also negatively impact our financial condition.

 

***We depend on the accuracy and completeness of information about clientsand counterparties and our financial condition could be adversely affected ifwe rely on misleading information.***

 

In deciding whether to extend credit or to enterinto other transactions with clients and counterparties, we may rely oninformation furnished to us by or on behalf of clients and counterparties,including financial statements and other financial information. We also mayrely on representations of clients and counterparties as to the accuracy andcompleteness of that information and, with respect to financial statements, onreports of independent auditors. For example, in deciding whether to extendcredit to clients, we may assume that a customer’s audited financial statementsconform with GAAP and present fairly, in all material respects, the financialcondition, results of operations and cash flows of the customer. Our financialcondition and results of operations could be negatively affected to the extentwe rely on financial statements that do not comply with GAAP or are materiallymisleading.

 

***We are dependenton key individuals and the loss of one or more of these key individuals couldcurtail our growth and adversely affect our prospects.***

*** ***

Charlie T. Lovering, our chief executive officer,has extensive and long-standing ties within our primary service areas andprovides us with an important medium through which to market our products andservices.  If we lose the services of Mr. Lovering,he could be difficult to replace and our business and development could bematerially and adversely affected.

 

Our success also depends, in part, on our continuedability to attract and retain experienced loan originators, as well as othermanagement personnel.  Competition forpersonnel is intense, and we may not be successful in attracting or retainingqualified personnel.  Our failure tocompete for these personnel, or the loss of the services of several of such keypersonnel, could adversely affect our growth strategy and seriously harm ourbusiness, results of operations, and financial condition.

** **

***Efforts to comply with the Sarbanes-Oxley Act will involve significantexpenditures, and non-compliance with the Sarbanes-Oxley Act may adverselyaffect us.***

*** ***

TheSarbanes-Oxley Act of 2002, and the related rules and regulationspromulgated by the Securities and Exchange Commission that are now applicableto us, have increased the scope, complexity, and cost of corporate governance,reporting, and disclosure practices.  Wehave experienced, and we expect to continue to experience, greater compliancecosts, including costs related to internal controls, as a result of theSarbanes-Oxley Act.  For example, for theyear ended December 31, 2009, our independent registered public accountingfirm will be required to attest to our internal control over financialreporting, in addition to our management’s assessment.   We expect these new rules andregulations to continue to increase our accounting, legal, and other costs, andto make some activities more difficult, time consuming, and costly.  In the event that we are unable to maintainor achieve compliance with the Sarbanes-Oxley Act and related rules, we may beadversely affected.

 

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Ifwe are unable to receive a positive attestation from our independent registeredpublic accounting firm for the year ending December 31, 2009 then we couldbe subject to scrutiny by regulatory authorities, the trading price of ourcommon stock could decline and our ability to obtain any necessary equity ordebt financing could suffer.

 

In addition, the new rules adoptedas a result of the Sarbanes-Oxley Act could make it more difficult or morecostly for us to obtain certain types of insurance, including directors’ andofficers’ liability insurance, which could make it more difficult for us toattract and retain qualified persons to serve on our board of directors or asexecutive officers.  Moreover, thesenecessary costs are proportionately higher for a company of our size and willaffect our profitability more than that of some of our larger competitors.

 

***We are subject to extensive regulation thatcould limit or restrict our activities.***

*** ***

Weoperate in a highly regulated industry and are subject to examination,supervision, and comprehensive regulation by various regulatory agencies.  Our compliance with these regulations iscostly and restricts certain of our activities, including payment of dividends,mergers and acquisitions, investments, loans and interest rates charged,interest rates paid on deposits, and locations of offices.  We are also subject to capitalizationguidelines established by our regulators, which require us to maintain adequatecapital to support our growth.

 

Thelaws and regulations applicable to the banking industry could change at anytime, and we cannot predict the effects of these changes on our business and profitability.  Because government regulation greatly affectsthe business and financial results of all commercial banks and bank holdingcompanies, our cost of compliance could adversely affect our ability to operateprofitably.

 

Althoughwe are subject to extensive and comprehensive regulation by various bankingregulatory agencies such as the FDIC and the South Carolina Board of FinancialInstitutions, the purpose of these banking regulatory agencies is to protectand insure the interests and deposits of our Bank’s depositors.  These agencies do not consider preserving ormaximizing the investment made by the Company’s investors when regulating theBank’s activities.

 

TheSarbanes-Oxley Act of 2002, and the related rules and regulationspromulgated by the Securities and Exchange Commission that are applicable tous, will increase the scope, complexity, and cost of corporate governance,reporting, and disclosure practices.  Wehave experienced, and we expect to continue to experience, significantcompliance costs, including costs related to internal controls, as a result ofthe Sarbanes-Oxley Act.

 

***Our continued operations and future growth may require us to raiseadditional capital in the future, but that capital may not be available when itis needed.***

*** ***

We arerequired by regulatory authorities to maintain adequate levels of capital tosupport our operations.  To support ourcontinued operations, including any additional growth, we may need to raiseadditional capital.  In addition, weintend to redeem the Series A Preferred Stock that we issued to theTreasury under the CPP before the dividends on the Series A PreferredStock increase from 5% per annum to 9% per annum in 2014, as we may need toraise additional capital to do so.  Ourability to raise additional capital will depend in part on conditions in thecapital markets at that time, which are outside our control, and our financialperformance.  Accordingly, we may beunable to raise additional capital, if and when needed, on terms acceptable tous, or at all.  If we cannot raiseadditional capital when needed, our ability to continue our current operationsor further expand our operations through internal growth and acquisitions couldbe materially impaired.  In addition, ifwe decide to raise additional equity capital, your interest could be diluted.

 

***We face strong competition forclients, which could prevent us from obtaining clients and may cause us to payhigher interest rates to attract deposits.***

 

The bankingbusiness is highly competitive, and we experience competition in our marketfrom many other financial institutions. We compete with commercial banks, credit unions, savings and loanassociations, mortgage banking firms, consumer finance companies, securitiesbrokerage firms, insurance companies, money market funds, and other mutualfunds, as well as other super-regional, national, and international financialinstitutions that operate offices in our primary market areas andelsewhere.  We compete with theseinstitutions both in attracting deposits

 

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and in making loans.  In addition, we have to attract our clientbase from other existing financial institutions and from new residents.  Many of our competitors are well-established,larger financial institutions.  Theseinstitutions offer some services, such as extensive and established branchnetworks, that we do not provide.  Thereare also a number of other relatively new community banks in our market thatshare our general marketing focus on small- to medium-sized businesses andindividuals.  There is a risk that wewill not be able to compete successfully with other financial institutions inour market, and that we may have to pay higher interest rates to attractdeposits, resulting in reduced profitability. In addition, competitors that are not depository institutions aregenerally not subject to the extensive regulations that apply to us.

 

***We willface risks with respect to future expansion and acquisitions or mergers.***

 

Althoughwe do not have any current plans to do so, we may seek to acquire otherfinancial institutions or parts of those institutions.  We may also expand into new markets or linesof business or offer new products or services. These activities would involve a number of risks, including:

 

·                  the potential inaccuracy of the estimates andjudgments used to evaluate credit, operations, management, and market riskswith respect to a target institution;

 

·                  the time and costs of evaluating new markets,hiring or retaining experienced local management, and opening new offices andthe time lags between these activities and the generation of sufficient assetsand deposits to support the costs of the expansion;

 

·                  the incurrence and possible impairment ofgoodwill associated with an acquisition and possible adverse effects on ourresults of operations; and

** **

·                  the risk of loss of key employees andcustomers.

** **

Wehave never acquired another institution before, so we lack experience inhandling any of these risks.  There isthe risk that any expansion effort will not be successful.

 

***There is no public marketfor our shares, and we do not believe that we have enough shareholders oroutstanding shares to support an active trading market, even if we areeventually listed on a recognized trading exchange.***

*** ***

Thereis currently no established market for our common stock.  We do not expect to qualify for listing onNASDAQ or any other exchange for at least several years.  We have a sponsoring broker-dealer to matchbuy and sell orders for our common stock which is listed on the OTC BulletinBoard.  However, the trading markets onthe OTC Bulletin Board lack the depth, liquidity, and orderliness necessary tomaintain a liquid market in our common stock. For these reasons, we do not expect a liquid market for our common stockto develop for several years, if at all.

 

***We are exposed to the possibility of technology failure.***

*** ***

We rely on our computersystems and the technology of outside service providers. Our daily operationsdepend on the operational effectiveness of their technology. We rely on oursystems to accurately track and record our assets and liabilities. If ourcomputer systems or outside technology sources become unreliable, fail, orexperience a breach of security, our ability to maintain accurate financialrecords may be impaired, which could materially affect our business operationsand financial condition.

 

**Item 1B.  Unresolved Staff Comments.**

 

Not applicable.

 

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**Item 2.   Properties.**

 

Our Sunset office, whichopened in January, 2008 is located at the intersection of SunsetBoulevard and Kim Street approximately one mile east of the Lexington MedicalCenter.  Our address is 2023 SunsetBoulevard, West Columbia, South Carolina 29169.  The building is approximately 4,100 squarefeet on a site that is approximately 1.5 acres in size and is a full servicebanking facility with 3 drive-thru lanes and a drive-thru ATM.  The Sunset office is subject toa 15 year lease, with the option to extend the lease for two consecutiverenewal terms of five years each.

 

We also occupy another branch andadministration office located at 1201 Knox Abbot Drive, Cayce, SouthCarolina.  This building is approximately7,500 square feet in administration area and approximately 2,100 square feetbranch office with a drive in facility.

 

On December 30, 2008, we sold our property at1201 12th Street, Cayce, South Carolina to 12 Street LLC for $500,000.  This property was comprised of five tenantoffice rental spaces of approximately 5,764 square feet.  The Bank subsequently entered into a fifteenyear lease with the option to extend the lease for two consecutive renewalterms of five years each.  The Bankoccupies 2,000 square feet for executive and accounting offices and leases 3,764square feet to other tenants.

 

**Item 3.   LegalProceedings****.**

 

In the ordinary course ofoperations, we may be a party to various legal proceedings from time totime.  We are not aware of any pending orthreatened proceeding against us which we expect to have a material effect onour business, results of operations, or financial condition.

 

**Item 4.   Submission ofMatters to a Vote of Security Holders****.**

 

Nomatter was submitted to a vote of security holders during the fourth quarter ofthe fiscal year covered by this report.

 

**Item 5.   Market forRegistrant’s Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities****.**

 

We arecurrently quoted on the OTC Bulletin Board under the symbol “CNRB.” Although weare quoted on the OTC Bulletin Board, the trading markets on the OTC BulletinBoard lack the depth, liquidity, and orderliness necessary to maintain a liquidmarket.  We have no current plans to seeklisting on any stock exchange, and we do not expect to qualify for listing onNASDAQ or any other exchange for at least several years.  The OTC Bulletin Board prices are quotations,which reflect inter-dealer prices, without retail mark-up, mark-down orcommissions and may not represent actual transactions

 

Trading andquotations of the common stock have been limited and sporadic.  Management is not aware of the prices atwhich all shares of stock have been traded. The only trades of which the Company is aware were $10.00 per share.

 

As ofMarch 1, 2009, there were 1,764,439 shares of common stock outstandingheld by approximately 1,838 shareholders of record.  All of our currently issued and outstandingcommon stock was issued in our initial public offering which was completed onOctober 16, 2006.  The price pershare in our initial public offering was $10.00.

 

We have notdeclared or paid any cash dividends on our common stock since our inception.For the foreseeable future we do not intend to declare cash dividends. Weintend to retain earnings to grow our business and strengthen our capital base.Our ability to pay dividends depends on the ability of our subsidiary, CongareeState Bank, to pay dividends to us. As a South Carolina state bank, our Bankmay only pay dividends out of its net profits, after deducting expenses,including losses and bad debts. In addition, our Bank is prohibited fromdeclaring a dividend on its shares of common stock until its surplus equals itsstated capital.

 

26

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Inaddition, on January 9, 2009, as part of the Capital Purchase Programestablished by the Treasury under the EESA, we entered into the CPP PurchaseAgreement with Treasury, pursuant to which we issued and sold to Treasury (i) 3,285shares of our Series A Preferred Stock, and (ii) a ten-year warrant topurchase 164 shares of our Series B Preferred Stock,for an aggregate purchase price of $3,285,000 in cash.  Pursuant to the CPP Purchase Agreement, priorto January 9, 2012, unless we have redeemed the Series A PreferredStock and the Series B Preferred Stock or the Treasury has transferred theSeries A Preferred Stock and the Series B Preferred Stock to a thirdparty, the consent of the Treasury will be required for us to declare or payany dividend or make any distribution on our common stock.

 

27

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The followingtable sets forth equity compensation plan information at December 31,2008.

 

**Equity Compensation Plan Information**

 
| **Plan Category**                                         | ** ** | **Number of securities  to be issued  upon exercise of  outstanding options,  warrants and rights (a)** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights  (b)** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation  plans (c)  (excluding securities  reflected in column(a))** | ** ** |
|----------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity compensation plans approved by  security holders (1)    |       | 225,636                                                                                                                                                   |       | $                                                                                                                | 10.00      |                                                                                                                                                                                                            | 87,230     |   |
|                                                           |       |                                                                                                                                                      |       |                                                                                                             |       |                                                                                                                                                                                                            |       |
| Equity compensation plans not approved by  security holders(2) |       | 130,000                                                                                                                                                   |       | $                                                                                                                | 10.00      |                                                                                                                                                                                                            | 130,000    |   |
| Total                                                          |       | 355,636                                                                                                                                                   |       | $                                                                                                                | 10.00      |                                                                                                                                                                                                            | 217,230    |   |

 

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(1)                                  At our annual meeting in 2007, we adopted theCongaree Bancshares, Inc. 2007 Stock Incentive Plan.

 

(2)                                  Each of our organizers received, for no additionalconsideration, a warrant to purchase one share of common stock for $10.00 pershare for each share purchased during our initial public offering up to amaximum of 10,000 warrants.  The warrantsare represented by separate warrant agreements. The warrants will vest over a three year period beginning October 16,2007, and they will be exercisable in whole or in part during the 10 yearperiod ending October 16, 2016.  Ifthe South Carolina Board of Financial Institutions or the FDIC issues a capitaldirective or other order requiring the Bank to obtain additional capital, thewarrants will be forfeited, if not immediately exercised.

** **

**Item 6. Selected Financial Data.**

** **

Not applicable.

 

28

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**Item 7. Management’s Discussion and Analysis or Plan of Operation.**

 

**General**

 

OurBank opened for business on October 16, 2006.  All activities of the Company prior to thatdate relate to the organization of the Bank. The following discussion describes our results of operations for theyears ended December 31, 2008 and 2007 and also analyzes our financialcondition as of December 31, 2008. The following discussion and analysisalso identifies significant factors that have affected our financial position andoperating results during the periods included in the accompanying financialstatements. We encourage you to read this discussion and analysis inconjunction with our financial statements and the other statistical informationincluded in this report.

 

Likemost community banks, we derive the majority of our income from interest wereceive on our loans and investments. Our primary source of funds for makingthese loans and investments is our deposits, on which we pay interest.Consequently, one of the key measures of our success is our amount of netinterest income, or the difference between the income on our interest-earningassets, such as loans and investments, and the expense on our interest-bearingliabilities, such as deposits, also known as net interest margin. Another keymeasure is the spread between the yield we earn on these interest-earningassets and the rate we pay on our interest-bearing liabilities, which isreferred to as net interest spread.

 

Thereare risks inherent in all loans, so we maintain an allowance for loan losses toabsorb probable losses on existing loans that may become uncollectible. Weestablish and maintain this allowance by charging a provision for loan lossesagainst our operating earnings. In the following section, we have included adetailed discussion of this process.

 

Inaddition to earning interest on our loans and investments, we earn incomethrough fees and other expenses we charge to our clients. We describe thevarious components of this non-interest income, as well as our non-interestexpense, in the following discussion.

 

In response to financial conditions affecting the banking system andfinancial markets and the potential threats to the solvency of investment banksand other financial institutions, the United States government has takenunprecedented actions. On October 3, 2008, President Bush signed into lawthe EESA.  Pursuant to the EESA, the Treasury has the authority to, amongother things, purchase mortgages, mortgage-backed securities, and otherfinancial instruments from financial institutions for the purpose ofstabilizing and providing liquidity to the U.S. financial markets. On October 14,2008, the Treasury announced the CPP under the EESA, pursuant to which theTreasury will make senior preferred stock investments in participatingfinancial institutions.  On January 9,2009, as part of the CPP established by the Treasury under the EESA, we enteredinto the CPP Purchase Agreement, pursuant to which the Company issued and soldto Treasury (i) 3,285 shares of our Series A Preferred Stock, and (ii) aten-year warrant to purchase 164shares of our Series B Preferred Stock, for an aggregate purchase price of$3,285,000 in cash.  The warrant wasimmediately exercised.

 

**CRITICAL ACCOUNTING POLICIES**

** **

Wehave adopted various accounting policies that govern the application ofaccounting principles generally accepted in the United States and with generalpractices within the banking industry in the preparation of our financialstatements. Our significant accounting policies are described in footnote 1 toour audited consolidated financial statements as of December 31, 2008,included herein.

 

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

 

29

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**Allowance for Loan Losses**

** **

Webelieve the allowance for loan losses is the critical accounting policy thatrequires the most significant judgment and estimates used in preparation of ourconsolidated financial statements. Some of the more critical judgmentssupporting the amount of our allowance for loan losses include judgments aboutthe creditworthiness of borrowers, the estimated value of the underlyingcollateral, the assumptions about cash flow, determination of loss factors forestimating credit losses, the impact of current events, and conditions, andother factors impacting the level of probable inherent losses.

 

Underdifferent conditions or using different assumptions, the actual amount ofcredit losses incurred by us may be different from management’s estimatesprovided in our consolidated financial statements. Refer to the portion of thisdiscussion that addresses our allowance for loan losses for a more completediscussion of our processes and methodology for determining our allowance forloan losses.

 

**Income Taxes**

 

Weuse assumptions and estimates in determining income taxes payable or refundablefor the current year, deferred income tax liabilities and assets for eventsrecognized differently in our financial statements and income tax returns, andincome tax expense. Determining these amounts requires analysis of certaintransactions and interpretation of tax laws and regulations. Managementexercises judgment in evaluating the amount and timing of recognition ofresulting tax liabilities and assets. These judgments and estimates arereevaluated on a continual basis as regulatory and business factors change. Noassurance can be given that either the tax returns submitted by us or theincome tax reported on the financial statements will not be adjusted by eitheradverse rulings by the United States Tax Court, changes in the tax code, orassessments made by the Internal Revenue Service. We are subject to potentialadverse adjustments, including, but not limited to, an increase in thestatutory federal or state income tax rates, the permanent nondeductibility ofamounts currently considered deductible either now or in future periods, andthe dependency on the generation of future taxable income, including capitalgains, in order to ultimately realize deferred income tax assets.

 

**Results of Operations**

** **

*General*

* *

Ournet loss was $3,302,939 and $3,488,013 for the years ended December 31,2008 and 2007, respectively. Net loss before income tax benefit was $3,302,939for the year ended December 31, 2008, an increase of $229,188, or 7.5%,compared to $3,073,751 for the year ended December 31, 2007.  The $229,188 increase in net loss beforeincome tax benefits resulted from a $1,026,945 increase in noninterest expense,partially offset by increases of $1,645,501 in net interest income and $40,746in noninterest income.  Noninterestincome increased from $101,770 for the year ended December 31, 2007, to$142,516 for the year ended December 31, 2008.  We also recorded a provision for loan lossesof $1,391,090 and $502,600 for the years ended December 31, 2008 and 2007,respectively.

 

*Net Interest Income*

* *

Ourprimary source of revenue is net interest income.  Net interest income is the difference betweenincome earned on interest-bearing assets and interest paid on deposits andborrowings used to support such assets. The level of net interest income isdetermined by the balances of interest-earning assets and interest-bearingliabilities and corresponding interest rates earned and paid on those assetsand liabilities, respectively.  Inaddition to the volume of and corresponding interest rates associated withthese interest-earning assets and interest-bearing liabilities, net interestincome is affected by the timing of the repricing of these interest-earningassets and interest-bearing liabilities.

 

Netinterest income was $3,238,732 for the year ended December 31, 2008, anincrease of $1,645,501 or 103.3% over net interest income of $1,593,231 for theyear ended December 31, 2007. Interest income of $6,345,217 for the year ended December 31, 2008,included $5,562,156 on loans, $758,865 on investment securities and $24,196 onfederal funds sold.  Loan interest andrelated fees improved $3,408,706, or 158.3%, over 2007, due 

 

30

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tocontinued growth in the loan portfolio volume. Total interest expense of$3,106,485 for the year ended December 31, 2008, included $2,986,792related to deposit accounts and $119,693 on federal funds purchased and FederalHome Loan Bank borrowings.  Interestexpense on deposits increased $1,468,470, or 99.1%, due to continued growth indeposits, primarily certificates of deposit.

 

Thefollowing table sets forth information related to our average balance sheet,average yields on assets, and average costs of liabilities. We derived theseyields by dividing income or expense by the average balance of thecorresponding assets or liabilities. We derived average balances from the dailybalances throughout the periods indicated. The net amount of capitalized loanfees is amortized into interest income over the life of the loans.

 

**Average Balances, Income and Expenses, Yields andRates**

**For the Years Ended December 31,**

 
| ** **                                          | ** ** | **2008**             | ** **  | **2007**             | ** ** |
|-----------------------------------------------------|------------|----------------------|-------------|----------------------|------------|
| ** **                                          | ** ** | **Average  balance** | ** **  | **Income/  expense** | ** ** | **Yield/  rate** | ** ** | **Average  balance** | ** ** | **Income/  expense** | ** ** | **Yield/  rate** | ** ** |
| **Interest-earning assets:**                        | ** ** | ** **           | ** **  | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Federal funds sold                                  |       | $                    | 1,085,080   |                 | $          | 24,196 |   | 2.23 | % | $ | 8,557,961 |   | $ | 440,931 |   | 5.15 | % |
| Investment securities and FHLB stock                |       | 14,137,396           |        | 758,865              |       | 5.37 |   | 10,412,377 |   | 565,520 |   | 5.43 |   |
| Loans (1)                                           |       | 87,390,666           |        | 5,562,156            |       | 6.36 |   | 26,821,247 |   | 2,153,450 |   | 8.03 |   |
| **Total interest-earning assets**                   |       | 102,613,142          |        | 6,345,217            |       | 6.18 |   | 45,791,585 |   | 3,159,901 |   | 6.90 |   |
| Non-earning assets                                  |       | 4,869,322            |        |                 |       |   |   | 2,509,620 |   |   |   |   |   |
| Total assets                                        |       | $                    | 107,482,464 |                 |       |   |   |   | $ | 48,301,205 |   |   |   |   |   |
|                                                |       |                 |        |                 |       |   |   |   |   |   |   |   |   |
| **Interest-bearing liabilities:**                   | ** ** | ** **           | ** **  | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest checking                                   |       | $                    | 4,309,880   |                 | 32,922     |   | 0.76 | % | $ | 1,969,755 |   | $ | 30,079 |   | 1.53 | % |
| Savings and money market                            |       | 23,914,113           |        | 685,817              |       | 2.87 |   | 15,443,173 |   | 792,748 |   | 5.13 |   |
| Time deposits                                       |       | 55,965,894           |        | 2,268,053            |       | 4.05 |   | 14,094,229 |   | 736,814 |   | 5.23 |   |
| FHLB advances                                       |       | 2,508,621            |        | 67,336               |       | 2.68 |   | — |   | — |   |   |   |
| Federal funds purchased and repurchase  agreement   |       | 2,009,050            |        | 52,357               |       | 2.61 |   | 1,553,252 |   | 7,029 |   | .45 |   |
| **Total interest-bearing liabilities**              |       | 88,707,558           |        | 3,106,485            |       | 3.50 |   | 33,060,409 |   | 1,566,670 |   | 4.74 |   |
| Non-interest bearing liabilities                    |       | 8,473,869            |        |                 |       |   |   | 3,848,730 |   |   |   |   |   |
| Shareholders’ equity                           |       | 10,301,037           |        |                 |       |   |   | 11,392,066 |   |   |   |   |   |
| **Total liabilities and shareholders’ equity** |       | $                    | 107,482,464 |                 |       |   |   |   | $ | 48,301,205 |   |   |   |   |   |
| **Net interest spread**                             |       |                 |        |                 |       | 2.68 | % |   |   |   |   | 2.16 | % |
| **Net interest income/margin**                      | ** ** | ** **           |        | 3,238,732            |       | 3.16 | % | ** ** |   | $ | 1,593,231 |   | 3.48 | % |
|                                                     |            |                      |             |                      |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1) Loan fees, which are immaterial, are included in interest income.  There were $294,596 in nonaccrual loans for2008 and no nonaccrual loans in 2007. Nonaccrual loans are included in theaverage balances, and income on nonaccrual loans is included on the cash basisfor yield computation purposes.

 

Ourconsolidated net interest margin for the year ended December 31, 2008 was3.16%, a decrease of 32 basis points from the net interest margin of 3.48% forthe year ended December 31, 2007. The net interest margin is calculated by dividing net interest income byyear-to-date average earning assets. This decrease can be attributed to the costs of our fundingsources.  We relied on a higher volume ofmoney market deposits to fund the growth of our loan portfolio in 2008.  These deposits are priced higher than coredeposits.  Earning assets averaged$102,613,142 for the year ended December 31, 2008, increasing from$45,791,585 for the year ended December 31, 2007. Our net interest spreadwas 2.68% for the year ended December 31, 2008. The net interest spread isthe difference between the yield we earn on our interest-earning assets and therate we pay on our interest-bearing liabilities. In pricing deposits, weconsider our liquidity needs, the direction and levels of interest rates andlocal market conditions. As such, higher rates have been paid initially toattract deposits.

 

31

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*Rate/Volume Analysis*

* *

Netinterest income can be analyzed in terms of the impact of changing interest ratesand changing volume. The following table sets forth the effect which thevarying levels of interest-earning assets and interest-bearing liabilities andthe applicable rates had on changes in net interest income for the comparativeperiods presented.  Changes attributed toboth rate and volume, have been allocated on a pro rata basis.

* *
| ** **                                               | ** ** | **2008 Compared to 2007** | ** ** |
|----------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                               | ** ** | **Total  Change**                        | ** ** | **Change in  Volume** | ** ** | **Change in  Rate** | ** ** |
| **Interest-earning assets:**                             | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Federal funds sold                                       |       | $                                        | (416,735   | ) | $ | (559,463 | ) | $ | 142,728 |   |
| Investment securities available-for-sale  and FHLB stock |       | 193,345                                  |       | 176,524 |   | 16,821 |   |
| Loans, including fees                                    |       | 3,408,706                                |       | 2,941,471 |   | 467,235 |   |
| **Total interest income**                                |       | 3,185,316                                |       | 2,558,532 |   | 626,784 |   |
|                                                     |       |                                     |       |   |   |   |   |
| **Interest-bearing liabilities:**                        | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest-bearing deposits                                |       | 1,486,470                                |       | 1,014,659 |   | (471,811 | ) |
| FHLB advances                                            |       | 67,336                                   |       | 67,336 |   | — |   |
| Federal funds purchased and Repurchase  agreement        |       | (13,991                                  | )          | (39,775 | ) | (25,784 | ) |
| **Total interest expense**                               |       | 1,539,815                                |       | 1,042,220 |   | (497,595 | ) |
| **Net interest income**                                  |       | $                                        | 1,645,501  |   | $ | 1,516,312 |   | $ | 129,189 |   |

* *

*Provision for Loan Losses*

* *

Wehave established an allowance for loan losses through a provision for loanlosses charged as a non-cash expense to our statement of operations. We reviewour loan portfolio periodically to evaluate our outstanding loans and tomeasure both the performance of the portfolio and the adequacy of the allowancefor loan losses.  Please see thediscussion below under “Provision and Allowance for Loan Losses” for adescription of the factors we consider in determining the amount of theprovision we expense each period to maintain this allowance.

 

Ourprovision for loan losses for the year ended December 31, 2008 was$1,391,090, an increase of $888,490, or 176.78%, over our provision of $502,600,for the year ended December 31, 2007. The allowance as a percentage of gross loans has been increased fromapproximately 1.00% to 1.57% as of December 31, 2007 and 2008,respectively, due to management’s evaluation of the adequacy of the reserve forpossible loan losses given the size, mix, and quality of the current loanportfolio. Management also relies on our limited history of past-dues andcharge-offs, as well as peer data to determine our loan loss allowance.

 

*Noninterest Income*

* *

Noninterestincome for the year ended December 31, 2008 was $142,516 compared to$101,770 for the year ended December 31, 2007.  Service charges and other fees on depositaccounts were $81,517 for the year ended December 31, 2008, an improvementof $58,430 over the year ended December 31, 2007, due to an increase indeposit accounts.  For the year ended December 31,2008, mortgage loan origination fees were $102,331, an increase of $48,751, or91.0% from 2007, as we continued to increase the volume of mortgage loans originated.  Noninterest income included gains on sales ofsecurities available-for-sale of $71,599 for the year ended December 31,2008, compared to no gains in 2007. However, these gains were offset by the loss on sale of assets of$83,570 for the year ended December 31, 2008.  Losses on sale of assets were $11,732 in2007.  The Company also recorded an otherthan temporary impairment charge on nonmarketable equity securities of $94,993in 2008.

 

32

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*Noninterest Expenses*

 

Thefollowing table sets forth information related to our noninterest expenses forthe year ended December 31, 2008 and 2007.

 
| ** **                                             | ** ** | **2008**  | ** ** | **2007** | ** ** |
|--------------------------------------------------------|------------|-----------|------------|----------|------------|
| Compensation and benefits                              |       | 3,137,426 |       | $        | 2,286,714  |   |
| Occupancy and equipment                                |       | 801,264   |       | 614,008  |       |
| Data processing and related costs                      |       | 277,337   |       | 276,151  |       |
| Marketing, advertising and shareholder  communications |       | 166,351   |       | 410,419  |       |
| Legal and audit                                        |       | 346,338   |       | 202,532  |       |
| Other professional fees                                |       | 45,831    |       | 140,197  |       |
| Supplies, postage and telephone                        |       | 177,893   |       | 111,803  |       |
| Insurance                                              |       | 45,964    |       | 43,583   |       |
| Credit related expenses                                |       | 131,055   |       | 82,341   |       |
| Courier and armored carrier service                    |       | 19,961    |       | 1,962    |       |
| Regulatory fees and FDIC insurance                     |       | 96,370    |       | 38,373   |       |
| Other                                                  |       | 47,307    |       | 58,069   |       |
| Total noninterest expense                              |       | $         | 5,293,097  |     | $          | 4,266,152 |   |
|                                                        |            |           |            |          |            |  |  |

 

Noninterestexpense was $5,293,097 for the year ended December 31, 2008, compared to$4,266,152 for the year ended December 31, 2007.  The most significant component of noninterestexpense is compensation and benefits, which totaled $3,137,426 for the yearended December 31, 2008, compared to $2,286,714 for the year ended December 31,2007. The increase primarily related to staff additions associated with theBank’s growth, performance raises and increases in bank-paid employee healthcare and other insurance costs. Occupancy and equipment expense of $801,264 in 2008 increased from$614,008 in 2007.  Occupancy andequipment costs were higher in 2008 due to amortization of leaseholdimprovements, and other occupancy expenses associated with a second fullservice branch that opened in 2008.  Dataprocessing and related expense increased from $276,151 in 2007 to $277,337 in2008. Legal and audit fees increased from $202,532 in 2007 to $346,338 in 2008,as a result of complying with the Sarbanes-Oxley Act of 2002.  Other professional fees decreased from$140,197 in 2007 to $45,831 in 2008. Supplies, postage and telephone increased from $111,803 in 2007 to $177,893in 2008, as a result of opening a new branch. Credit related expenses were $131,055 in 2008 as a result of the Bank’sloan growth.  Regulatory fees and FDICinsurance were $96,370 in 2008. These assessments are based on deposit levels.

 

*Income Tax Benefit*

* *

TheCompany had no currently taxable income for the years ended December 31,2008 and 2007.  The Company has recordeda valuation allowance equal to the net deferred tax asset as the realization ofthis asset is dependent on the Company’s ability to generate future taxableincome during the periods in which temporary differences become deductible.

 

***Balance Sheet Review***

*** ***

*General*

* *

AtDecember 31, 2008, total assets were $132,004,104 compared to $78,443,677at December 31, 2007, for an increase of $53,560,427, or 68.3%.  The increase in assets resulted from volumeincreases in our loan and investment portfolios and related increases in ourfunding sources of deposits and other borrowings.  Interest-earning assets comprisedapproximately 93.7% and 89.2% of total assets at December 31, 2008 and December 31,2007.  Gross loans totaled $107,547,656,an increase of $52,258,752, or 94.5%, from $55,288,904 at December 31,2007.  Investment securities were$14,279,170, a decrease of $822,506, or 5.4%, from $15,101,676 at December 31,2007.  Investment in overnight federalfunds increased $3,384,000 to $3,494,000 at December 31, 2008.

 

33

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Deposits totaled$118,534,560 at December 31, 2008, a $58,254,750, or 96.6% increase from$60,279,810 at December 31, 2007. Federal funds purchased were $0 at December 31,2008, compared to $3,658,000 at December 31, 2007.  Shareholders’ equity was $10,063,099 and$12,935,788 at December 31, 2008 and December 31, 2007, respectively.

 

*Investments*

* *

At December 31,2008, our available-for-sale investment securities portfolio was $13,843,218and represented approximately 10.5% of our total assets. Investments decreased$990,214 from $14,833,432 at December 31, 2007.  Our portfolio consisted of governmentsponsored enterprises of $7,134,445 and mortgage-backed securities of$6,708,773.

 

Contractual maturitiesand yields on our investment securities available for sale at December 31,2008 are shown in the following table. Expected maturities may differ fromcontractual maturities because issuers may have the right to call or prepayobligations with or without call or prepayment penalties.

 
| ** **                        | ** ** | **Less than  one year** | ** ** | **One year to  five years** | ** ** | **Five years  to ten years** | ** ** | **Over ten years** | ** ** | **Total**  | ** ** |
|-----------------------------------|------------|-----------------------------------|------------|--------------------------------------------|------------|---------------------------------------------|------------|------------------------------|------------|------------|------------|
| ** **                        | ** ** | **Amount**                        | ** ** | **Yield**                                  | ** ** | **Amount**                                  | ** ** | **Yield**                    | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** |
| Government  sponsored enterprises |       | —                            |       | —                                     |       | $                                           | 1,270,151  |                         | 5.14       | %          | $          | 5,081,447 |   | 5.43 | % | $ | 782,847 |   | 5.33 | % | $ | 7,134,445 |   | 5.37 | % |
| Mortgage-backed  securities       |       | —                            |       | —                                     |       | —                                      |       | —                       |       | $          | 1,194,832  |   | 5.44 | % | $ | 5,513,941 |   | 5.46 | % | $ | 6,708,773 |   | 5.45 | % |
| **Total**                         |       | —                            |       | —                                     |       | $                                           | 1,270,151  |                         | 5.14       | %          | $          | 6,276,279 |   | 5.44 | % | $ | 6,296,788 |   | 5.44 | % | $ | 13,843,218 |   | 5.41 | % |

 

The amortized costs andthe fair value of our investment securities at December 31, 2008 and 2007are shown in the following table.

 
| ** **                       | ** ** | **2008**            | ** ** | **2007**        | ** ** |
|----------------------------------|------------|---------------------|------------|-----------------|------------|
| ** **                       | ** ** | **Amortized  Cost** | ** ** | **Fair  Value** | ** ** | **Amortized  Cost** | ** ** | **Fair  Value** | ** ** |
| **Available for Sale**           | ** ** | ** **          | ** ** | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Government sponsored enterprises |       | $                   | 7,017,105  |            | $          | 7,134,445 |   | $ | 6,788,421 |   | $ | 6,888,242 |   |
| Mortgage-backed securities       |       | 6,489,572           |       | 6,708,773       |       | 7,913,338 |   | 7,945,190 |   |
|                             |       |                |       |            |       |   |   |   |   |
| **Total**                        |       | $                   | 13,506,677 |            | $          | 13,843,218 |   | $ | 14,701,759 |   | $ | 14,833,432 |   |

 

We believe, based onindustry analyst reports and credit ratings, the deterioration in fair valuesof individual investment securities available for sale is attributed to changesin market interest rates and not in the credit quality of the issuer andtherefore, these losses are not considered other-than-temporary. We have theability and intent to hold these securities until such time as the valuerecovers or the securities mature.

 

Investmentsecurities with market values of approximately $6,753,584 and $4,195,988 at December 31,2008 and 2007, respectively, were pledged to secure public deposits andborrowings from the Federal Home Loan Bank.

 

Proceedsfrom sales of available-for-sale securities during 2008 were $2,244,612.  Gross gains of $71,599 were recognized onthese sales.  There were no sales ofavailable-for-sale securities during 2007.

 

34

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In2007, we became a member of the Federal Home Loan Bank, and at December 31,2008, we held non-marketable equity securities, which consisted of Federal HomeLoan Bank stock of $273,600 and Silverton Bank stock of $60,352 after an otherthan temporary impairment charge of $94,993, and Pacific Coast Banker’s Bankstock of $102,000.  These investments arecarried at cost, which approximates fair market value.

 

*Loans*

* *

Since loans typicallyprovide higher interest yields than other interest-earning assets, it is ourgoal to ensure that the highest percentage of our earning assets is invested inour loan portfolio. Gross loans outstanding at December 31, 2008 were$107,547,656, or 87.1%, of interest-earning and 81.5% of total assets, comparedto $55,288,904, or 79.2%, of interest-earning and 70.5% of total assets at December 31,2007.

 

Loans secured by realestate mortgages comprised approximately 86.2% of loans outstanding at December 31,2008 and 83.4% at December 31, 2007. Most of our real estate loans aresecured by residential and commercial properties. We do not generally originatetraditional long term residential mortgages, but we do issue traditional secondmortgage residential real estate loans and home equity lines of credit. Weobtain a security interest in real estate whenever possible, in addition to anyother available collateral. This collateral is taken to increase the likelihoodof the ultimate repayment of the loan. Generally, we limit the loan-to-valueratio on loans we make to 80%.

 

Commercial loans andlines of credit represented approximately 11.0% and 13.6% of our loan portfolioat December 31, 2008 and 2007, respectively.

 

Our construction anddevelopment, and land loan portfolio represented approximately 15.9% and 14.8%at December 31, 2008 and 2007, respectively.

 

Due to the short time ourportfolio has existed, the loan mix shown below may not be indicative of theongoing portfolio mix. We attempt to maintain a relatively diversified loanportfolio to help reduce the risk inherent in concentration of certain types ofcollateral.

 

The following tablesummarizes the composition of our loan portfolio as of December 31, 2008and 2007.

 
| ** **                            | ** ** | **2008**    | ** **  | **2007**                      | ** ** |
|---------------------------------------|------------|-------------|-------------|-------------------------------|------------|
| ** **                            | ** ** | **Amount**  | ** **  | **Percentage  of Total** | ** ** | **Amount** | ** ** | **Percentage  of Total** | ** ** |
| Real Estate:                          | ** ** | ** **  | ** **  | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Construction and development and land |       | $           | 17,150,969  |                          | 15.95      | % | $ | 8,188,004 |   | 14.81 | % |
| Commercial                            |       | 29,539,423  |        | 27.46                         |       | 22,048,484 |   | 39.88 |   |
| Residential mortgages                 |       | 20,646,023  |        | 19.20                         |       | 3,803,706 |   | 6.88 |   |
| Home equity lines                     |       | 25,414,399  |        | 23.63                         |       | 12,082,002 |   | 21.85 |   |
| Total real estate                     |       | 92,750,814  |        | 86.24                         |       | 46,122,196 |   | 83.42 |   |
|                                  |       |        |        |                          |       |   |   |   |   |
| Commercial                            |       | 11,870,971  |        | 11.04                         |       | 7,505,415 |   | 13.58 |   |
| Consumer                              |       | 2,925,871   |        | 2.72                          |       | 1,661,293 |   | 3.00 |   |
| Gross loans                           |       | 107,547,656 |        | 100                           | %          | 55,288,904 |   | 100 | % |
| Less allowance for loan losses        |       | (1,688,840  | )           |                          |       | (552,600 | ) |   |   |
| Total loans, net                      |       | $           | 105,858,816 |                          |       |   | $ | 54,736,304 |   |   |   |

 

35

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*Maturitiesand Sensitivity of Loans to Changes in Interest Rates*

* *

The information in thefollowing tables is based on the contractual maturities of individual loans,including loans which may be subject to renewal at their contractual maturity.Renewal of such loans is subject to review and credit approval, as well asmodification of terms upon maturity. Actual repayments of loans may differ fromthe maturities reflected below because borrowers have the right to prepayobligations with or without prepayment penalties.

 

The following tablesummarizes the loan maturity distribution by composition and interest ratetypes at December 31, 2008.

 
| ** **                          | ** ** | **One year  or less** | ** ** | **After one  but within  five years** | ** ** | **After five  years** | ** ** | **Total**  | ** ** |
|-------------------------------------|------------|---------------------------------|------------|------------------------------------------------------|------------|----------------------------|------------|------------|------------|
| Real estate- mortgage               |       | $                               | 11,423,982 |                                                 | $          | 39,611,521                 |       | $          | 24,564,342 |   | $ | 75,599,845 |   |
| Real estate- construction           |       | 8,470,649                       |       | 7,505,338                                            |       | 1,174,982                  |       | 17,150,969 |       |
| Total real estate                   |       | 19,894,631                      |       | 47,116,859                                           |       | 25,739,324                 |       | 92,750,814 |       |
|                                |       |                            |       |                                                 |       |                       |       |       |       |
| Commercial                          |       | 10,039,094                      |       | 1,185,369                                            |       | 646,508                    |       | 11,870,971 |       |
| Consumer- other                     |       | 534,218                         |       | 1,992,536                                            |       | 399,117                    |       | 2,925,871  |       |
| Gross loans                         |       | $                               | 30,467,943 |                                                 | $          | 50,294,764                 |       | $          | 26,784,949 |   | $ | 107,547,656 |   |
|                                |       |                            |       |                                                 |       |                       |       |       |       |
| Loans maturing after one year with: |       |                            |       |                                                 |       |                       |       |       |       |
| Fixed interest rates                |       |                            |       |                                                 |       |                       |       | $          | 47,690,929 |   |
| Floating interest rates             |       |                            |       |                                                 |       |                       |       | 29,388,784 |       |
|                                |       |                            |       |                                                 |       |                       |       | $          | 77,079,713 |   |

 

*Provisionand Allowance for Loan Losses*

 

We have established an allowance for loan lossesthrough a provision for loan losses charged to expense on our consolidatedstatement of operations. The allowance for loan losses was $1,688,840 and$552,600 as of December 31, 2008 and December 31, 2007, respectively, andrepresented 1.6% of outstanding loans at December 31, 2008 and 1.0% ofoutstanding loans at December 31, 2007. The allowance for loan losses representsan amount which we believe will be adequate to absorb probable losses onexisting loans that may become uncollectible. Our judgment as to the adequacyof the allowance for loan losses is based on a number of assumptions aboutfuture events, which we believe to be reasonable, but which may or may notprove to be accurate. Our determination of the allowance for loan losses isbased on evaluations of the collectibility of loans, including consideration offactors such as the balance of impaired loans, the quality, mix, and size ofour overall loan portfolio, economic conditions that may affect the borrower’sability to repay, the amount and quality of collateral securing the loans, ourhistorical loan loss experience, and a review of specific problem loans. Wealso consider subjective issues such as changes in the lending policies andprocedures, changes in the local/national economy, changes in volume or type ofcredits, changes in volume/severity of problem loans, quality of loan reviewand board of director oversight, concentrations of credit, and peer groupcomparisons.

 

Due to our short operating history, the loans in ourloan portfolio and our lending relationships are of very recent origin. Ingeneral, loans do not begin to show signs of credit deterioration or defaultuntil they have been outstanding for some period of time, a process known asseasoning. As a result, a portfolio of older loans will usually behave morepredictably than a newer portfolio. Because our loan portfolio is new, the currentlevel of delinquencies and defaults may not be representative of the level thatwill prevail when the portfolio becomes more seasoned, which may be higher thancurrent levels.  In recent months, we,like many banks have begun to see an overall decline in credit quality and haveincreased their allowance for loan losses accordingly.  If delinquencies and defaults increase, wemay be required to increase our provision for loan losses, which wouldadversely affect our results of operations and financial condition.Periodically, we will adjust the amount of the allowance based on changingcircumstances. We will charge recognized losses to the allowance and addsubsequent recoveries back to the allowance for loan losses. There can be noassurance that charge-offs of loans in future periods will not exceed theallowance for loan losses as estimated at any point in time or that provisionsfor loan losses will not be 

 

36

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significant to a particularaccounting period, especially considering the overall weakness in thecommercial real estate market in our market areas.

 

We calculate our generalreserve based on historical and peer loss percentage allocations of each of thecategories of unclassified loan types, including commercial, commercial realestate, construction and development, residential mortgages, home equity linesof credit and consumer loans.  The lossfactors are adjusted for qualitative factors, including those describedabove.  We also analyze individualsignificant credits not considered impaired but with risk characteristics, andmaintain a general unallocated reserve in accordance with regulatory guidancein our assessment of the allowance for loan losses.  Significant individual credits criticized asspecial mention or classified as substandard or doubtful require individualanalysis.  Loans in the substandardcategory are characterized by deterioration in quality exhibited by any numberof well-defined weaknesses requiring corrective action such as declining ornegative earnings trends and declining or inadequate liquidity orcollateral.  Loans in the doubtfulcategory exhibit the same weaknesses found in the substandard category, but theweaknesses are more pronounced.  Theseloans are not yet rated as loss because certain events may occur which couldrepay the debt.  Loans classified assubstandard totaled $3,388,195, at December 31, 2008.  We have identified a specific reserve of$368,861 associated with these loans. Loans classified as doubtful totaled $421,542, at December 31,2008.  We have identified an impairmentcharge or specific reserve of $310,804 associated with these loans.  We had no doubtful loans at December 31,2007.

 

We have retained anindependent consultant to review our loan files on a test basis to assess thegrading of samples of loans.  Inaddition, various regulatory agencies review our allowance for loan lossesthrough periodic examinations, and they may require us to record additions tothe allowance for loan losses based on their judgment about information madeavailable to them at the time of their examination.  Our losses may vary from our estimates, andthere is the possibility that charge-offs in future periods will exceed the allowancefor loan losses that we have estimated.

 

The following table presents a summary related to ourallowance for loan losses for the years ended December 31, 2008 and 2007:

 
| ** **                                    | ** ** | **For the years ended December 31,** | ** **  |
|-----------------------------------------------|------------|---------------------------------------------------------------|-------------|
| ** **                                    | ** ** | **2008**                                                      | ** **  | **2007** | ** ** |
|                                          |       |                                                          |        |   |   |
| Balance at the beginning of period            |       | $                                                             | 552,600     |   | $ | 50,000 |   |
| Charge-offs:                                  |       |                                                          |        |   |   |
| Commercial, financial and agricultural        |       | 53,011                                                        |        | — |   |
| Real estate - mortgage                        |       | 201,012                                                       |        | — |   |
| Real estate - construction                    |       | —                                                        |        | — |   |
| Consumer                                      |       | 827                                                           |        | — |   |
| Total Charged-off                             |       | $                                                             | 254,850     |   | $ | 0 |   |
|                                          |       |                                                          |        |   |   |
| Recoveries:                                   |       |                                                          |        |   |   |
| Commercial, financial and agricultural        |       | —                                                        |        | — |   |
| Real estate - mortgage                        |       | —                                                        |        | — |   |
| Consumer                                      |       | —                                                        |        | — |   |
| Total Recoveries                              |       | $                                                             | —      |   | $ | 0 |   |
|                                          |       |                                                          |        |   |   |
| Net Charge-offs                               |       | $                                                             | 254,850     |   | $ | 0 |   |
|                                          |       |                                                          |        |   |   |
| Provision for Loan Loss                       |       | $                                                             | 1,391,090   |   | $ | 502,600 |   |
|                                          |       |                                                          |        |   |   |
| Balance at end of period                      |       | $                                                             | 1,688,840   |   | $ | 552,600 |   |
|                                          |       |                                                          |        |   |   |
| Total loans at end of period                  |       | $                                                             | 107,547,656 |   | $ | 55,288,904 |   |
|                                          |       |                                                          |        |   |   |
| Average loans outstanding                     |       | $                                                             | 87,390,666  |   | $ | 26,861,247 |   |
| As a percentage of average loans:             |       |                                                          |        |   |   |   |   |
| Net loans charged-off                         |       | .29                                                           | %           | 0 | % |
| Provision for loan losses                     |       | 1.59                                                          | %           | 1.87 | % |
|                                          |       |                                                          |        |   |   |
| Allowance for loan losses as a percentage of: |       |                                                          |        |   |   |
| Year end loans                                |       | 1.57                                                          | %           | 1.00 | % |

 

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*Non-PerformingAssets*

* *

The following table summarizes non-performing assetsand the income that would have been reported on non-accrual loans as of December 31,2008 and 2007:

 
| ** **                              | ** ** | **December 31,** | ** ** |
|-----------------------------------------|------------|-----------------------|------------|
| ** **                              | ** ** | **2008**              | ** ** | **2007** | ** ** |
|                                    |       |                  |       |   |   |
| Other real estate and repossessions     |       | —                |       | — |   |
|                                    |       |                  |       |   |   |
| Non-accrual loans                       |       | $                     | 294,596    |   | — |   |
|                                    |       |                  |       |   |   |
| Accruing loans 90 days or more past due |       | —                |       | — |   |
|                                    |       |                  |       |   |   |
| Total non-performing assets             |       | $                     | 294,596    |   | — |   |
|                                    |       |                  |       |   |   |
| As a percentage of gross loans:         |       | .274                  | %          | 0.00 | % |

* *

The Bank charged offloans in the amount of $254,850 for the year ended December 31, 2008,compared to $0 loans charged off in 2007. At December 31, 2008, non-accrual loans totaled $294,596.  There were no nonaccrual or nonperformingloans at December 31, 2007, and no accruing loans which were contractuallypast due 90 days or more as to principal or interest payments.  At December 31, 2008, impaired loanstotaled $421,542.   Generally, a loanwill be placed on nonaccrual status when it becomes 90 days past due as toprincipal or interest, or when management believes, after considering economicand business conditions and collection efforts, that the borrower’s financialcondition is such that collection of the loan is doubtful. A payment ofinterest on a loan that is classified as nonaccrual will be recognized asincome when received. During the year ended December 31, 2008, we receivedapproximately $1,302 in interest income in relation to loans on non-accrualstatus and forgone interest income related to loans on non-accrual status wasapproximately $2,427.

 

*Deposits*

* *

Our primary source forour loans and investments is our deposits. Total deposits as of the years endedDecember 31, 2008 and 2007 were $118,534,560 and $60,279,810,respectively. The following table shows the balance outstanding and the averagerates paid on deposits during 2008 and 2007.

 
| ** **                           | ** ** | **2008**   | ** **  | **2007** | ** ** |
|--------------------------------------|------------|------------|-------------|----------|------------|
| ** **                           | ** ** | **Amount** | ** **  | **Rate** | ** ** | **Amount** | ** ** | **Rate** | ** ** |
| Non-interest bearing demand deposits |       | $          | 11,190,632  |     | —     | % | $ | 4,911,717 |   | — | % |
| Interest-bearing checking            |       | 4,358,995  |        | 0.76     |       | 5,670,104 |   | 1.54 |   |
| Money market                         |       | 24,274,390 |        | 2.91     |       | 24,037,611 |   | 4.82 |   |
| Savings                              |       | 631,321    |        | 0.95     |       | 443,778 |   | 1.84 |   |
| Time deposits less than $100,000     |       | 45,288,107 |        | 4.05     |       | 11,529,784 |   | 5.20 |   |
| Time deposits $100,000 and over      |       | 32,791,115 |        | 4.03     |       | 13,686,816 |   | 5.29 |   |
| Total                                |       | $          | 118,534,560 |     | 3.54       | % | $ | 60,279,810 |   | 4.78 | % |

 

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Coredeposits, which exclude time deposits of $100,000 or more and brokeredcertificates of deposit, provide a relatively stable funding source for ourloan portfolio and other earning assets. Our core deposits were $67,718,445 at December 31,2008, compared to $43,592,994 at December 31, 2007. Our loan-to-depositratio was 90.73% and 91.72% at December 31, 2008 and 2007,respectively.  Due to the competitiveinterest rate environment in our market, we utilized brokered certificates ofdeposit as a funding source when we were able to procure these certificates atinterest rates less than those in the local market.  Brokered certificates of deposit purchasedoutside our primary market totaled $18,025,000 at December 31, 2008,compared to $3,000,000 at December 31, 2007.  All of our time deposits are certificates ofdeposits.

 

Thematurity distribution of our time deposits of $100,000 or more and brokeredtime deposits at December 31, 2008 was as follows:

 
| Three months or less           |   | $          | 14,234,747 |   |
|--------------------------------|--------|------------|------------|--------|
| Over three through six months  |   | 11,894,792 |       |
| Over six through twelve months |   | 17,840,966 |       |
| Over twelve months             |   | 2,460,744  |       |
| Total                          |   | $          | 46,431,249 |   |

 

*Borrowings and lines of credit*

 

At December 31, 2008,the Bank had short-term lines of credit with correspondent banks to purchase amaximum of $4,000,000 in unsecured federal funds on a one to fourteen day basisand $5,300,000 in unused federal funds on a one to thirty day basis for generalcorporate purposes. The interest rate on borrowings under these lines is theprevailing market rate for federal funds purchased. These accommodation linesof credit are renewable annually and may be terminated at any time at thecorrespondent banks’ sole discretion.  AtDecember 31, 2008, we had no borrowings outstanding compared to $3,658,000outstanding at December 31, 2007.

 

Weare also a member of the Federal Home Loan Bank. At December 31, 2008, wehad $3,000,000 outstanding at an interest rate of 2.62%, with a maturity dateof February 25, 2013.  At December 31,2007, we had no balance outstanding in Federal Home Loan Bank borrowings.  The Bank borrowed the funds to reduce thecost of funds on money used to fund loans. The bank has remaining credit availability of $10,170,000 at the FederalHome Loan Bank.

 

**Capital Resources**

** **

Totalshareholders’ equity was $10,063,099 at December 31, 2008, a decrease of$2,872,689 from $12,935,788 at December 31, 2007. The decrease isprimarily due to the net loss of $3,302,939 for the year ended December 31,2008.  Capital surplus increased due tostock compensation expense of $295,038 in 2008. Unrealized gains on investmentsecurities available for sale increased shareholders’ equity by $135,212 during2008.

 

TheFederal Reserve and bank regulatory agencies require bank holding companies andfinancial institutions to maintain capital at adequate levels based on apercentage of assets and off-balance sheet exposures, adjusted for risk weightsranging from 0% to 100%.  The FederalReserve guidelines contain an exemption from the capital requirements for “smallbank holding companies”, which in 2006 were amended to cover most bank holdingcompanies with less than $500 million in total assets that do not have amaterial amount of debt or equity securities outstanding registered with theSEC.  Although we file periodic reportswith the SEC, we believe that because our stock is not registered under Section 12of the Securities Exchange Act and is not listed on any exchange or otherwiseactively traded, the Federal Reserve Board will interpret its new guidelines tomean that we qualify as a small bank holding company.  Nevertheless, our Bank remains subject tothese capital requirements.  Failure tomeet minimum capital requirements can initiate certain mandatory and possiblyadditional discretionary actions by regulators that, if undertaken, could havea direct material effect on the Bank’s financial statements.  Under capital adequacy guidelines and theregulatory framework for prompt corrective action, the Bank must meet specificcapital guidelines that involve quantitative measures of the Bank’s assets,liabilities and certain off-balance sheet items as calculated under regulatoryaccounting practices.  The Bank’s capitalamounts and classifications are also subject to 

 

39

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qualitativejudgments by the regulators about components, risk weightings, and otherfactors.  Regardless, our Bank is “adequatelycapitalized” under these minimum capital requirements as set per bankregulatory agencies.

 

Underthe capital adequacy guidelines, regulatory capital is classified into twotiers. These guidelines require an institution to maintain a certain level ofTier 1 and Tier 2 capital to risk-weighted assets. Tier 1 capital consists ofcommon shareholders’ equity, excluding the unrealized gain or loss onsecurities available for sale, minus certain intangible assets. In determiningthe amount of risk-weighted assets, all assets, including certain off-balancesheet assets, are multiplied by a risk-weight factor of 0% to 100% based on therisks believed to be inherent in the type of asset. Tier 2 capital consists ofTier 1 capital plus the general reserve for loan losses, subject to certainlimitations. We are also required to maintain capital at a minimum level basedon total average assets, which is known as the Tier 1 leverage ratio.

 

Atthe bank level, we are subject to various regulatory capital requirementsadministered by the federal banking agencies. To be considered “adequatelycapitalized” under these capital guidelines, we must maintain a minimum totalrisk-based capital of 8%, with at least 4% being Tier 1 capital. In addition,we must maintain a minimum Tier 1 leverage ratio of at least 4%. To beconsidered “well-capitalized,” we must maintain total risk-based capital of atleast 10%, Tier 1 capital of at least 6%, and a leverage ratio of at least 5%.

 

Thefollowing table sets forth the bank capital ratios at December 31, 2008and 2007.  For the year ended December 31,2008, the Bank was considered “adequately capitalized”. After receiving$3,285,000 under the TARP CPP on January 9, 2009, the Bank was considered “wellcapitalized.”  If the Bank were to fallbelow the “well capitalized” level in the future, the Bank would be requiredamong other things, to obtain the approval of the FDIC before participatingfurther in the brokered deposit market, which could materially adversely affectour business, financial condition, including our liquidity, and results ofoperations.

 
| ** **                | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|
|                      |       |     |       |     |       |   |   |   |   |
| Total risk-based capital  |       | $        | 8,878      |     | 8.37       | % | $ | 10,225 |   | 15.74 | % |
| Tier 1 risk-based capital |       | 7,548    |       | 7.12     | %          | 9,672 |   | 14.89 | % |
| Leverage capital          |       | 7,548    |       | 5.95     | %          | 9,672 |   | 14.38 | % |
|                           |            |          |            |          |            |  |  |  |  |  |  |

 

**Return on Equity and Assets**

** **

Thefollowing table shows the return on average assets (net income (loss) dividedby average total assets), return on average equity (net income (loss) dividedby average equity), and equity to assets ratio (average equity divided byaverage total assets) for the year ended December 31, 2008 and 2007. Sinceour inception, we have not paid cash dividends.

 
| ** **               | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|
| Return on average assets |       | (3.07    | )%         | (7.22    | )%         |
|                     |       |     |       |     |       |
| Return on average equity |       | (32.06   | )%         | (30.62   | )%         |
|                     |       |     |       |     |       |
| Equity to assets ratio   |       | 9.58     | %          | 23.59    | %          |

 

**Effect of Inflation and Changing Prices**

** **

Theeffect of relative purchasing power over time due to inflation has not beentaken into account in our consolidated financial statements. Rather, ourfinancial statements have been prepared on an historical cost basis inaccordance with accounting principles generally accepted in the United Statesof America.

 

40

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Unlikemost industrial companies, our assets and liabilities are primarily monetary innature. Therefore, the effect of changes in interest rates will have a more significantimpact on our performance than will the effect of changing prices and inflationin general. In addition, interest rates may generally increase as the rate ofinflation increases, although not necessarily in the same magnitude. We attemptto manage the relationships between interest-sensitive assets and liabilitiesin order to protect against wide rate fluctuations, including those resultingfrom inflation.

 

**Off-Balance Sheet Risk**

** **

Throughthe Bank, we have made contractual commitments to extend credit in the ordinarycourse of our business activities. These commitments are legally bindingagreements to lend money to our clients at predetermined interest rates for aspecified period of time. We evaluate each client’s creditworthiness on acase-by-case basis. The amount of collateral obtained, if deemed necessary byus upon extension of credit, is based on our credit evaluation of the borrower.Collateral varies but may include accounts receivable, inventory, property,plant and equipment, commercial and residential real estate. We manage thecredit risk on these commitments by subjecting them to normal underwriting andrisk management processes.  At December 31,2008, we had issued commitments to extend credit of approximately $23,394,000through various types of lending arrangements. There were two standby letters of credit included in the commitments for$110,000.  Fixed rate commitments were$6,803,054 and variable rate commitments were $16,590,946.  At December 31, 2007, commitments toextend credit amounted to $20,034,340.

 

Commitmentsgenerally have fixed expiration dates or other termination clauses and mayrequire the payment of a fee. A significant portion of the unfunded commitmentsrelate to consumer equity lines of credit and commercial lines of credit. Basedon historical experience, we anticipate that a portion of these lines of creditwill not be funded.

 

Exceptas disclosed in this document, we are not involved in off-balance sheetcontractual relationships, unconsolidated related entities that haveoff-balance sheet arrangements or transactions that could result in liquidityneeds or other commitments that significantly impact earnings.

 

**Liquidity**

** **

Liquidityrepresents the ability of a company to convert assets into cash or cashequivalents without significant loss, and the ability to raise additional fundsby increasing liabilities. Liquidity management involves monitoring our sourcesand uses of funds in order to meet our day-to-day cash flow requirements whilemaximizing profits. Liquidity management is made more complicated becausedifferent balance sheet components are subject to varying degrees of managementcontrol. For example, the timing of maturities of our investment portfolio isfairly predictable and subject to a high degree of control at the timeinvestment decisions are made. However, net deposit inflows and outflows arefar less predictable and are not subject to the same degree of control.

 

AtDecember 31, 2008, our liquid assets, consisting of cash and due frombanks and federal funds sold, amounted to $7,624,319, or approximately 5.8% oftotal assets. Our investment securities available for sale at December 31,2008 amounted to $13,843,218, or approximately 10.5% of total assets. Unpledgedinvestment securities traditionally provide a secondary source of liquiditysince they can be converted into cash in a timely manner. At December 31,2008, $6,753,584 of ourinvestment securities were pledged to secure public entity deposits and ascollateral for advances from the Federal Home Loan Bank (“FHLB”).

 

Ourability to maintain and expand our deposit base and borrowing capabilitiesserves as our primary source of liquidity. We plan to meet our future cashneeds through the liquidation of temporary investments and the generation ofdeposits. In addition, we will receive cash upon the maturities and sales ofloans and maturities, calls and prepayments on investment securities. Wemaintain federal funds purchased lines of credit with correspondent bankstotaling $9,300,000. Availability on these lines of credit was $9,300,000 at December 31,2008. We are a member of the FHLB, from which applications for borrowings canbe made.  The FHLB requires thatinvestment securities or qualifying mortgage loans be pledged to secureadvances from them. We are also required to purchase FHLB stock in a percentageof each advance.  At December 31,2008 we had borrowed $3,000,000 from FHLB.  

 

41

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Webelieve that our existing stable base of core deposits along with continuedgrowth in this deposit base will enable us to successfully meet our long termliquidity needs.

 

**Market Risk**

** **

Marketrisk is the risk of loss from adverse changes in market prices and rates, whichprincipally arise from interest rate risk inherent in our lending, investing,deposit gathering, and borrowing activities. Other types of market risks, suchas foreign currency exchange rate risk and commodity price risk, do notgenerally arise in the normal course of our business.

 

Weactively monitor and manage our interest rate risk exposure principally bymeasuring our interest sensitivity “gap,” which is the positive or negativedollar difference between assets and liabilities that are subject to interestrate repricing within a given period of time. Interest rate sensitivity can bemanaged by repricing assets or liabilities, selling securities available forsale, replacing an asset or liability at maturity, or adjusting the interestrate during the life of an asset or liability. Managing the amount of assetsand liabilities repricing in this same time interval helps to hedge the riskand minimize the impact on net interest income of rising or falling interestrates. We generally would benefit from increasing market rates of interest whenwe have an asset-sensitive gap position and generally would benefit fromdecreasing market rates of interest when we are liability-sensitive.  The analysis presents only a static view ofthe timing of maturities and repricing opportunities, without taking intoconsideration that changes in interest rates do not affect all assets andliabilities equally. For example, rates paid on a substantial portion of coredeposits may change contractually within a relatively short time frame, butthose rates are viewed by us as significantly less interest-sensitive thanmarket-based rates such as those paid on noncore deposits. Net interest incomemay be affected by other significant factors in a given interest rateenvironment, including changes in the volume and mix of interest-earning assetsand interest-bearing liabilities.

 

42

----

 

**Interest Rate Sensitivity**

 

Asset-liabilitymanagement is the process by which we monitor and control the mix andmaturities of our assets and liabilities. The essential purposes ofasset-liability management are to ensure adequate liquidity and to maintain anappropriate balance between interest sensitive assets and liabilities in orderto minimize potentially adverse impacts on earnings from changes in marketinterest rates. Our asset-liability management committee monitors and considersmethods of managing exposure to interest rate risk. The asset-liabilitymanagement committee is responsible for maintaining the level of interest ratesensitivity of our interest sensitive assets and liabilities withinboard-approved limits.

 

Thefollowing table sets forth information regarding our rate sensitivity, as of December 31,2008 at each of the time intervals. The information in the table may not beindicative of our rate sensitivity position at other points in time. Inaddition, the repricing distribution indicated in the table differs from thecontractual maturities of certain interest-earning assets and interest-bearingliabilities presented due to consideration of prepayment speeds under variousinterest rate change scenarios in the application of the interest ratesensitivity methods described above.

 
| ** **                                                                    | ** ** | ** **                    | ** ** | **After three**                    | ** ** | **After one but** | ** ** | ** **                 | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------------------|------------|-----------------------------------------|------------|-----------------------------|------------|----------------------------|------------|------------|------------|
| **December 31, 2008**                                               | ** ** | **Within three  months** | ** ** | **But within  twelve months** | ** ** | **within five  years** | ** ** | **After five  years** | ** ** | **Total**  | ** ** |
|                                                                          |       |                          |       |                                    |       |                        |       |                       |       |       |       |
| Interest-earning assets:(in thousands)                                        |       |                          |       |                                    |       |                        |       |                       |       |       |       |
| Federal funds sold                                                            |       | $                             | 3,494      |                                    | $          | —                      |       | $                          | —     |       | $          | — |   | $ | 3,494 |   |
| Investment securities available-for-sale  and nonmarketable equity securities |       | 1,059                         |       | 2,291                                   |       | 6,207                       |       | 4,817                      |       | 14,374     |       |
| Loans                                                                         |       | 63,524                        |       | 7,366                                   |       | 34,454                      |       | 2,204                      |       | 107,548    |       |
| Total interest-earning assets                                                 |       | $                             | 68,077     |                                    | $          | 9,657                       |       | $                          | 40,661     |       | $          | 7,021 |   | $ | 125,416 |   |
| Interest-bearing liabilities:(in thousands)                                   |       |                          |       |                                    |       |                        |       |                       |       |       |       |
| Interest-bearing checking                                                     |       | $                             | 4,359      |                                    | $          | —                      |       | $                          | —     |       | $          | — |   | $ | 4,359 |   |
| Money market and savings                                                      |       | 24,906                        |       | —                                  |       | —                      |       | —                     |       | 24,906     |       |
| Time deposits                                                                 |       | 21,702                        |       | 51,043                                  |       | 5,335                       |       | —                     |       | 78,080     |       |
| Federal funds purchased                                                       |       | —                        |       | —                                  |       | —                      |       | —                     |       | —     |       |
| FHLB Advances                                                                 |       | —                        |       | —                                  |       | 3,000                       |       |                       |       | 3,000      |       |
| Total interest-bearing Liabilities                                            |       | $                             | 50,967     |                                    | $          | 51,043                      |       | $                          | 8,335      |       | $          | — |   | $ | 110,345 |   |
| Period gap                                                                    |       | $                             | 17,110     |                                    | $          | (41,386                     | )          | $                          | 32,326     |       | $          | 7,021 |   | 15,071 |   |
| Cumulative gap                                                                |       | $                             | 17,110     |                                    | $          | (24,276                     | )          | $                          | 8,050      |       | $          | 15,071 |   | 15,071 |   |
| Ratio of cumulative gap to total  interest-earning assets                     |       | 13.64                         | %          | (19.36                                  | )%         | 6.42                        | %          | 12.02                      | %          | 12.02      | %          |

 

**Item 7A.  Quantitative and Qualitative DisclosuresAbout Market Risk.**

** **

Not applicable.

 

43

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**Item 8.  FinancialStatements and Supplementary Data**

** **

**INDEX TO AUDITED FINANCIALSTATEMENTS**

** **

**CONGAREE BANCSHARES, INC. AND SUBSIDIARY**

** **
| Report of Independent Registered Public Accounting  Firm                                                                                       | 45     |
|------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                           |   |
| Consolidated Balance Sheets as of December 31,  2008 and 2007                                                                             | 46     |
|                                                                                                                                           |   |
| Consolidated Statements of Operations for the years  ended December 31, 2008 and 2007                                                     | 47     |
|                                                                                                                                           |   |
| Consolidated  Statements of Changes in Shareholders’ Equity and Comprehensive Income for the  years ended December 31, 2008 and 2007 | 48     |
|                                                                                                                                           |   |
| Consolidated Statements of Cash Flows for the years  ended December 31, 2008 and 2007                                                     | 49     |
|                                                                                                                                           |   |
| Notes to Consolidated Financial Statements                                                                                                     | 50     |

 

44

----

 

## **REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM**

## ** **

TheBoard of Directors

CongareeBancshares, Inc. and Subsidiary

Cayce,South Carolina

 

Wehave audited the accompanying consolidated balance sheets of CongareeBancshares, Inc. and Subsidiary as of December 31, 2008 and 2007, andthe related consolidated statements of operations, changes in shareholders’equity and comprehensive income (loss), and cash flows for the years thenended.  These financial statements arethe responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

Inour opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of Congaree Bancshares, Inc.and Subsidiary, as of December 31, 2008 and 2007, and the results of theiroperations and cash flows for the years then ended in conformity withaccounting principles generally accepted in the United States of America.

 

Asdiscussed in Note 1 to the financial statements, the 2007 financial statementshave been restated to add a valuation allowance for income taxes.

 

Wewere not engaged to examine management’s assertion about the effectiveness ofCongaree Bancshares, Inc. and its Subsidiary’s internal control overfinancial reporting as of December 31, 2008 included in the accompanyingManagement’s Report on Internal Control Over Financial Reporting and,accordingly, we do not express an opinion thereon.

 

 

/s/Elliott Davis, LLC

Columbia,South Carolina

March 26,2009

 

45

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**CONGAREE BANCSHARES, INC. AND SUBSIDIARY**

** **

# **Consolidated Balance Sheets**

# ** **

| ** **                                                                                                                                             | ** ** | **December 31,** | ** **      |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|-----------------|
| ** **                                                                                                                                             | ** ** | **2008**              | ** **      | **2007** | ** ** |
| **Assets:**                                                                                                                                            | ** ** | ** **            | ** **      | ** ** | ** ** |
| Cash and cash equivalents:                                                                                                                             |       |                  |            |   |   |
| Cash and due from banks                                                                                                                                |       | $                     | 4,130,319       |   | $ | 4,012,721 |   |
| Federal funds sold                                                                                                                                     |       | 3,494,000             |            | 110,000 |   |
|                                                                                                                                                   |       |                  |            |   |   |
| Total cash and cash equivalents                                                                                                                        |       | 7,624,319             |            | 4,122,721 |   |
|                                                                                                                                                   |       |                  |            |   |   |
| Securities available-for-sale                                                                                                                          |       | 13,843,218            |            | 14,833,432 |   |
| Nonmarketable equity securities                                                                                                                        |       | 435,952               |            | 268,244 |   |
|                                                                                                                                                   |       |                  |            |   |   |
| Loans receivable                                                                                                                                       |       | 107,547,656           |            | 55,288,904 |   |
| Less allowance for loan losses                                                                                                                         |       | 1,688,840             |            | 552,600 |   |
|                                                                                                                                                   |       |                  |            |   |   |
| Loans, net                                                                                                                                             |       | 105,858,816           |            | 54,736,304 |   |
|                                                                                                                                                   |       |                  |            |   |   |
| Premises, furniture and equipment, net                                                                                                                 |       | 3,667,099             |            | 4,035,931 |   |
| Accrued interest receivable                                                                                                                            |       | 472,880               |            | 338,183 |   |
| Other assets                                                                                                                                           |       | 101,820               |            | 108,862 |   |
|                                                                                                                                                   |       |                  |            |   |   |
| Total assets                                                                                                                                           | ** ** | **$**                 | **132,004,104** | ** ** | **$** | **78,443,677** | ** ** |
|                                                                                                                                                   | ** ** | ** **            | ** **      | ** ** | ** ** |
| **Liabilities:**                                                                                                                                       | ** ** | ** **            | ** **      | ** ** | ** ** |
| Deposits:                                                                                                                                              |       |                  |            |   |   |
| Noninterest-bearing transaction accounts                                                                                                               |       | $                     | 11,190,632      |   | $ | 4,911,717 |   |
| Interest-bearing transaction accounts                                                                                                                  |       | 4,358,995             |            | 5,670,104 |   |
| Savings and money market                                                                                                                               |       | 24,905,711            |            | 24,481,389 |   |
| Time deposits $100,000 and over                                                                                                                        |       | 45,288,107            |            | 13,686,816 |   |
| Other time deposits                                                                                                                                    |       | 32,791,115            |            | 11,529,784 |   |
|                                                                                                                                                   |       |                  |            |   |   |
| Total deposits                                                                                                                                         |       | 118,534,560           |            | 60,279,810 |   |
|                                                                                                                                                   |       |                  |            |   |   |
| Federal funds purchased                                                                                                                                |       | —                |            | 3,658,000 |   |
| Federal Home Loan Bank advances                                                                                                                        |       | 3,000,000             |            | — |   |
| Securities sold under agreements to repurchase                                                                                                         |       | —                |            | 1,395,326 |   |
| Accrued interest payable                                                                                                                               |       | 224,434               |            | 65,019 |   |
| Other liabilities                                                                                                                                      |       | 182,011               |            | 109,734 |   |
|                                                                                                                                                   |       |                  |            |   |   |
| Total liabilities                                                                                                                                      |       | 121,941,005           |            | 65,507,889 |   |
|                                                                                                                                                   |       |                  |            |   |   |
| Commitments and contingencies (Notes 14 and 19)                                                                                                        |       |                  |            |   |   |
|                                                                                                                                                   |       |                  |            |   |   |
| **Shareholders’ equity:**                                                                                                                         | ** ** | ** **            | ** **      | ** ** | ** ** |
| Preferred stock, $.01 par value, 10,000,000 shares authorized; no  shares issued and outstanding                                                       |       | —                |            | — |   |
| Common stock, $.01 par value, 10,000,000 shares authorized; 1,764,439  shares issued and outstanding at December 31, 2008 and 2007,  respectively |       | 17,644                |            | 17,644 |   |
| Capital surplus                                                                                                                                        |       | 17,436,270            |            | 17,141,232 |   |
| Retained deficit                                                                                                                                       |       | (7,612,931            | )               | (4,309,992 | ) |
| Accumulated other comprehensive income                                                                                                                 |       | 222,116               |            | 86,904 |   |
|                                                                                                                                                   |       |                  |            |   |   |
| Total shareholders’ equity                                                                                                                        |       | 10,063,099            |            | 12,935,788 |   |
|                                                                                                                                                   |       |                  |            |   |   |
| Total liabilities and shareholders’ equity                                                                                                        | ** ** | **$**                 | **132,004,104** | ** ** | **$** | **78,443,677** | ** ** |

 

The accompanying notesare an integral part of the consolidated financial statements.

 

46

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**CONGAREE BANCSHARES, INC. AND SUBSIDIARY**

 

**Consolidated Statements of Operations**

**For theyears ended December 31, 2008 and 2007**

** **
| ** **                                               | ** ** | **2008**      | ** **     | **2007**      | ** ** |
|----------------------------------------------------------|------------|---------------|----------------|---------------|------------|
| **Interest income:**                                     | ** ** | ** **    | ** **     | ** **    | ** ** |
| Loans, including fees                                    |       | $             | 5,562,156      |          | $          | 2,153,450 |   |
| Securities available-for-sale, taxable                   |       | 758,865       |           | 565,520       |       |
| Federal funds sold                                       |       | 24,196        |           | 440,931       |       |
|                                                     |       |          |           |          |       |
| Total                                                    |       | 6,345,217     |           | 3,159,901     |       |
|                                                     |       |          |           |          |       |
| **Interest expense:**                                    | ** ** | ** **    | ** **     | ** **    | ** ** |
| Time deposits $100,000 and over                          |       | 1,081,167     |           | 337,699       |       |
| Other deposits                                           |       | 1,905,625     |           | 1,162,623     |       |
| Other borrowings                                         |       | 119,693       |           | 66,348        |       |
|                                                     |       |          |           |          |       |
| Total                                                    |       | 3,106,485     |           | 1,566,670     |       |
|                                                     |       |          |           |          |       |
| **Net interest income**                                  |       | 3,238,732     |           | 1,593,231     |       |
| ** **                                               |       |          |           |          |       |
| Provision for loan losses                                |       | 1,391,090     |           | 502,600       |       |
|                                                     |       |          |           |          |       |
| **Net interest income after provision for loan  losses** |       | 1,847,642     |           | 1,090,631     |       |
| ** **                                               |       |          |           |          |       |
| **Noninterest income:**                                  | ** ** | ** **    | ** **     | ** **    | ** ** |
| Service charges on deposit accounts                      |       | 81,517        |           | 23,087        |       |
| Residential mortgage origination fees                    |       | 102,331       |           | 53,580        |       |
| Gain on sale of securities available-for-sale            |       | 71,599        |           | —        |       |
| Loss on sale of assets                                   |       | (83,570       | )              | (11,732       | )          |
| Other than temporary impairment on investment securities |       | (94,993       | )              | —        |       |
| Other                                                    |       | 65,632        |           | 36,835        |       |
|                                                     |       |          |           |          |       |
| Total noninterest income                                 |       | 142,516       |           | 101,770       |       |
|                                                     |       |          |           |          |       |
| **Noninterest expenses:**                                | ** ** | ** **    | ** **     | ** **    | ** ** |
| Salaries and employee benefits                           |       | 3,137,426     |           | 2,286,714     |       |
| Net occupancy                                            |       | 379,300       |           | 254,131       |       |
| Furniture and equipment                                  |       | 421,964       |           | 359,877       |       |
| Other operating                                          |       | 1,354,407     |           | 1,365,430     |       |
|                                                     |       |          |           |          |       |
| Total noninterest expense                                |       | 5,293,097     |           | 4,266,152     |       |
|                                                     |       |          |           |          |       |
| **Loss before income taxes**                             |       | (3,302,939    | )              | (3,073,751    | )          |
| ** **                                               |       |          |           |          |       |
| Income tax expense                                       |       | —        |           | 414,262       |       |
|                                                     |       |          |           |          |       |
| **Net loss**                                             | ** ** | **$**         | **(3,302,939** | **)**         | **$**      | **(3,488,013** | **)** |
| **Loss per share**                                       | ** ** | ** **    | ** **     | ** **    | ** ** |
| Basic loss per share                                     | ** ** | **$**         | **(1.87**      | **)**         | **$**      | **(1.98** | **)** |
|                                                     | ** ** | ** **    | ** **     | ** **    | ** ** |
| Average shares outstanding                               | ** ** | **1,764,439** | ** **     | **1,764,439** | ** ** |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

47

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**CONGAREE BANCSHARES, INC. AND SUBSIDIARY**

 

**ConsolidatedStatements of Changes in Shareholders’ Equity and Comprehensive Income (Loss)**

**For the years ended December 31, 2008 and 2007**

** **
| ** **                                        | ** ** | ** **            | ** ** | ** **  | ** ** | ** **   | ** ** | ** **     | ** ** | **Accumulated** | ** **     | ** ** | ** ** |
|---------------------------------------------------|------------|-----------------------|------------|-------------|------------|--------------|------------|----------------|------------|-----------------|----------------|------------|------------|
| ** **                                        | ** ** | ** **            | ** ** | ** **  | ** ** | ** **   | ** ** | ** **     | ** ** | **other**       | ** **     | ** ** | ** ** |
| ** **                                        | ** ** | ** **            | ** ** | ** **  | ** ** | ** **   | ** ** | ** **     | ** ** | **compre-**     | ** **     | ** ** | ** ** |
| ** **                                        | ** ** | ** **            | ** ** | ** **  | ** ** | ** **   | ** ** | ** **     | ** ** | **hensive**     | ** **     | ** ** | ** ** |
| ** **                                        | ** ** | **Common Stock** | ** ** | **Capital** | ** ** | **Retained** | ** ** | **income**     | ** ** | ** **      | ** **     |
| ** **                                        | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **surplus**  | ** ** | **deficit**    | ** ** | **(loss)**      | ** **     | **Total**  | ** ** |
| ** **                                        | ** ** | ** **            | ** ** | ** **  | ** ** | ** **   | ** ** | ** **     | ** ** | ** **      | ** **     | ** ** | ** ** |
| **Balance, December 31, 2006**               | ** ** | 1,764,439             | ** ** | $           | 17,644     |         | $          | 16,861,718     |       | $               | (821,979       | )          | $          | (162 | ) | $ | 16,057,221 |   |
| ** **                                        | ** ** |                  | ** ** |        | ** ** |         | ** ** |           |       |            |           |       | ** ** |
| Net loss                                          |       |                  |       |        |       |         |       | (3,488,013     | )          |            |           | (3,488,013 | )          |
|                                              |       |                  |       |        |       |         |       |           |       |            |           |       |       |
| Other comprehensive gain, net of taxes of $44,934 |       |                  |       |        |       |         |       |           |       | 87,066          |           | 87,066     |       |
|                                              |       |                  |       |        |       |         |       |           |       |            |           |       |       |
| Comprehensive loss                                |       |                  |       |        |       |         |       |           |       |            |           | (3,400,947 | )          |
|                                              |       |                  |       |        |       |         |       |           |       |            |           |       |       |
| Stock and warrant compensation expense            |       |                  |       |        |       | 279,514      |       |           |       |            |           | 279,514    |       |
|                                              |       |                  |       |        |       |         |       |           |       |            |           |       |       |
| **Balance, December 31, 2007**               | ** ** | 1,764,439             | ** ** | 17,644      | ** ** | 17,141,232   | ** ** | (4,309,992     | )          | 86,904          | ** **     | 12,935,788 | ** ** |
| ** **                                        | ** ** |                  | ** ** |        | ** ** |         | ** ** |           |       |            | ** **     |       | ** ** |
| Net loss                                          |       |                  |       |        |       |         |       | (3,302,939     | )          |            |           | (3,302,939 | )          |
|                                              |       |                  |       |        |       |         |       |           |       |            |           |       |       |
| Other comprehensive gain, net of taxes of $69,655 |       |                  |       |        |       |         |       |           |       | 135,212         |           | 135,212    |       |
|                                              |       |                  |       |        |       |         |       |           |       |            |           |       |       |
| Comprehensive loss                                |       |                  |       |        |       |         |       |           |       |            |           | (3,167,727 | )          |
|                                              |       |                  |       |        |       |         |       |           |       |            |           |       |       |
| Stock and warrant compensation expense            |       |                  |       |        |       | 295,038      |       |           |       |            |           | 295,038    |       |
|                                              |       |                  |       |        |       |         |       |           |       |            |           |       |       |
| **Balance, December 31, 2008**               | ** ** | **1,764,439**         | ** ** | **$**       | **17,644** | ** **   | **$**      | **17,436,270** | ** ** | **$**           | **(7,612,931** | **)**      | **$**      | **222,116** | ** ** | **$** | **10,063,099** | ** ** |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

48

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**CONGAREE BANCSHARES, INC. AND SUBSIDIARY**

 

**ConsolidatedStatements of Cash Flows**

**For the years ended December 31, 2008 and 2007**

** **
| ** **                                                                   | ** ** | **2008**    | ** **    | **2007**    | ** ** |
|------------------------------------------------------------------------------|------------|-------------|---------------|-------------|------------|
| **Cash flows from operating activities:**                                    |       |        |          |        |       |
| Net loss                                                                     |       | $           | (3,302,939    | )           | $          | (3,488,013 | ) |
| Adjustments to reconcile net loss to net cash used by operating  activities: |       |        |          |        |       |
| Provision for loan losses                                                    |       | 1,391,090   |          | 502,600     |       |
| Depreciation and amortization expense                                        |       | 271,210     |          | 180,726     |       |
| Discount accretion and premium amortization                                  |       | (50,519     | )             | (53,655     | )          |
| Deferred income tax benefit                                                  |       | —      |          | 414,262     |       |
| Stock and warrant compensation expense                                       |       | 295,038     |          | 279,514     |       |
| Increase in accrued interest receivable                                      |       | (134,697    | )             | (259,305    | )          |
| Increase in accrued interest payable                                         |       | 159,415     |          | 52,685      |       |
| Gain from sale of securities available-for-sale                              |       | (71,599     | )             | —      |       |
| Loss on sale of assets                                                       |       | 83,570      |          | —      |       |
| Other than temporary impairment on investment securities                     |       | 94,993      |          | —      |       |
| Increase in other assets                                                     |       | (59,737     | )             | (142,003    | )          |
| Increase in other liabilities                                                |       | 72,277      |          | 109,734     |       |
|                                                                         |       |        |          |        |       |
| Net cash used by operating activities                                        |       | (1,251,898  | )             | (2,403,455  | )          |
|                                                                         |       |        |          |        |       |
| **Cash flows from investing activities:**                                    | ** ** | ** **  | ** **    | ** **  | ** ** |
| Purchase of nonmarketable equity securities                                  |       | (262,700    | )             | (268,244    | )          |
| Proceeds from maturities/calls of securities available-for-sale              |       | 2,344,843   |          | 4,205,535   |       |
| Proceeds from sales of securities available-for-sale                         |       | 2,244,612   |          | —      |       |
| Purchases of securities available-for-sale                                   |       | (3,275,134  | )             | (14,638,971 | )          |
| Net increase in loans receivable                                             |       | (52,779,202 | )             | (50,293,123 | )          |
| Purchase of premises, furniture and equipment                                |       | (443,386    | )             | (1,978,830  | )          |
| Proceeds from sales of other real estate and repossessed property            |       | 226,165     |          | —      |       |
| Proceeds from sales of premises, furniture and equipment                     |       | 496,874     |          | —      |       |
|                                                                         |       |        |          |        |       |
| Net cash used by investing activities                                        |       | (51,447,928 | )             | (62,973,633 | )          |
|                                                                         |       |        |          |        |       |
| **Cash flows from financing activities:**                                    | ** ** | ** **  | ** **    | ** **  | ** ** |
| Increase in noninterest-bearing deposits                                     |       | 6,278,915   |          | 4,188,643   |       |
| Increase in interest-bearing deposits                                        |       | 51,975,835  |          | 48,082,601  |       |
| (Decrease) increase in federal funds purchased                               |       | (3,658,000  | )             | 3,658,000   |       |
| (Decrease) increase in securities sold under agreements to repurchase        |       | (1,395,326  | )             | 1,395,326   |       |
| Proceeds from Federal Home Loan Bank advances                                |       | 3,000,000   |          | —      |       |
|                                                                         |       |        |          |        |       |
| Net cash provided by financing activities                                    |       | 56,201,424  |          | 57,324,570  |       |
|                                                                         |       |        |          |        |       |
| **Net increase (decrease) in cash and cash  equivalents**                    |       | 3,501,598   |          | (8,052,518  | )          |
| ** **                                                                   |       |        |          |        |       |
| **Cash and cash equivalents, beginning of period**                           |       | 4,122,721   |          | 12,175,239  |       |
| ** **                                                                   |       |        |          |        |       |
| **Cash and cash equivalents, end of period**                                 | ** ** | **$**       | **7,624,319** | ** **  | **$**      | **4,122,721** | ** ** |

 

The accompanying notes are an integral partof the consolidated financial statements.

 

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**CONGAREE BANCSHARES, INC. AND SUBSIDIARY**

 

### **NOTE 1 - SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

### ** **

**Organization** - Congaree Bancshares, Inc.and Subsidiary (the Company) was incorporated to serve as a bank holdingcompany for its subsidiary, Congaree State Bank (the Bank).  Congaree State Bank commenced business on October 16,2006.  The principal business activity ofthe Bank is to provide banking services to domestic markets, principally inWest Columbia and Cayce, South Carolina. The Bank is a state-chartered commercial bank, and its deposits areinsured by the Federal Deposit Insurance Corporation.  The consolidated financial statements includethe accounts of the parent company and its wholly-owned subsidiary afterelimination of all significant intercompany balances and transactions.

 

**Restatement** - The Company has restated its previouslyfiled financial statements to add a valuation allowance in accordance with the rules ofSFAS 109, Deferred Income Taxes.  TheCompany believes it is more likely than not that it will not be able to realizeall of the tax benefits.  The Company hasincurred operating losses since inception. The Company received a Comment Letter from the Securities and ExchangeCommission in January 2009, and based on their views and the Company’sre-evaluation, determined that a valuation allowance on deferred taxes wasappropriate at December 31, 2007. These financial statements reflect thisrevision to income taxes.

 

**Management’s Estimates** - The preparation ofconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of income and expenses duringthe reporting period.  Actual resultscould differ from those estimates.

 

Materialestimates that are particularly susceptible to significant change relate to thedetermination of the allowance for losses on loans, including valuationallowances for impaired loans, and the valuation of real estate acquired inconnection with foreclosures or in satisfaction of loans.  In connection with the determination of theallowances for losses on loans and foreclosed real estate, management obtainsindependent appraisals for significant properties.  Management must also make estimates indetermining the estimated useful lives and methods for depreciating premisesand equipment.

 

Whilemanagement uses available information to recognize losses on loans andforeclosed real estate, future additions to the allowances may be necessarybased on changes in local economic conditions. In addition, regulatory agencies, as an integral part of theirexamination process, periodically review the Company’s allowances for losses onloans and foreclosed real estate.  Suchagencies may require the Company to recognize additions to the allowances basedon their judgments about information available to them at the time of theirexamination.  Because of these factors,it is reasonably possible that the allowances for losses on loans and foreclosedreal estate may change materially in the near term.

 

**Concentrations of Credit Risk** - Financialinstruments, which potentially subject the Company to concentrations of creditrisk, consist principally of loans receivable, investment securities, federalfunds sold and amounts due from banks.

 

TheCompany makes loans to individuals and small businesses for various personaland commercial purposes primarily in the Lexington County region of SouthCarolina.  The Company’s loan portfoliois not concentrated in loans to any single borrower or a relatively smallnumber of borrowers.  Additionally,Management is not aware of any concentrations of loans to classes of borrowersor industries that would be similarly affected by economic conditions.

 

Inaddition to monitoring potential concentrations of loans to particularborrowers or groups of borrowers, industries and geographic regions, Managementmonitors exposure to credit risk from concentrations of lending products andpractices 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.  Management has determined that there is no concentrationof credit risk associated with its lending policies or practices.  Additionally, there are industry practicesthat could subject the Company to increased credit risk should economicconditions change over the course of a loan’s life. For example, the Companymakes variable rate loans and fixed rate principal-amortizing loans withmaturities prior to the loan being fully paid (i.e. balloon paymentloans).  These loans are underwritten andmonitored to manage the associated risks. Therefore, management believes that these particular practices do notsubject the Company to unusual credit risk.

 

50

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**CONGAREE BANCSHARES, INC. AND SUBSIDIARY**

 

TheCompany’s investment portfolio consists principally of obligations of theUnited States, its agencies or its corporations.  In the opinion of Management, there is noconcentration of credit risk in its investment portfolio.  The Company places its deposits andcorrespondent accounts with and sells its federal funds to high qualityinstitutions. Management believes credit risk associated with correspondentaccounts is not significant.

 

### **NOTE 1 - SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES***-continued*

### ** **

**Securities Available-for-Sale**- Securitiesavailable-for-sale are carried at amortized cost and adjusted to estimatedmarket value by recognizing the aggregate unrealized gains or losses in avaluation account.  Aggregate marketvaluation adjustments are recorded in shareholders’ equity net of deferredincome taxes.  Reductions in market valueconsidered by management to be other than temporary are reported as a realizedloss and a reduction in the cost basis of the security. The adjusted cost basisof investments available-for-sale is determined by specific identification andis used in computing the gain or loss upon sale.

 

**NonmarketableEquity Securities** - Nonmarketable equity securities includethe cost of the Company’s investment in the stock of the Federal Home Loan Bankand Silverton Bank.  These stocks have noquoted market value and no ready market exists. The Bank’s investment in nonmarketable equity securities was $435,952and $268,244 as of December 31, 2008 and 2007, respectively.  The Company evaluated these securities at December 31,2008 and concluded that the Silverton stock was other than temporarilyimpaired.  Accordingly, an impairmentcharge of $94,993 was recorded in the statement of operations for the yearended December 31, 2008.

 

**Loans Receivable** - Loans are stated at theirunpaid principal balance.  Interestincome is computed using the simple interest method and is recorded in theperiod earned.

 

Whenserious doubt exists as to the collectibility of a loan or when a loan becomescontractually 90 days past due as to principal or interest, interest income isgenerally discontinued unless the estimated net realizable value of collateralexceeds the principal balance and accrued interest.  When interest accruals are discontinued,income earned but not collected is reversed.

 

Loanorigination and commitment fees and certain direct loan origination costs(principally salaries and employee benefits) are deferred and amortized toincome over the contractual life of the related loans or commitments, adjustedfor prepayments, using the straight-line method.

 

TheCompany identifies impaired loans through its normal internal loan reviewprocess.  Loans on the Company’s problemloan watch list are considered potentially impaired loans.  These loans are evaluated in determining whetherall outstanding principal and interest are expected to be collected.  Loans are not considered impaired if aminimal payment delay occurs and all amounts due, including accrued interest atthe contractual interest rate for the period of delay, are expected to becollected.

 

**Allowance for Loan Losses** - An allowance for loan lossesis maintained at a level deemed appropriate by management to provide adequatelyfor known and inherent risks in the loan portfolio.  The allowance is based upon a continuingreview of past loan loss experience, current economic conditions which may affectthe borrowers’ ability to pay, and the underlying collateral value of theloans.  Loans or portions of loans thatare deemed to be uncollectible are charged-off and deducted from the allowance.  The provision for loan losses and recoverieson loans previously charged-off are added to the allowance.

 

TheBank accounts for impaired loans in accordance with SFAS No. 114,“Accounting by Creditors for Impairment of a Loan.”  This standard requires that all lenders valueloans at the loan’s fair value if it is probable that the lender will be unableto collect all amounts due according to the terms of the loan agreement.  Fair value may be determined based upon thepresent value of expected cash flows, market price of the loan, if available,or value of the underlying collateral. Expected cash flows are required to bediscounted at the loan’s effective interest rate.  SFAS No. 114 was amended by SFAS No. 118to allow a lender to use existing methods for recognizing interest income on animpaired loan and by requiring additional disclosures about how a creditorrecognizes interest income on an impaired loan.

 

UnderSFAS No. 114, as amended by SFAS No. 118, when the ultimatecollectibility of an impaired loan’s principal is in doubt, wholly orpartially, cash receipts are applied to principal.  Once the reported principal balance has beenreduced to the loan’s estimated net realized value, future cash receipts areapplied to interest income, to the extent

 

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**CONGAREE BANCSHARES, INC. AND SUBSIDIARY**

 

thatany interest has been foregone.  Furthercash receipts are recorded as recoveries of any amounts previously chargedoff.  When this doubt does not exist,cash receipts are applied under the contractual terms of the loan agreementfirst to interest income then to principal.

 

### **NOTE 1 - SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES***-continued*

### ** **

**Allowance for Loan Losses***(continued)*- A loan is also considered impaired if its terms are modified in a troubleddebt restructuring.  For these accruingimpaired loans, cash receipts are typically applied to principal and interestreceivable in accordance with the terms of the restructured loanagreement.  Interest income is recognizedon these loans using the accrual method of accounting.

 

**Premises, Furniture and Equipment** - Premises,furniture and equipment are stated at cost, less accumulated depreciation.  The provision for depreciation is computed bythe straight-line method, based on the estimated useful lives for buildings andimprovements of 40 years, furniture and equipment of 5 to 10 years and softwareof 5 years.  The cost of assets sold orotherwise disposed of and the related allowance for depreciation are eliminatedfrom the accounts and the resulting gains or losses are reflected in the incomestatement when incurred.  Maintenance andrepairs are charged to current expense. The costs of major renewals andimprovements are capitalized.

 

**Income Taxes** - Income taxes are the sumof amounts currently payable to taxing authorities and the net changes inincome taxes payable or refundable in future years.  Income taxes deferred to future years aredetermined utilizing a liability approach. This method gives consideration to the future tax consequencesassociated with differences between financial accounting and tax bases ofcertain assets and liabilities which are principally the allowance for loanlosses, depreciable premises and equipment, and the net operating losscarryforward.

 

In2006, the FASB issued Interpretation No. 48 (FIN 48), “Accounting forUncertainty in Income Taxes - an Interpretation of SFAS No. 109.”  FIN 48 clarifies the accounting foruncertainty in income taxes recognized in an enterprise’s financial statementsin accordance with SFAS No. 109, “Accounting for Income Taxes.”  FIN 48 also prescribes a recognitionthreshold and measurement of a tax position taken or expected to be taken in anenterprise’s tax return.  FIN 48 iseffective for fiscal years beginning after December 15, 2006.  Accordingly, the Company adopted FIN 48effective January 1, 2007.  Theadoption of FIN 48 did not have any impact on the Company’s consolidatedfinancial position.

 

**AdvertisingExpense** - Advertising and public relations costs aregenerally expensed as incurred.  Externalcosts incurred in producing media advertising are expensed the first time theadvertising takes place.  External costsrelating to direct mailing costs are expended in the period in which the directmailings are sent.  Advertising expensewas $126,099 and $352,213 for the years ended December 31, 2008 and 2007,respectively.

 

**EmployeeBenefits** - The Bank sponsors a defined contribution 401(k) plancovering substantially all full-time employees. Employee contributions are voluntary and can range up to 100% of compensationon a pre-tax basis.  The Bank may makediscretionary matching contributions with vesting of these employercontributions ratably over the next five year period.  During the years ended December 31, 2008and 2007, the Bank recognized $74,106 and $16,178, respectively, in expensesrelated to this plan.

 

**Loss Per Share** - Basic loss per sharerepresents loss available to shareholders divided by the weighted-averagenumber of common shares outstanding during the period.  Dilutive loss per share reflects additionalcommon shares that would have been outstanding if dilutive potential commonshares had been issued. The only potential common share equivalents are thoserelated to stock options and warrants. Stock options and warrants which are anti-dilutive are excluded from thecalculation of diluted net income per share.

 

**Stock-Based Compensation** - The Company accounts forstock options and warrants under the fair value recognition provisions ofFinancial Accounting Standards Board (“FASB”) Statement of Financial AccountingStandards (“SFAS”) No. 123(R), “Share-Based Payment.”  Compensation expense is recognized assalaries and benefits in the consolidated statement of operations.

 

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**CONGAREE BANCSHARES, INC. AND SUBSIDIARY**

 

### **NOTE 1 - SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES***-continued*

### ** **

**ComprehensiveIncome** - Accounting principles generally require thatrecognized income, expenses, gains, and losses be included in net income.  Although certain changes in assets andliabilities, such as unrealized gains and losses on available-for-salesecurities, are reported as a separate component of the equity section of thebalance sheet, such items, along with net income, are components ofcomprehensive income.

 

Thecomponents of other comprehensive income and related tax effects are as followsfor the years ended December 31, 2008 and 2007:

 

| ** **                                                   | ** ** | **2008** | ** **  | **2007**   | ** ** |
|--------------------------------------------------------------|------------|----------|-------------|------------|------------|
| Unrealized gains on securities available-for-sale            |       | $        | 133,268     |       | $          | 132,000 |   |
| Reclassification adjustment for gains realized in net income |       | 71,599   |        | —     |       |
|                                                         |       |     |        |       |       |
| Net unrealized gains on securities                           |       | 204,867  |        | 132,000    |       |
|                                                         |       |     |        |       |       |
| Tax effect                                                   |       | (69,655  | )           | (44,934    | )          |
|                                                         |       |     |        |       |       |
| Net-of-tax amount                                            | ** ** | **$**    | **135,212** | ** ** | **$**      | **87,066** | ** ** |

 

**Statement of Cash Flows** - For purposes of reportingcash flows in the financial statements, the Company considers certain highlyliquid debt instruments purchased with a maturity of three months or less to becash equivalents.  Cash equivalentsinclude amounts due from banks and federal funds sold.  Generally, federal funds are sold for one-dayperiods.

 

Interestpaid on deposits and other borrowings totaled $2,947,070 and $1,513,985 for theyears ended December 31, 2008 and 2007, respectively.

 

Noncashinvesting and financing activities include the transfer of loans to other realestate owned and repossessed property of $265,600 and an increase in theunrealized gain on securities available-for-sale of $135,212 during the yearended December 31, 2008.  The onlynoncash activity for the year ended December 31, 2007 was an increase inthe unrealized gain on securities available-for-sale of $132,000.

 

Therewere no income tax payments during the years ended December 31, 2008 and2007.

 

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

 

**Recent Accounting Pronouncements** - Thefollowing is a summary of recent authoritative pronouncements that may affectaccounting, reporting, and disclosure of financial information by the Company:

 

InDecember 2007, the Financial Accounting Standards Board*(“*FASB*”)* issued *Statement of Financial Accounting Standard (“*SFAS*”)* No. 141(R), “Business Combinations,” (“SFAS 141(R)”)which replaces SFAS 141. SFAS 141(R) establishes principles andrequirements for how an acquirer in a business combination recognizes andmeasures in its financial statements the identifiable assets acquired, theliabilities assumed, and any controlling interest; recognizes and measuresgoodwill acquired in the business combination or a gain from a bargainpurchase; and determines what information to disclose to enable users of thefinancial statements to evaluate the nature and financial effects of thebusiness combination. SFAS 141(R) is effective for acquisitions by theCompany taking place on or after January 1, 2009. Early adoption isprohibited. Accordingly, a calendar year-end company is required to record anddisclose business combinations following existing accounting guidance until January 1,2009. The Company will assess the impact of SFAS 141(R) if and when afuture acquisition occurs.

 

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**CONGAREE BANCSHARES, INC. AND SUBSIDIARY**

 

**NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES*-****continued*

 

**Recently Issued Accounting Standards** (*continued)* - Also, in December 2007, the FASB issuedSFAS No. 160, “Noncontrolling Interests in Consolidated FinancialStatements - an amendment of ARB No. 51,” (“SFAS 160”). SFAS 160establishes new accounting and reporting standards for the noncontrollinginterest in a subsidiary and for the deconsolidation of a subsidiary. Beforethis statement, limited guidance existed for reporting noncontrolling interests(minority interest). As a result, diversity in practice exists. In some casesminority interest is reported as a liability and in others it is reported inthe mezzanine section between liabilities and equity. Specifically, SFAS 160requires the recognition of a noncontrolling interest (minority interest) asequity in the consolidated financial statements and separate from the parent’sequity. The amount of net income attributable to the noncontrolling interestwill be included in consolidated net income on the face of the incomestatement. SFAS 160 clarifies that changes in a parent’s ownership interest ina subsidiary that do not result in deconsolidation are equity transactions ifthe parent retains its controlling financial interest. In addition, thisstatement requires that a parent recognize gain or loss in net income when asubsidiary is deconsolidated. Such gain or loss will be measured using the fairvalue of the noncontrolling equity investment on the deconsolidation date. SFAS160 also includes expanded disclosure requirements regarding the interests ofthe parent and its noncontrolling interests. SFAS 160 was effective for theCompany on January 1, 2009.  SFAS160 had no impact on the Company’s financial position, results of operations orcash flows.

 

In February 2008, the FASB issued FASBStaff Position No. 140-3, “Accounting for Transfers of Financial Assetsand Repurchase Financing Transactions,” (“FSP 140-3”).  This FSP providesguidance on accounting for a transfer of a financial asset and the transferor’srepurchase financing of the asset.  This FSP presumes that an initialtransfer of a financial asset and a repurchase financing are considered part ofthe same arrangement (linked transaction) under SFAS 140. However, if certaincriteria are met, the initial transfer and repurchase financing are notevaluated as a linked transaction and are evaluated separately under SFAS 140. FSP 140-3 was effective for the Company on January 1, 2009. The adoption of FSP 140-3 had no impact on the Company’s financial position,results of operations or cash flows.

 

In March 2008, the FASB issued SFAS No. 161, “Disclosuresabout Derivative Instruments and Hedging Activities,” (“SFAS 161”).  SFAS 161 requires enhanced disclosures aboutan entity’s derivative and hedging activities, thereby improving thetransparency of financial reporting.  Itis intended to enhance the current disclosure framework in SFAS 133 byrequiring that objectives for using derivative instruments be disclosed interms of underlying risk and accounting designation. This disclosure isintended to convey the purpose of derivative use in terms of the risks that theentity is intending to manage.  SFAS 161was effective for the Company on January 1, 2009 and will result inadditional disclosures if the Company enters into any material derivative orhedging activities.

 

In April 2008, the FASB issued FASB StaffPosition No. 142-3, “Determination of the Useful Life of IntangibleAssets,” (“FSP 142-3”).  This FSP amendsthe factors that should be considered in developing renewal or extensionassumptions used to determine the useful life of a recognized intangible assetunder SFAS No. 142, “Goodwill andOther Intangible Assets,” (“SFAS 142”). The intent of this FSP is to improve the consistency between the usefullife of a recognized intangible asset under SFAS 142 and the period of expectedcash flows used to measure the fair value of the asset under SFAS 141(R) andother U.S. generally accepted accounting principles.  This FSP was effective for the Company on January 1,2009 and had no material impact on the Company’s financial position, results ofoperations or cash flows.

 

InMay, 2008, the FASB issued SFAS No. 162, “The Hierarchy of GenerallyAccepted Accounting Principles,” (“SFAS 162”). SFAS 162 identifies the sources of accounting principles and theframework for selecting the principles used in the preparation of financialstatements of nongovernmental entities that are presented in conformity withgenerally accepted accounting principles (GAAP) in the United States (the GAAPhierarchy).  SFAS 162 is effective November 15,2008.  The FASB has stated that it doesnot expect SFAS 162 will result in a change in current practice. Theapplication of SFAS 162 had no effect on the Company’s financial position,results of operations or cash flows.

 

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**CONGAREE BANCSHARES, INC. AND SUBSIDIARY**

 

### **NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES***- continued*

 

**Recently Issued Accounting Standards***(continued)* - The FASB issued FASB Staff Position No. APB 14-1, “Accounting forConvertible Debt Instruments That May Be Settled in Cash upon Conversion(Including Partial Cash Settlement),” (“FSP APB 14-1”). The Staff Positionspecifies that issuers of convertible debt instruments that may be settled incash upon conversion should separately account for the liability and equitycomponents in a manner that will reflect the entity’s nonconvertible debtborrowing rate when interest cost is recognized in subsequent periods.  FSP APB 14-1 provides guidance for initialand subsequent measurement as well as derecognition provisions.  The Staff Position was effective as of January 1,2009 and had no material effect on the Company’s financial position, results ofoperations or cash flows.

 

In June, 2008, the FASB issued FASB StaffPosition No. EITF 03-6-1, “Determining Whether Instruments Granted inShare-Based Payment Transactions are Participating Securities,” (“FSP EITF 03-6-1”).  The Staff Position provides that unvested share-based payment awards thatcontain nonforfeitable rights to dividends or dividend equivalents areparticipating securities and must be included in the earnings per sharecomputation.  FSP EITF 03-6-1 waseffective January 1, 2009 and had no effect on the Company’s financialposition, results of operations, earnings per share or cash flows.

 

FSP SFAS 133-1 and FIN 45-4, “Disclosures aboutCredit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133and FASB Interpretation No. 45; and Clarification of the Effective Date ofFASB Statement No. 161,” (“FSP SFAS 133-1 and FIN 45-4”) was issued September 2008,effective for reporting periods (annual or interim) ending after November 15,2008.  FSP SFAS 133-1 and FIN 45-4 amendsSFAS 133 to require the seller ofcredit derivatives to disclose the nature of the credit derivative, the maximumpotential amount of future payments, fair value of the derivative, and thenature of any recourse provisions. Disclosures must be made for entire hybrid instruments that haveembedded credit derivatives.

 

The Staff Position also amends FASBInterpretation No. (“FIN”) 45 to require disclosure of the current statusof the payment/performance risk of the credit derivative guarantee.  If an entity utilizes internal groupings as abasis for the risk, how the groupings are determined must be disclosed as wellas how the risk is managed.

 

The Staff Position encourages that theamendments be applied in periods earlier than the effective date to facilitatecomparisons at initial adoption.  Afterinitial adoption, comparative disclosures are required only for subsequentperiods.

 

FSP SFAS 133-1 and FIN 45-4 clarifies theeffective date of SFAS 161 such that required disclosures should be providedfor any reporting period (annual or quarterly interim) beginning after November 15,2008.  The adoption of thisStaff Position had no material effect on the Company’s financial position,results of operations or cash flows.

 

The SEC’s Office of the Chief Accountant and the staff of the FASBissued press release 2008-234 on September 30, 2008 (“Press Release”) toprovide clarifications on fair value accounting.  The Press Release includes guidance on theuse of management’s internal assumptions and the use of “market” quotes.  It also reiterates the factors in SEC StaffAccounting Bulletin (“SAB”) Topic 5M which should be considered whendetermining other-than-temporary impairment: the length of time and extent towhich the market value has been less than cost; financial condition andnear-term prospects of the issuer; and the intent and ability of the holder toretain its investment for a period of time sufficient to allow for anyanticipated recovery in market value.

 

On October 10, 2008, the FASB issued FSP SFAS 157-3, “Determiningthe Fair Value of a Financial Asset When the Market for That Asset Is NotActive” (“FSP SFAS 157-3”). This FSP clarifies the application of SFAS No. 157,“Fair Value Measurements” (see Note 20) in a market that is not active andprovides an example to illustrate key considerations in determining the fairvalue of a financial asset when the market for that asset is not active.  The FSP is effective upon issuance, includingprior periods for which financial statements have not been issued. For theCompany, this FSP was effective for the quarter ended September 30, 2008.

 

The Company considered the guidance in the Press Release and in FSPSFAS 157-3 when conducting its review for other-than-temporary impairment as ofDecember 31, 2008 as discussed in Note 3.

 

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**CONGAREE BANCSHARES, INC. AND SUBSIDIARY**

 

**NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES*-****continued*

* *

**Recently Issued Accounting Standards***(continued)* - FSP SFAS 140-4 and FIN 46(R)-8, “Disclosuresby Public Entities (Enterprises) about Transfers of Financial Assets andInterests in Variable Interest Entities,” (“FSP SFAS 140-4 and FIN 46(R)-8”)was issued in December 2008 to require public entities to discloseadditional information about transfers of financial assets and to requirepublic enterprises to provide additional disclosures about their involvementwith variable interest entities.  The FSPalso requires certain disclosures for public enterprises that are sponsors andservicers of qualifying special purpose entities.  The FSP is effective for the first reportingperiod ending after December 15, 2008. This FSP had no material impact on the financial position of theCompany.

 

Other accounting standards that have been issued or proposed by theFASB or other standards-setting bodies are not expected to have a materialimpact on the Company’s financial position, results of operations or cashflows.

 

**Risks and Uncertainties** - In the normalcourse of its business, the Company encounters two significant types of risks:economic and regulatory.  There are threemain components of economic risk: interest rate risk, credit risk and market risk.  The Company is subject to interest rate riskto the degree that its interest-bearing liabilities mature or reprice atdifferent speeds, or on different basis, than its interest-earning assets.  Credit risk is the risk of default on theCompany’s loan portfolio that results from borrower’s inability or unwillingnessto make contractually required payments. Market risk reflects changes in the value of collateral underlying loansreceivable 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 changesignificantly from period to period.  TheCompany also undergoes periodic examinations by the regulatory agencies, whichmay subject it to further changes with respect to asset valuations, amounts ofrequired loss allowances and operating restrictions from the regulators’judgments based on information available to them at the time of theirexamination.

 

**Reclassifications** - Certain captions andamounts in the 2007 consolidated financial statements were reclassified toconform with the 2008 presentation.

 

**NOTE 2 - CASH AND DUE FROM BANKS**

** **

The Company is required to maintain cash balances with itscorrespondent banks to cover all cash letter transactions.  At December 31, 2008 and 2007, therequirement was met by the cash balance in the vault.

 

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**CONGAREE BANCSHARES, INC. AND SUBSIDIARY**

 

**NOTE 3 - SECURITIES AVAILABLE-FOR-SALE**

** **

The amortized cost and estimated fair values of securities availablefor sale were:

 
| ** **                       | ** ** | ** ** | ** **     | **Gross Unrealized** | ** ** | **Estimated** | ** ** |
|----------------------------------|------------|------------|----------------|---------------------------|------------|---------------|------------|
| ** **                       | ** ** | **Costs**  | ** **     | **Gains**                 | ** ** | **Losses**    | ** ** | **Fair  Value** | ** ** |
| **December 31, 2008**       | ** ** | ** ** | ** **     | ** **                | ** ** | ** **    | ** ** | ** ** | ** ** |
| Government sponsored enterprises |       | $          | 7,017,105      |                      | $          | 121,566       |       | $ | 4,226 |   | $ | 7,134,445 |   |
| Mortgage-backed securities       |       | 6,489,572  |           | 220,921                   |       | 1,720         |       | 6,708,773 |   |
| ** **                       | ** ** | **$**      | **13,506,677** | ** **                | **$**      | **342,487**   | ** ** | **$** | **5,946** | ** ** | **$** | **13,843,218** | ** ** |
| **December 31, 2007**       | ** ** | ** ** | ** **     | ** **                | ** ** | ** **    | ** ** | ** ** | ** ** |
| Government sponsored enterprises |       | $          | 6,788,421      |                      | $          | 99,821        |       | $ | — |   | $ | 6,888,242 |   |
| Mortgage-backed securities       |       | 7,913,338  |           | 40,813                    |       | 8,961         |       | 7,945,190 |   |
| ** **                       | ** ** | **$**      | **14,701,759** | ** **                | **$**      | **140,634**   | ** ** | **$** | **8,961** | ** ** | **$** | **14,833,432** |   |

 

Proceeds from sales of available-for-sale securities during 2008 were$2,244,612.  Gross gains of $71,599 wererecognized on those sales.  There were nosales of available-for-sale securities during 2007.  The amortized costs and fair values ofinvestment securities at December 31, 2008, by contractual maturity, areshown in the following chart.  Expectedmaturities may differ from contractual maturities because borrowers may havethe right to call or prepay obligations with or without call or prepaymentpenalties.

 
| ** **                       | ** ** | **Amortized** | ** **     | ** **          | ** ** |
|----------------------------------|------------|---------------|----------------|---------------------|------------|
| ** **                       | ** ** | **Cost**      | ** **     | **Fair Value** | ** ** |
| ** **                       | ** ** | ** **    | ** **     | ** **          | ** ** |
| Due within one year              |       | $             | —         |                | $          | — |   |
| Due after one through five years |       | 1,240,775     |           | 1,270,151           |       |
| Due after five through ten years |       | 5,008,084     |           | 5,081,447           |       |
| Due after ten years              |       | 768,246       |           | 782,847             |       |
|                             |       | 7,017,105     |           | 7,134,445           |       |
| Mortgage-backed securities       |       | 6,489,572     |           | 6,708,773           |       |
| Total securities                 | ** ** | **$**         | **13,506,677** | ** **          | **$**      | **13,843,218** | ** ** |

 

The following table shows gross unrealizedlosses and fair value, aggregated by investment category, and length of timethat individual securities have been in a continuous unrealized loss position,at December 31, 2008.

 
| ** **                       | ** ** | **Less than 12 months** | ** **    | **12 months or more** | ** ** | **Total** | ** ** |
|----------------------------------|------------|----------------------------------------|---------------|--------------------------------------|------------|-----------|------------|
| ** **                       | ** ** | **Fair**                               | ** **    | **Unrealized**                       | ** ** | **Fair**  | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** |
| ** **                       | ** ** | **Value**                              | ** **    | **Losses**                           | ** ** | **Value** | ** ** | **Losses** | ** ** | **Value** | ** ** | **Losses** | ** ** |
| Government sponsored enterprises |       | $                                      | 930,504       |                                 | $          | 4,226     |       | $ | — |   | $ | — |   | $ | 930,504 |   | 4,226 |   |
| Mortgage-backed securities       |       | 646,496                                |          | 1,720                                |       | —    |       | — |   | 646,496 |   | 1,720 |   |
| ** **                       | ** ** | **$**                                  | **1,577,000** | ** **                           | **$**      | **5,946** | ** ** | **$** | ** ** | ** ** | **$** | ** ** | ** ** | **$** | **1,577,000** | ** ** | **$** | **5,946** | ** ** |
|                                  |            |                                        |               |                                      |            |           |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

The following table shows gross unrealizedlosses and fair value, aggregated by investment category, and length of timethat individual securities have been in a continuous unrealized loss position,at December 31, 2007.

 
| ** **                       | ** ** | **Less than 12 months** | ** **    | **12 months or more** | ** ** | **Total** | ** ** |
|----------------------------------|------------|----------------------------------------|---------------|--------------------------------------|------------|-----------|------------|
| ** **                       | ** ** | **Fair**                               | ** **    | **Unrealized**                       | ** ** | **Fair**  | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** |
| ** **                       | ** ** | **Value**                              | ** **    | **Losses**                           | ** ** | **Value** | ** ** | **Losses** | ** ** | **Value** | ** ** | **Losses** | ** ** |
| Government sponsored enterprises |       | $                                      | —        |                                 | $          | —    |       | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Mortgage-backed securities       |       | 3,768,784                              |          | 8,961                                |       | —    |       | — |   | 3,768,784 |   | 8,961 |   |
| ** **                       | ** ** | **$**                                  | **3,768,784** | ** **                           | **$**      | **8,961** | ** ** | **$** | **—** | ** ** | **$** | **—** | ** ** | **$** | **3,768,784** | ** ** | **$** | **8,961** | ** ** |

 

57

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**CONGAREE BANCSHARES, INC. AND SUBSIDIARY**

 

**NOTE 3 - INVESTMENT SECURITIES**- *continued*

 

Securities classified as available-for-sale are recorded at fair marketvalue.  There were no securities in acontinuous loss position for more than twelve months at December 31, 2008or 2007.

 

Management evaluates securities for other-than-temporary impairment atleast on a quarterly basis, and more frequently when economic or marketconcerns warrant such evaluation. Consideration is given to (1) the length of time and the extent towhich the fair value has been less than cost, (2) the financial conditionand near-term prospects of the issuer, and (3) the intent and ability ofthe Company to retain its investment in the issuer for a period of timesufficient to allow for any anticipated recovery in fair value.

 

In analyzing an issuer’s financial condition, management considers whetherthe securities are issued by the federal government or its agencies, whetherdowngrades by bond rating agencies have occurred, and industry analysts’reports. As management has the ability to hold debt securities until maturity,or for the foreseeable future if classified as available for sale, no declinesare deemed to be other than temporary.

 

At December 31, 2008, securities with an amortized cost of$6,584,134 and an estimated fair value of $6,753,584 were pledged to securepublic deposits and to secure the borrowings as required by law from the FHLB.

 

**NOTE 4 - LOANS RECEIVABLE**

** **

Major classifications of loans receivable at December 31 aresummarized as follows:

 
| ** **                 | ** ** | **2008**   | ** **      | **2007**   | ** ** |
|----------------------------|------------|------------|-----------------|------------|------------|
| Real estate - mortgage     |       | $          | 75,599,845      |       | $          | 37,934,192 |   |
| Real estate - construction |       | 17,150,969 |            | 8,188,004  |       |
| Commercial and industrial  |       | 11,870,971 |            | 7,505,415  |       |
| Consumer and other         |       | 2,925,871  |            | 1,661,293  |       |
| Total gross loans          | ** ** | **$**      | **107,547,656** | ** ** | **$**      | **55,288,904** | ** ** |

 

Transactions in the allowance for loan losses during 2008 and 2007 are summarizedbelow:

 
| ** **                      | ** ** | **2008**  | ** **    | **2007**   | ** ** |
|---------------------------------|------------|-----------|---------------|------------|------------|
| Balance, beginning of year      |       | $         | 552,600       |       | $          | 50,000 |   |
| Provision charged to operations |       | 1,391,090 |          | 502,600    |       |
| Loans charged-off               |       | (254,850  | )             | —     |       |
| Balance, end of year            | ** ** | **$**     | **1,688,840** | ** ** | **$**      | **552,600** | ** ** |

 

At December 31, 2008 nonaccrual loans totaled $294,596.  There were no loans past due 90 days or moreas to principal or interest and still accruing interest at December 31,2008.  There were no nonaccrual orimpaired loans at December 31, 2007, and no accruing loans which werecontractually past due 90 days or more as to principal or interest payments. AtDecember 31, 2008 impaired loans totaled $421,542.  Every impaired loan had a specified reservewith the total reserve for impaired loans at December 31, 2008 totaling$310,804.  The average recordedinvestment in impaired loans was $121,195 for the year ended December 31,2008.  Generally, a loan will be placedon nonaccrual status when it becomes 90 days past due as to principal orinterest, or when management believes, after considering economic and businessconditions and collection efforts, that the borrower’s financial condition issuch that collection of the loan is doubtful. A payment of interest on a loanthat is classified as nonaccrual will be recognized as income when received.

 

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**CONGAREE BANCSHARES, INC. AND SUBSIDIARY**

 

**NOTE 5 - PREMISES, FURNITURE AND EQUIPMENT**

** **

Premises, furniture and equipment consisted of the following:

 
| ** **                             | ** ** | **December 31,** | ** **    |
|----------------------------------------|------------|-----------------------|---------------|
| ** **                             | ** ** | **2008**              | ** **    | **2007** | ** ** |
| Land                                   |       | $                     | 1,015,000     |   | $ | 1,090,000 |   |
| Building and improvements              |       | 1,860,994             |          | 1,633,383 |   |
| Furniture and equipment                |       | 1,101,286             |          | 938,650 |   |
| Automobiles                            |       | 138,982               |          | 138,982 |   |
| Construction in progress               |       | —                |          | 430,097 |   |
|                                   |       |                  |          |   |   |
| Total                                  |       | 4,116,262             |          | 4,231,112 |   |
|                                   |       |                  |          |   |   |
| Less, accumulated depreciation         |       | 449,163               |          | 195,181 |   |
|                                   | ** ** | ** **            | ** **    | ** ** | ** ** |
| Premises, furniture and equipment, net | ** ** | **$**                 | **3,667,099** | ** ** | **$** | **4,035,931** | ** ** |

 

### **Depreciation and amortization expense for the years ended December 31,2008 and 2007 amounted to $271,210 and $180,726, respectively.**

###  

### **NOTE 6 - DEPOSITS**

### ** **

At December 31, 2008, the scheduled maturities of certificates ofdeposit were as follows:

 
| ** ** | **Maturing In:** | ** ** | ** ** | ** ** | **Amount** | ** **     |
|------------|-----------------------|------------|------------|------------|------------|----------------|
|       | 2009                  |       |       |       | $          | 72,744,765     | ** ** |
|       | 2010                  |       |       |       | 4,116,664  | ** **     |
|       | 2011                  |       |       |       | 1,096,134  | ** **     |
|       | 2012                  |       |       |       | 99,000     | ** **     |
|       | 2013                  |       |       |       | 22,659     | ** **     |
|       |                  | ** ** | ** ** |       | ** ** | ** **     |
|       | Total                 | ** ** | ** ** |       | **$**      | **78,079,222** | ** ** |

 

**NOTE 7 - FHLB ADVANCES**

** **

Advances outstanding at December 31, 2008 consisted of:

 
| ** **         | ** ** | ** **       | ** ** | ** **             | ** ** | **Outstanding** | ** ** |
|--------------------|------------|------------------|------------|------------------------|------------|-----------------|------------|
| **Interest Basis** | ** ** | **Current Rate** | ** ** | **Maturity**           | ** ** | **Balance**     | ** ** |
|               |       |             |       |                   |       |            |       |
| Fixed              |       | 2.62             | %          | February 25, 2013 |       | $               | 3,000,000  |   |
|                    |            |                  |            |                        |            |                 |            |  |

 

There were no advances outstanding at December 31, 2007.

 

**NOTE 8 - SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE**

 

The Bank entered into sales of securities under agreements torepurchase.  These obligations torepurchase securities sold are reflected as liabilities in the consolidatedbalance sheets.  The dollar amounts ofsecurities underlying the agreements are book entry securities.  Government-sponsored enterprises andmortgage-backed securities with a book value of $3,215,849 and a fair value of$3,171,758 at December 31, 2007 are used as collateral for theagreements.  There were no securitiessold under repurchase agreements at December 31, 2008.

 

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**CONGAREE BANCSHARES, INC. AND SUBSIDIARY**

** **

**NOTE 9 - STOCK COMPENSATION PLAN**

** **

Under the terms of employment agreements with the Chief ExecutiveOfficer (CEO) and President, Chief Business Development Officer and ChiefFinancial Officer (CFO), stock options were granted to each as part of theircompensation and benefits package.  Underthese agreements, the CEO and President was granted 79,399 stock options, theChief Business Development Officer 61,755 options and the CFO 44,110options.  These options vest over fiveyears. The options have an exercise price of $10.00 per share and terminate tenyears after the date of grant.

 

The Company also established the 2007 Stock Incentive Plan (the Plan)which provides for the granting of options to employees of the Company.  The Company granted 1,000 options during2008.  These options vest over threeyears.  The options have an exerciseprice of $10.00 per share and terminate ten years after the grant date.

 

The Company recognized $168,913 and $153,389 of stock-based employeecompensation expense during 2008 and 2007, respectively, associated with itsstock option grants.  The Company isrecognizing the compensation expense for stock option grants with gradedvesting schedules on a straight-line basis over the requisite service period ofthe award as permitted by SFAS No. 123(R). As of December 31, 2008, there was $433,279 of unrecognizedcompensation cost related to stock option grants.  The cost is expected to be recognized over aweighted average period of 1.90 years.

 

The weighted average grant-date fair value of each option grantedduring 2008 was $3.97.  The fair valuefor each option is estimated on the date of grant using the Black-ScholesModel.  The following weighted averageassumptions were used for grants:

 
| ** **              | ** ** | **2008** | ** ** | **2007**     | ** ** |
|-------------------------|------------|----------|------------|--------------|------------|
| Dividend yield          |       | 0.00     | %          | 0.00         | %          |
| Expected volatility     |       | 30.00    | %          | 17.89        | %          |
| Risk-free interest rate |       | 3.65     | %          | 3.53% - 4.93 | %          |
| Expected term           |       | 7 years  |       | 7 years      |       |

 

A summary of the activity under the stock option plan for the yearended December 31, 2008 follows:

 
| ** **                           | ** ** | ** **  | ** ** | **Weighted** | ** ** |
|--------------------------------------|------------|-------------|------------|--------------|------------|
| ** **                           | ** ** | ** **  | ** ** | **Average**  | ** ** |
| ** **                           | ** ** | ** **  | ** ** | **Exercise** | ** ** |
| ** **                           | ** ** | **Shares**  | ** ** | **Price**    | ** ** |
| Outstanding, beginning of the period |       | 231,636     |       | $            | 10.00      |   |
| Granted during the period            |       | 1,000       |       | 10.00        |       |
| Exercised during the period          |       | —      |       | —       |       |
| Forfeited during the period          |       | (7,000      | )          | 10.00        |       |
|                                 | ** ** | ** **  | ** ** | ** **   | ** ** |
| Outstanding, end of the period       | ** ** | **225,636** | ** ** | **$**        | **10.00**  | ** ** |
|                                 | ** ** | ** **  | ** ** | ** **   | ** ** |
| Options exercisable at year end      | ** ** | **86,980**  | ** ** | **$**        | **10.00**  | ** ** |

 

The weighted average contractual life of the options outstanding as of December 31,2008 is 7.91 years.  There was noaggregate intrinsic value of options outstanding or exercisable at December 31,2008 and 2007.  The total fair value ofshares vested during the years ended December 31, 2008 and 2007 was$165,255 and $124,128, respectively.

 

A summary of the status of the Company’s nonvested shares as of December 31,2008 is presented below:

 
|                                | ** ** | ** **  | ** ** | **Weighted**   | ** ** |
|-------------------------------------|------------|-------------|------------|----------------|------------|
|                                | ** ** | ** **  | ** ** | **Average**    | ** ** |
|                                | ** ** | ** **  | ** ** | **Grant Date** | ** ** |
|                                | ** ** | **Shares**  | ** ** | **Fair Value** | ** ** |
| Nonvested at January 1, 2008   |       | 194,583     |       | $              | 3.34       |   |
| Granted                             |       | 1,000       |       | 3.97           |       |
| Forfeited                           |       | (7,000      | )          | 3.32           |       |
| Vested                              |       | (49,926     | )          | 3.31           |       |
|                                | ** ** | ** **  | ** ** | ** **     | ** ** | ** ** |
| Nonvested at December 31, 2008 | ** ** | **138,657** | ** ** | **$**          | **3.32**   | ** ** |
|                                     |            |             |            |                |            |  |  |

 

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**CONGAREE BANCSHARES, INC. AND SUBSIDIARY**

 

**NOTE 10 - STOCK WARRANTS**

** **

The organizers of the Company received stock warrants giving them theright to purchase one share of common stock for every share they purchased inthe initial offering of the Company’s common stock up to 10,000 shares at aprice of $10 per share.  The warrantsvest over three years and expire on October 16, 2016.  Warrants held by directors of the Companywill expire 90 days after the director ceases to be a director or officer ofthe Bank (365 days if due to death or disability).

 

At December 31, 2008 and 2007, 86,667 and 43,333 of the warrantswere exercisable.

 

In calculating the expense for warrants, the fair value of warrants isestimated as of the grant date using the Black-Scholes option pricing modelwith the following weighted-average assumptions: dividend yield of 0 percentbased on the Company’s expectation of dividend payouts; expected volatility of9.77 percent based on peer group data; risk-free interest rate of 4.76 percentbased on the grant date and expected term of the options and expected life of 3years based on factors such as the vesting period and the option’s contractualterm.  Total compensation expense relatedto warrants was $126,125 for the years ended December 31, 2008 and 2007,respectively.

 

**NOTE 11 - INCOME TAXES**

** **

Income tax expense is summarized as follows:

 
| ** **            | ** ** | **Years ended December 31,** | ** ** |
|-----------------------|------------|---------------------------------------------|------------|
| ** **            | ** ** | **2008**                                    | ** ** | **2007** | ** ** |
| Current portion       | ** ** | ** **                                  | ** ** | ** ** | ** ** |
| Federal               |       | $                                           | —     |   | $ | — |   |
| State                 |       | —                                      |       | (469 | ) |
|                  |       |                                        |       |   |   |
| Total current         |       | —                                      |       | (469 | ) |
|                  |       |                                        |       |   |   |
| Deferred income taxes |       | —                                      |       | 414,731 |   |
|                  | ** ** | ** **                                  | ** ** | ** ** | ** ** |
| Income tax benefit    | ** ** | **$**                                       | **—** | ** ** | **$** | **(414,262** | **)** |

 

The gross amounts of deferred tax assets and deferred tax liabilitiesare as follows:

 
| ** **                                        | ** ** | **Years ended December 31,** | ** **   |
|---------------------------------------------------|------------|---------------------------------------------|--------------|
| ** **                                        | ** ** | **2008**                                    | ** **   | **2007** | ** ** |
| Deferred tax assets:                              |       |                                        |         |   |   |
| Allowance for loan losses                         |       | $                                           | 465,729      |   | $ | 119,873 |   |
| Net operating loss carryforward                   |       | 1,827,447                                   |         | 1,081,789 |   |
| Organization and start-up costs                   |       | 251,718                                     |         | 271,794 |   |
| Other                                             |       | 76,151                                      |         | 35,503 |   |
|                                              |       |                                        |         |   |   |
| Deferred tax assets                               |       | 2,621,045                                   |         | 1,508,959 |   |
|                                              |       |                                        |         |   |   |
| Valuation allowance                               |       | (2,425,623                                  | )            | (1,396,970 | ) |
|                                              |       |                                        |         |   |   |
| Net deferred tax assets                           |       | 195,422                                     |         | 111,989 |   |
|                                              |       |                                        |         |   |   |
| Deferred tax liabilities:                         |       |                                        |         |   |   |
| Unrealized gain on securities available for  sale |       | 114,426                                     |         | 44,851 |   |
| Accumulated depreciation                          |       | 81,867                                      |         | 24,695 |   |
| Prepaid expenses                                  |       | 37,720                                      |         | 38,611 |   |
| Loan origination costs                            |       | 75,835                                      |         | 48,683 |   |
|                                              |       |                                        |         |   |   |
| Total deferred tax liabilities                    |       | 309,848                                     |         | 156,840 |   |
|                                              |       | ** **                                  | ** **   | ** ** | ** ** |
| Net deferred tax asset (liability)                |       | **$**                                       | **(114,426** | **)** | **$** | **(44,851** | **)** |

 

Deferred tax assetsrepresent the future tax benefit of deductible differences and, if it is morelikely than not that a tax asset will not be realized, a valuation allowance isrequired to reduce the recorded deferred tax assets to net realizablevalue.  As of December 31, 2008, inconsideration of the lack of an established earnings history, management hasprovided a valuation allowance of 100% to reflect its net realizable value.

 

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**CONGAREE BANCSHARES, INC. AND SUBSIDIARY**

** **

**NOTE 11 - INCOME TAXES**- *continued*

 

The Company has a netoperating loss for income tax purposes of $5,329,224 and $3,157,618 as of December 31,2008 and 2007, respectively.  This netoperating loss begins to expire in the year 2026.

 

A reconciliation of theincome tax provision and the amount computed by applying the federal statutoryrate of 34% to income before income taxes follows:

 
| ** **                                     | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|------------------------------------------------|------------|------------|------------|------------|------------|
|  Tax expense (benefit) at statutory  rate |       | $          | (1,122,999 | )          | $          | (1,045,075 | ) |
|  Stock compensation expense               |       | 100,313    |       | 95,035     |       |
|  Change in valuation allowance            |       | 1,028,653  |       | 1,396,970  |       |
|  Other                                    |       | (5,967     | )          | (32,668    | )          |
|                                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income tax expense                             | ** ** | **$**      | **—** | ** ** | **$**      | **414,262** | ** ** |

 

The Company had analyzed thetax positions taken or expected to be taken in its tax returns and concluded ithas no liability related to uncertain tax positions in accordance with FIN 48.

 

### **NOTE 12 - RELATED PARTY TRANSACTIONS**

### ** **

Certain parties(principally certain directors and executive officers of the Company, theirimmediate families and business interests) were loan customers of and had othertransactions in the normal course of business with the Company.  Related party loans are made on substantiallythe same terms, including interest rates and collateral, as those prevailing atthe time for comparable transactions with unrelated persons and do not involvemore than the normal risk of collectibility. The following table summarizes the Bank’s related party loan activityfor the years ended December 31, 2008 and 2007:

 
| ** **                | ** ** | **2008**   | ** **    | **2007**   | ** ** |
|---------------------------|------------|------------|---------------|------------|------------|
| Balance, January 1   |       | $          | 3,030,076     |       | $          | — |   |
| Disbursements             |       | (1,015,178 | )             | 3,342,670  |       |
| Repayments                |       | 1,196,313  |          | (312,594   | )          |
|                      | ** ** | ** ** | ** **    | ** ** | ** ** |
| Balance, December 31 | ** ** | **$**      | **3,211,211** | ** ** | **$**      | **3,030,076** | ** ** |

 

Deposits by directors,including their affiliates and executive officers, at December 31, 2008and 2007 were approximately $2,054,031 and $5,124,428, respectively.

 

On December 31,2008, the Company sold land and a building for $500,000 to an LLC in which onedirector of the Company is a member.  TheCompany concurrently entered into an agreement to lease the property back for afifteen year initial term with the option of two consecutive renewal terms offive years each.  The lease payments duefor 2009 total $50,000 and will increase by two percent each year thereafter.

 

### **NOTE 13 - LEASES**

### ** **

The Company has entered into an agreement to lease an office facilityunder a noncancellable operating lease agreement expiring in 2023.  The Company may, at its option, extend thelease of its office facility at 2023 Sunset Boulevard in West Columbia, SouthCarolina, for two additional five year periods. The Company also entered into a lease agreement for an office located onDevine Street for a thirty-six month period. As described in Note 12, the Company entered into a sale leaseback for afifteen year initial term with the option of three consecutive renewal terms offive years each. Minimum rental commitments as of December 31, 2008 are asfollows:

 
| 2009       | ** ** | $          |  182,457 | ** ** |
|------------|------------|------------|---------------|------------|
| 2010       | ** ** | 179,960    | ** **    |
| 2011       | ** ** | 164,568    | ** **    |
| 2012       | ** ** | 167,859    | ** **    |
| 2013       | ** ** | 171,212    | ** **    |
| Thereafter | ** ** | 1,698,786  | ** **    |
|       | ** ** | ** ** | ** **    |
| Total      | ** ** | **$**      | **2,564,842** | ** ** |

** **

The leases have various renewal options andrequire increased rentals under cost of living escalation clauses.  Rental expenses charged to occupancy andequipment expense in 2008 and 2007 were $134,840 and $55,938, respectively.

 

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**CONGAREE BANCSHARES, INC. AND SUBSIDIARY**

** **

**NOTE 14 - COMMITMENTS AND CONTINGENCIES**

 

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

 

**NOTE 15 - LOSS PER SHARE**

** **

Basic loss per share iscomputed by dividing net income (loss) by the weighted-average number of commonshares outstanding.  Diluted loss pershare is computed by dividing net income (loss) by the weighted-average numberof common shares outstanding and dilutive common share equivalents using thetreasury stock method.  There were nodilutive common share equivalents outstanding during 2008 and 2007 due to thenet loss; therefore, basic loss per share and diluted loss per share were thesame.

 
| ** **                                  | ** ** | **2008**   | ** **     | **2007**   | ** ** |
|---------------------------------------------|------------|------------|----------------|------------|------------|
| **Net loss per share - basic computation:** | ** ** | ** ** | ** **     | ** ** | ** ** |
|                                        | ** ** | ** ** | ** **     | ** ** | ** ** |
| Net loss to common shareholders             | ** ** | **$**      | **(3,302,939** | **)**      | **$**      | **(3,488,013** | **)** |
|                                        | ** ** | ** ** | ** **     | ** ** | ** ** |
| Average common shares outstanding - basic   | ** ** | **$**      | **1,764,439**  | ** ** | **$**      | **1,764,439** | ** ** |
|                                        | ** ** | ** ** | ** **     | ** ** | ** ** |
| Basic loss per share                        | ** ** | **$**      | **(1.87**      | **)**      | **$**      | **(1.98** | **)** |

 

### **NOTE 16 - REGULATORY MATTERS**

### ** **

The Bank is subject to various regulatory capital requirementsadministered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certainmandatory, and possibly additional discretionary actions by regulators that, ifundertaken, could have a direct adverse material effect on the Bank’s financialstatements.  Under capital adequacyguidelines and the regulatory framework for prompt corrective action, the Bankmust meet specific capital guidelines that involve quantitative measures of theBank’s assets, liabilities, and certain off-balance-sheet items as calculatedunder regulatory accounting practices.  TheBank’s capital amounts and classification are also subject to qualitativejudgments by the regulators about components, risk weightings, and otherfactors.

 

Quantitative measuresestablished by regulation to ensure capital adequacy require the Bank to maintainminimum ratios of Tier 1 and total capital as a percentage of assets andoff-balance-sheet exposures, adjusted for risk weights ranging from 0% to100%.  Tier 1 capital consists of commonshareholders’ equity, excluding the unrealized gain or loss on securitiesavailable-for-sale, minus certain intangible assets.  Tier 2 capital consists of the allowance forloan losses subject to certain limitations. Total capital for purposes of computing the capital ratios consists ofthe sum of Tier 1 and Tier 2 capital. The regulatory minimum requirements are 4% for Tier 1 and 8% for totalrisk-based capital.

 

The Bank is also required to maintain capital at a minimum level basedon total assets, which is known as the leverage ratio.  Only the strongest banks are allowed tomaintain capital at the minimum requirement of 3%.  All others are subject to maintaining ratios1% to 2% above the minimum.

 

As of December 31,2008, management believes it is categorized as adequately-capitalized under theregulatory framework for prompt corrective action.  There are no conditions or events thatmanagement believes have changed the Bank’s category.

 

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**CONGAREE BANCSHARES,INC. AND SUBSIDIARY**

** **

**NOTE 16 - REGULATORY MATTERS-***continued*

 

The following tablesummarizes the capital amounts and ratios of the Bank and the regulatoryminimum requirements at December 31:

 
| ** **                               | ** ** | ** ** | ** ** | ** **            | ** ** | ** **            | ** ** | ** **                 | ** ** | **To Be Well-**  | ** ** |
|------------------------------------------|------------|------------|------------|-----------------------|------------|-----------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                               | ** ** | ** ** | ** ** | ** **            | ** ** | ** **            | ** ** | ** **                 | ** ** | **Capitalized Under** | ** ** |
| ** **                               | ** ** | ** ** | ** ** | ** **            | ** ** | **For Capital**  | ** ** | **Prompt Corrective** | ** ** |
| ** **                               | ** ** | **Actual** | ** ** | **Adequacy Purposes** | ** ** | **Action Provisions** | ** ** |
| **(Dollars in thousands)**               | ** ** | **Amount** | ** ** | **Ratio**             | ** ** | **Amount**            | ** ** | **Ratio**                  | ** ** | **Amount**                 | ** ** | **Ratio** | ** ** |
| **December 31, 2008**               | ** ** | ** ** | ** ** | ** **            | ** ** | ** **            | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Total capital (to risk-weighted assets)  |       | $          | 8,878      |                  | 8.37       | %                     | $          | 8,485                      |       | 8.00                       | %          | $ | 10,607 |   | 10.00 | % |
| Tier 1 capital (to risk-weighted assets) |       | 7,548      |       | 7.12                  | %          | 4,240                 |       | 4.00                       | %          | 6,361                      |       | 6.00 | % |
| Tier 1 capital (to average assets)       |       | 7,548      |       | 5.95                  | %          | 5,074                 |       | 4.00                       | %          | 6,343                      |       | 5.00 | % |
| ** **                               | ** ** | ** ** | ** ** | ** **            | ** ** | ** **            | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** ** | ** ** |
| **December 31, 2007**               | ** ** | ** ** | ** ** | ** **            | ** ** | ** **            | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Total capital (to risk-weighted assets)  |       | $          | 10,225     |                  | 15.74      | %                     | $          | 4,192                      |       | 8.00                       | %          | $ | 5,240 |   | 10.00 | % |
| Tier 1 capital (to risk-weighted assets) |       | 9,672      |       | 14.89                 | %          | 2,096                 |       | 4.00                       | %          | 3,144                      |       | 6.00 | % |
| Tier 1 capital (to average assets)       |       | 9,672      |       | 14.38                 | %          | 2,690                 |       | 4.00                       | %          | 3,362                      |       | 5.00 | % |

 

As discussed in Note 22, on January 9, 2008, the Company received$3,285,000 in funds from the Capital Purchase Program subsequent to December 31,2008.  The Company invested $3,000,000 inthe Bank which bolstered the Bank’s capital ratios.  The Bank is considered to be well capitalizedsubsequent to this transaction.

 

**NOTE 17 - UNUSED LINES OF CREDIT**

** **

Asof December 31, 2008, the Company had unused lines of credit to purchasefederal funds from unrelated banks totaling $ 9,300,000.  These lines of credit are available on a oneto thirty day basis for general corporate purposes.  As of December 31, 2008 and 2007, theCompany had borrowed $0 and $3,658,000, respectively on these lines.

 

AtDecember 31, 2008, the Bank had the ability to borrow an additional$10,170,000 from the FHLB secured by investment securities.  FHLB has approved borrowings up to 10% of theBank’s total assets less advances outstanding. The borrowings are available bypledging collateral and purchasing additional stock in the FHLB.

 

**NOTE 18 - RESTRICTIONS ON DIVIDENDS, LOANS, ORADVANCES**

 

Theability of the Company to pay cash dividends to shareholders is dependent uponreceiving cash in the form of dividends from its banking subsidiary.  However, certain restrictions exist regardingthe ability of the subsidiary to transfer funds in the form of cash dividendsto the Company.  State chartered banksare authorized to pay cash dividends up to 100% of net income in any calendaryear without obtaining the prior approval of the State Board of FinancialInstitutions or the Commissioner of Banking provided that the Bank received acomposite rating of one or two at the last examination conducted by the Stateor Federal regulatory authority. Otherwise, the Bank must file an income and expense report and obtainthe specific approval of the State Board.

 

UnderFederal Reserve Board regulations, the amount of loans or advances from thebanking subsidiary to the parent company are also restricted.

 

**NOTE 19- FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK**

 

TheCompany is a party to financial instruments with off-balance sheet risk in thenormal course of business to meet the financing needs of its customers.  These financial instruments includecommitments to extend credit and standby letters of credit.  Those instruments involve, to varyingdegrees, elements of credit, interest rate, and liquidity risk.  The Company’s exposure to credit loss in theevent of nonperformance by the other party to the financial instrument forcommitments to extend credit and standby letters of credit is essentially thesame as that involved in extending loan facilities to customers.  The Company uses the same credit policies inmaking commitments and conditional obligations as it does for on-balance sheetinstruments.

 

64

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**CONGAREE BANCSHARES,INC. AND SUBSIDIARY**

** **

**NOTE 19- FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK** - *continued*

* *

Commitmentsto extend credit are agreements to lend to a customer as long as there is noviolation of any condition established in the contract.  Commitments generally have fixed expirationdates or other termination clauses and may require payment of a fee.  Since many of the commitments are expected toexpire without being drawn upon, the total commitment amounts do notnecessarily represent future cash requirements. The amount of collateral obtained if deemed necessary by the Companyupon extension of credit is based on management’s credit evaluation of the borrower.Collateral held varies, but may include accounts receivable, negotiableinstruments, inventory, property, plant and equipment, and real estate.  Commitments to extend credit, includingunused lines of credit, amounted to $ 23,284,400 and $20,034,340 at December 31,2008 and 2007, respectively.

 

Standbyletters of credit represent an obligation of the Company to a third partycontingent upon the failure of the Company’s customer to perform under theterms of an underlying contract with the third party or obligates the Companyto guarantee or stand as surety for the benefit of the third party.  The underlying contract may entail eitherfinancial or nonfinancial obligations and may involve such things as the shipmentof goods, performance of a contract, or repayment of an obligation.  Under the terms of a standby letter,generally drafts will be drawn only when the underlying event fails to occur asintended.  The Company can seek recoveryof the amounts paid from the borrower. The majority of these standby letters of credit are unsecured.  Commitments under standby letters of creditare usually for one year or less.  At December 31,2008 and 2007, the Company has recorded no liability for the current carryingamount of the obligation to perform as a guarantor; as such amounts are notconsidered material.  The Company hadstandby letters of credit outstanding of $110,000 and $0 at December 31,2008 and 2007, respectively.

 

TheCompany originates certain fixed rate residential loans and commits these loansfor sale.  The commitments to originatefixed rate residential loans and the sales commitments are freestandingderivative instruments.  The fair valueof these commitments was not significant at December 31, 2008 and 2007.

 

**NOTE 20 - FAIR VALUE OF FINANCIALINSTRUMENTS**

 

The fair value of afinancial instrument is the amount at which the asset or obligation could beexchanged in a current transaction between willing parties, other than in aforced or liquidation sale.  Fair valueestimates are made at a specific point in time based on relevant marketinformation and information about the financial instruments.  Because no market value exists for asignificant portion of the financial instruments, fair value estimates arebased on judgments regarding future expected loss experience, current economicconditions, risk characteristics of various financial instruments, and otherfactors.

 

The following methods andassumptions were used to estimate the fair value of significant financialinstruments:

 

***Cashand Due from Banks*** - The carrying amount is a reasonableestimate of fair value.

 

***FederalFunds Sold*** - Federal funds sold are for a term of oneday, and the carrying amount approximates the fair value.

 

***InvestmentSecurities*** - The fair values of securities available-for-saleequal the carrying amounts, which are the quoted market prices.  If quoted market prices are not available,fair values are based on quoted market prices of comparable securities.  The carrying value of nonmarketable equitysecurities approximates the fair value since no ready market exists for thestocks.

 

***LoansReceivable***- For certain categories of loans, such asvariable rate loans which are repriced frequently and have no significantchange in credit risk, fair values are based on the carrying amounts.  The fair value of other types of loans isestimated by discounting the future cash flows using the current rates at whichsimilar loans would be made to borrowers with similar credit ratings and for thesame remaining maturities.

 

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

 

***FederalFunds Purchased*** - Federal funds purchased are for a termof one day, and the carrying amount approximates the fair value.

 

65

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** **

**CONGAREE BANCSHARES,INC. AND SUBSIDIARY**

** **

**NOTE 20 - FAIR VALUE OF FINANCIALINSTRUMENTS**- *continued*

*** ***

***SecuritiesSold Under Agreements to Repurchase*** - These repurchaseagreements have variable rates that reprice on a continuous basis.  Due to the minor change in interest rates,management estimates the carrying value to be a reasonable estimate of fairvalue.

 

***FHLBAdvances –*** For disclosure purposes, the fair value of theFHLB fixed rate borrowing is estimated using discounted cash flows, based onthe current incremental borrowing rates for similar types of borrowingarrangements.

 

***AccruedInterest Receivable and Payable*** - The carrying value ofthese instruments is a reasonable estimate of fair value.

 

***Off-Balance-SheetFinancial Instruments*** - In the ordinary course of business,the Company enters into off-balance-sheet financial instruments consisting ofcommitments to extend credit and letters of credit.  Because these commitments are made usingvariable rates and have short maturities, the carrying value and the fair valueare immaterial for disclosure.

 

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

 
| ** **                                                         | ** ** | **December 31, 2008** | ** ** | **December 31, 2007** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                                         | ** ** | **Carrying**                    | ** ** | **Estimated**                   | ** ** | **Carrying** | ** ** | **Estimated** | ** ** |
| ** **                                                         | ** ** | **Amount**                      | ** ** | **Fair Value**                  | ** ** | **Amount** | ** ** | **Fair Value** | ** ** |
| **Financial Assets:**                                              |       |                            |       |                            |       |   |   |   |   |
| Cash and due from banks                                            |       | $                               | 4,130,319  |                            | $          | 4,130,319 |   | $ | 4,012,721 |   | $ | 4,012,721 |   |
| Federal funds sold                                                 |       | 3,494,000                       |       | 3,494,000                       |       | 110,000 |   | 110,000 |   |
| Securities available-for-sale                                      |       | 13,843,218                      |       | 13,843,218                      |       | 14,833,432 |   | 14,833,432 |   |
| Nonmarketable equity securities                                    |       | 435,952                         |       | 435,952                         |       | 268,244 |   | 268,244 |   |
| Loans receivable, net                                              |       | 105,858,816                     |       | 106,069,160                     |       | 54,736,304 |   | 54,987,400 |   |
| Accrued interest receivable                                        |       | 472,880                         |       | 472,880                         |       | 338,183 |   | 338,183 |   |
| ** **                                                         |       |                            |       |                            |       |   |   |   |   |
| **Financial Liabilities:**                                         |       |                            |       |                            |       |   |   |   |   |
| Demand deposit, interest-bearing transaction, and savings accounts |       | 40,455,338                      |       | 40,455,338                      |       | 35,063,210 |   | 35,063,210 |   |
| Certificates of deposit and other time deposits                    |       | 78,079,222                      |       | 78,662,000                      |       | 25,216,600 |   | 24,733,000 |   |
| Federal funds purchased                                            |       | —                          |       | —                          |       | 3,658,000 |   | 3,658,000 |   |
| Federal Home Loan Bank advances                                    |       | 3,000,000                       |       | 3,104,207                       |       | — |   | — |   |
| Securities sold under agreements to repurchase                     |       | —                          |       | —                          |       | 1,395,326 |   | 1,395,326 |   |
| Accrued interest payable                                           |       | 224,434                         |       | 224,434                         |       | 65,019 |   | 65,019 |   |
|                                                                    |            |                                 |            |                                 |            |  |  |  |  |  |  |  |  |

 
| ** **                                   | ** ** | **Notional** | ** ** | **Estimated**  | ** ** | **Notional** | ** ** | **Estimated**  | ** ** |
|----------------------------------------------|------------|--------------|------------|----------------|------------|--------------|------------|----------------|------------|
| ** **                                   | ** ** | **Amount**   | ** ** | **Fair Value** | ** ** | **Amount**   | ** ** | **Fair Value** | ** ** |
| **Off-Balance Sheet Financial Instruments:** |       |         |       |           |       |         |       |           |       |
| Commitments to extend credit                 |       | $            | 23,284,400 |           | $          | —       |       | $              | 20,034,340 |   | $ | — |   |
|                                              |            |              |            |                |            |              |            |                |            |  |  |  |  |

 

The Company adopted Statement No. 157 at the beginning of the 2008fiscal year.  Statement No. 157applies to all assets and liabilities that are being measured and reported on afair value basis.  Statement No. 157requires new disclosure that establishes a framework for measuring fair valuein GAAP, and expands disclosure about fair value measurements.  This statement enables the reader of thefinancial statements to assess the inputs used to develop those measurements byestablishing a hierarchy for ranking the quality and reliability of theinformation used to determine fair values. The statement requires that assets and liabilities carried at fair valuewill be classified and disclosed in one of the following three categories:

 

·                  Level 1:  Quoted market prices in active markets for identicalassets or liabilities.

 

·                  Level 2:  Observable market based inputs orunobservable inputs that are corroborated by market data.

 

·                  Level 3:  Unobservable inputs that are not corroboratedby market data.

 

In determining the appropriate levels, the Company performs a detailedanalysis of the assets and liabilities that are subject to Statement No. 157.  At each reporting period, all assets andliabilities for which the fair value measurement is based on significantunobservable inputs are classified as Level 3.

 

66

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** **

**CONGAREE BANCSHARES,INC. AND SUBSIDIARY**

** **

**NOTE 20 - FAIR VALUE OF FINANCIAL INSTRUMENTS******- *continued*

* *

The table below presents the balances of assets measured at fair valueon a recurring basis by level within the hierarchy.

 
| ** **                          | ** ** | **December 31, 2008** | ** ** |
|-------------------------------------|------------|---------------------------------|------------|
| ** **                          | ** ** | **Total**                       | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|                                |       |                            |       |   |   |   |   |   |   |
|  Securities available-for-sale |       | $                               | 13,843,218 |   | $ | — |   | $ | 13,843,218 |   | $ | — |   |
|                                     |            |                                 |            |  |  |  |  |  |  |  |  |  |  |

 

Certainassets and liabilities are measured at fair value on a nonrecurring basis; thatis, the instruments are not measured at fair value on an ongoing basis but aresubject to fair value adjustments in certain circumstances (for example, whenthere is evidence of impairment).  Thefollowing table presents the assets and liabilities carried on the balancesheet by caption and by level within the Statement No. 157 valuationhierarchy (as described above) as of December 31, 2008 for which anonrecurring change in fair value has been recorded during the year ended December 31,2008.

 
| ** **           | ** ** | **Carrying Value at December 31, 2008** | ** ** |
|----------------------|------------|------------------------------------------------------------------|------------|
| ** **           | ** ** | **Total**                                                        | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|                 |       | ** **                                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |
|  Impaired loans |       | $                                                                | 421,542    |   | $ | — |   | $ | 421,542 |   | $ | — |   |
|                      |            |                                                                  |            |  |  |  |  |  |  |  |  |  |  |

 

**NOTE 21- CONGAREE BANCSHARES, INC. (PARENT COMPANY ONLY)**

*** ***

Presented below are thecondensed financial statements for Congaree Bancshares, Inc.

 

**Condensed Balance Sheets**

 
| ** **                                      | ** ** | **December 31,** | ** **     |
|-------------------------------------------------|------------|-----------------------|----------------|
| ** **                                      | ** ** | **2008**              | ** **     | **2007** | ** ** |
| **Assets:**                                     |       |                  |           |   |   |
| Cash                                            |       | $                     | 20,372         |   | $ | 531,154 |   |
| Premises and equipment                          |       | 2,482,288             |           | 2,710,101 |   |
| Due from investors                              |       | —                |           | 18,440 |   |
| Investment in banking subsidiary                |       | 7,560,439             |           | 9,705,878 |   |
|                                            | ** ** | ** **            | ** **     | ** ** | ** ** |
| Total assets                                    | ** ** | **$**                 | **10,063,099** | ** ** | **$** | **12,965,573** | ** ** |
| ** **                                      | ** ** | ** **            | ** **     | ** ** | ** ** |
| **Liabilities and shareholders’ equity:**  | ** ** | ** **            | ** **     | ** ** | ** ** |
| Other liabilities                               |       | $                     | —         |   | $ | 29,785 |   |
|                                            |       |                  |           |   |   |
| Total liabilities                               |       | —                |           | 29,785 |   |
|                                            |       |                  |           |   |   |
| Shareholders’ equity                       |       | 10,063,099            |           | 12,935,788 |   |
|                                            | ** ** | ** **            | ** **     | ** ** | ** ** |
| Total liabilities and shareholders’ equity | ** ** | **$**                 | **10,063,099** | ** ** | **$** | **12,965,573** | ** ** |

 

67

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** **

**CONGAREE BANCSHARES,INC. AND SUBSIDIARY**

** **

**NOTE 21- CONGAREE BANCSHARES, INC. (PARENT COMPANY ONLY)** - *continued*

* *

**Condensed Statements ofOperations**

** **
| ** **                                                                             | ** ** | **Years ended December 31,** | ** **     |
|----------------------------------------------------------------------------------------|------------|---------------------------------------------|----------------|
| ** **                                                                             | ** ** | **2008**                                    | ** **     | **2007** | ** ** |
| **Income:**                                                                            |       | $                                           | 37,268         |   | $ | 5,950 |   |
| ** **                                                                             |       |                                        |           |   |   |
| **Expenses:**                                                                          |       |                                        |           |   |   |
| Stock based compensation expense                                                       |       | 295,038                                     |           | 279,514 |   |
| Other expenses                                                                         |       | 264,514                                     |           | 258,406 |   |
| ** **                                                                             | ** ** | ** **                                  | ** **     | ** ** | ** ** |
| **Income (loss) and equity in undistributed  earnings (losses) of banking subsidiary** | ** ** | (522,284                                    | )              | (531,970 | ) |
|                                                                                   |       |                                        |           |   |   |
| Equity in undistributed losses of banking subsidiary                                   |       | (2,780,655                                  | )              | (2,956,043 | ) |
| ** **                                                                             | ** ** | ** **                                  | ** **     | ** ** | ** ** |
| **Net loss**                                                                           | ** ** | **$**                                       | **(3,302,939** | **)** | **$** | **(3,488,013** | **)** |

 

**CondensedStatements of Cash Flows**

 
| ** **                                                                   | ** ** | **Years ended December 31,** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                   | ** ** | **2008**                          | ** ** | **2007** | ** ** |
| **Cash flows from operating activities:**                                    | ** ** | ** **                        | ** ** | ** ** | ** ** |
| Net loss                                                                     |       | $                                 | (3,302,939 | ) | $ | (3,488,013 | ) |
| Adjustments to reconcile net loss to net cash used by operating  activities: |       |                              |       |   |   |
| Depreciation expense                                                         |       | 63,468                            |       | 40,923 |   |
| Equity in undistributed net loss of banking subsidiary                       |       | 2,780,655                         |       | 2,956,043 |   |
| Loss from sale of assets                                                     |       | 44,134                            |       | — |   |
| Decrease (increase) in other assets                                          |       | 18,440                            |       | (18,440 | ) |
| Increase (decrease) in other liabilities                                     |       | (29,785                           | )          | 29,788 |   |
| Stock and warrant compensation expense                                       |       | 295,038                           |       | 279,514 |   |
|                                                                         |       |                              |       |   |   |
| Net cash used by operating activities                                        |       | (130,989                          | )          | (200,185 | ) |
| ** **                                                                   | ** ** | ** **                        | ** ** | ** ** | ** ** |
| **Cash flows from investing activities:**                                    | ** ** | ** **                        | ** ** | ** ** | ** ** |
| Purchase of premises and equipment                                           |       | (376,667                          | )          | (913,860 | ) |
| Sale of premises and equipment                                               |       | 496,874                           |       | — |   |
| Capital contribution to Bank                                                 |       | (500,000                          | )          | — |   |
|                                                                         |       |                              |       |   |   |
| Net cash used by investing activities                                        |       | (379,793                          | )          | (913,860 | ) |
| ** **                                                                   |       |                              |       |   |   |
| **Net increase (decrease) in cash and cash  equivalents**                    |       | (510,782                          | )          | (1,114,045 | ) |
| ** **                                                                   |       |                              |       |   |   |
| **Cash and cash equivalents, beginning of period**                           |       | 531,154                           |       | 1,645,199 |   |
| ** **                                                                   | ** ** | ** **                        | ** ** | ** ** | ** ** |
| **Cash and cash equivalents, end of period**                                 | ** ** | **$**                             | **20,372** | ** ** | **$** | **531,154** | ** ** |

 

68

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**CONGAREE BANCSHARES, INC. AND SUBSIDIARY**

 

**NOTE 22 - SUBSEQUENT EVENTS**

 

***Capital Purchase Program*** - On January 9, 2009, as part of the CapitalPurchase Program established by the U.S. Department of the Treasury (“Treasury”)under the Emergency Economic Stabilization Act of 2008 (the “EESA”), CongareeBancshares, Inc. (the “Company” or the “Registrant”) entered into a LetterAgreement (including a Side Letter Agreement and the Securities PurchaseAgreement - Standard Terms incorporated by reference therein, the “PurchaseAgreement”) with Treasury dated January 9, 2009, pursuant to which theCompany issued and sold to Treasury (i) 3,285 shares of the Company’sFixed Rate Cumulative Perpetual Preferred Stock, Series A, having aliquidation preference of $1,000 per share (the “Series A Preferred Stock”),and (ii) a ten-year warrant to purchase 164 shares of the Company’s FixedRate Cumulative Perpetual Preferred Stock, Series B, (the “Series BPreferred Stock”), having a liquidation preference of $1,000 per share, at aninitial exercise price of $0.01 per share (the “Warrant”), for an aggregatepurchase price of $3,285,000 in cash. The Warrants were immediately exercised.

 

69

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**Item9.  Changes in and Disagreements withAccountants on Accounting and Financial Disclosure.**

 

None.

 

**Item9A(T).  Controls and Procedures.**

 

**Evaluationof Disclosure Controls and Procedures**

 

As of the end of the period covered by this report, we carried out anevaluation, under the supervision and with the participation of our management,including our Chief Executive Officer and Chief Financial Officer, of theeffectiveness of our disclosure controls and procedures as defined in ExchangeAct Rule 13a-15(e).  Based upon thatevaluation, our Chief Executive Officer and Chief Financial Officer haveconcluded that our current disclosure controls and procedures are effective asof December 31, 2008.  There have been nosignificant changes in our internal controls over financial reporting during thefourth fiscal quarter ended December 31, 2008 that have materiallyaffected, or are reasonably likely to materially affect, our internal controlsover financial reporting.

 

Thedesign of any system of controls and procedures is based in part upon certainassumptions about the likelihood of future events.  There can be no assurance that any designwill succeed in achieving its stated goals under all potential futureconditions, regardless of how remote.

 

**Management’sReport on Internal Control Over Financial Reporting**

** **

Managementis responsible for establishing and maintaining adequate internal control overfinancial reporting, as such term is defined in the Exchange Act Rules 13a-15(f).  A system of internal control over financialreporting is a process designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accountingprinciples.

 

Underthe supervision and with the participation of management, including theprincipal executive officer and the principal financial officer, our managementhas evaluated the effectiveness of our internal control over financialreporting as of December 31, 2008 based on the criteria established in areport entitled “Internal Control – Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission” and theinterpretive guidance issued by the Commission in Release No. 34-55929.  Based on this evaluation, our management hasevaluated and concluded that our internal control over financial reporting waseffective as of December 31, 2008.

 

Weare continuously seeking to improve the efficiency and effectiveness of ouroperations and of our internal controls. This results in modifications to our processes throughout thecompany.  However, there has been nochange in our internal control over financial reporting that occurred duringour most recent fiscal quarter that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

 

Thisannual report does not include an attestation report of the Company’sregistered public accounting firm regarding internal control over financialreporting.  Management’s report was notsubject to attestation by the company’s registered public accounting firmpursuant to temporary rules of the Securities and Exchange Commission thatpermit the company to provide only management’s report in this annual report.

 

**Item 9B.  Other Information.**

 

Not applicable.

 

70

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**PART III**

 

**Item10.  Directors, Executive Officers andCorporate Governance.**

 

Information required by Item 10 is hereby incorporated by referencefrom our proxy statement for our 2009 annual meeting of shareholders to be heldon June 18, 2009.

 

**Item 11.  ExecutiveCompensation.**

 

Information required by Item 11 is hereby incorporated by referencefrom our proxy statement for our 2009 annual meeting of shareholders to be heldon June 18, 2009.

 

**Item12.  Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters.**

 

Informationrequired by Item 12 is hereby incorporated by reference from our proxystatement for our 2009 annual meeting of shareholders to be held on June 18,2009.

 

**Item13.  Certain Relationships and RelatedTransactions, and Director Independence.**

 

Information requiredby Item 13 is hereby incorporated by reference from our proxy statement for our2009 annual meeting of shareholders to be held on June 18, 2009.

 

**Item14.  Principal Accountant and Fees.**

 

Informationrequired by Item 14 is hereby incorporated by reference from our proxystatement for our 2009 annual meeting of shareholders to be held on June 18,2009.

 

71

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**PART IV**

 

**Item 15.  Exhibits.**

 
| 3.1.       |       | Articles of Incorporation (incorporated by reference to Exhibit 3.1  of the Company’s Form SB-2, File No. 333-131931)                                                                                                                                                   |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                                                                                                        |
| 3.2        |       | Articles of Amendment to Articles of Incorporation  (incorporated by reference to Exhibit 3.2 of the Company’s  Form SB-2, File No. 333-131931).                                                                                                                        |
|       |       |                                                                                                                                                                                                                                                                                        |
| 3.3        |       | Articles of Amendment to the Company’s Restated  Articles of Incorporation establishing the terms of the Series A  Preferred Stock (incorporated by reference to Exhibit 3.1 of the  Company’s Form 8-K filed on January 12, 2009).                           |
|       |       |                                                                                                                                                                                                                                                                                        |
| 3.4        |       | Articles of Amendment to the Company’s Restated  Articles of Incorporation establishing the terms of the Series B  Preferred Stock (incorporated by reference to Exhibit 3.2 of the  Company’s Form 8-K filed on January 12, 2009).                           |
|       |       |                                                                                                                                                                                                                                                                                        |
| 3.5        |       | Bylaws (incorporated by reference to Exhibit 3.3 of the  Company’s Form SB-2, File No. 333-131931).                                                                                                                                                                     |
|       |       |                                                                                                                                                                                                                                                                                        |
| 4.1.       |       | See Exhibits 3.1 and 3.2 for provisions in Congaree  Bancshares, Inc.’s Articles of Incorporation and Bylaws defining the  rights of holders of the common stock (incorporated by reference to Exhibit 4.1  of the Company’s Form SB-2, File No. 333-131931). |
|       |       |                                                                                                                                                                                                                                                                                        |
| 4.2.       |       | Form of certificate of common stock (incorporated by  reference to Exhibit 4.2 of the Company’s Form SB-2, File  No. 333-131931).                                                                                                                                       |
|       |       |                                                                                                                                                                                                                                                                                        |
| 4.3        |       | Warrant to Purchase up to 164  shares of Preferred Stock (incorporated by reference to Exhibit 4.1 of  the Company’s Form 8-K filed on January 12, 2009).                                                                                                               |
|       |       |                                                                                                                                                                                                                                                                                        |
| 4.4        |       | Form of Series A Preferred Stock  Certificate (incorporated by reference to Exhibit 4.2 of the Company’s  Form 8-K filed on January 12, 2009).                                                                                                                |
|       |       |                                                                                                                                                                                                                                                                                        |
| 4.5        |       | Form of Series B Preferred Stock  Certificate (incorporated by reference to Exhibit 4.3 of the Company’s  Form 8-K filed on January 12, 2009).                                                                                                                |
|       |       |                                                                                                                                                                                                                                                                                        |
| 10.1       |       | Employment Agreement between Congaree Bancshares, Inc. and F.  Ray Harvin Jr., dated February 15, 2006(incorporated by  reference to Exhibit 10.1 of the Company’s Form SB-2, File  No. 333-131931).*                                                         |
|       |       |                                                                                                                                                                                                                                                                                        |
| 10.2       |       | Employment  Agreement between Congaree Bancshares, Inc. and Charlie T. Lovering  dated September 14, 2006 (incorporated by reference to Exhibit 10.1  of the Company’s Form 8-K filed September 14, 2006).*                                                   |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                  |
| 10.3       |       | Employment Agreement between Congaree Bancshares, Inc. and  Stephen P. Nivens dated February 15, 2006 (incorporated by  reference to Exhibit 10.2 of the Company’s Form SB-2, File  No. 333-121485).*                                                         |
|       |       |                                                                                                                                                                                                                                                                                        |
| 10.4       |       | Form of Stock Warrant Agreement (incorporated by  reference to Exhibit 10.5 of the Company’s Form SB-2, File  No. 333-131931).*                                                                                                                                         |
|       |       |                                                                                                                                                                                                                                                                                        |
| 10.5       |       | Congaree Bancshares, Inc. 2007 Stock  Incentive Plan (incorporated by reference to Exhibit 10.5 of the Company’s Form 10-KSB  filed on March 31, 2008).*                                                                                                                |
|       |       |                                                                                                                                                                                                                                                                                        |
| 10.6       |       | Amendment No. 1 to the Congaree  Bancshares, Inc. 2007 Stock Incentive Plan adopted October 15, 2008  (incorporated by reference to the Company’s Form 10-Q as  Exhibit 10.1 for the period ended September 30, 2008).                                   |

 

72

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| 10.7   |   | Letter Agreement, dated January 9, 2009,  including the Side Letter Agreement and Securities Purchase Agreement –  Standard Terms incorporated by reference therein, between the Company and the  United States Department of the Treasury (incorporated by reference to  Exhibit 10.1 of the Company’s Form 8-K filed on January 12,  2009). |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| 10.8   |   | Form of Waiver, executed by each of  Messrs. F. Harvin Ray, Jr., Charlie T. Lovering, Jr. and  Stephen P. Nivens (incorporated by reference to Exhibit 10.2 of the  Company’s Form 8-K filed on January 12, 2009).                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| 10.9   |   | Form of Letter Agreement, executed by each of  Messrs. F. Harvin Ray, Jr., Charlie T. Lovering, Jr. and  Stephen P. Nivens with the Company (incorporated by reference to  Exhibit 10.3 of the Company’s Form 8-K filed on January 12,  2009).                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| 21.1   |   | Subsidiaries  of the Company.                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| 24.1   |   | Power of Attorney (filed as part of the signature  page herewith).                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| 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.                                                                                                                                                                                                                                                                                                                                           |

 

----

| * |   | Management contract of compensatory plan or arrangement required to  be filed as an Exhibit to this Annual Report on Form 10-K. |
|---|--------|--------------------------------------------------------------------------------------------------------------------------------------|

 

73

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**SIGNATURES**

 

In accordance with Section 13or 15(d) of the Securities Exchange Act of 1934, the registrant causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 

 
| ** ** | ** **                | **CONGAREE BANCSHARES, INC.**                        |
|------------|---------------------------|------------------------------------------------------|
| ** ** | ** **                | ** **                                           |
| Dated:     |  March 31, 2009 |                                                 | By: | /s/  Charlie T. Lovering |
|       |                      | Charlie T. Lovering                                  |
|       |                      | Chief  Executive Officer and Chief Financial Officer |
|            |                           |                                                      |  |  |

 

KNOW ALL MEN BY THESEPRESENTS, that each person whose signature appears below constitutes andappoints Charlie T. Lovering, his true and lawful attorney-in-fact and agent,with full power of substitution and resubstitution, for him and in his name,place and stead, in any and all capacities, to sign any and all amendments tothis Annual Report on Form 10-K, and to file the same, with all exhibitsthereto, and other documents in connection therewith, with the Securities and ExchangeCommission, granting unto attorney-in-fact and agent full power and authorityto do and perform each and every act and thing requisite or necessary to bedone in and about the premises, as fully to all intents and purposes as hemight or could do in person, hereby ratifying and confirming all thatattorney-in-fact and agent, or his substitute or substitutes, may lawfully door cause to be done by virtue hereof.

 

In accordance with the Exchange Act, this report hasbeen signed below by the following persons on behalf of the registrant in thecapacities and on the dates indicated.

 
| **Signature**                 | ** ** | **Title**                        | ** ** | **Date**            |
|-------------------------------|------------|----------------------------------|------------|---------------------|
|                          |       |                             |       |                |
| /s/ Thomas Hal Derrick        |       | Director                         |       | March 31, 2009 |
| Thomas Hal Derrick            |       |                             |       |                |
|                          |       |                             |       |                |
| /s/ Stephen P. Nivens         |       | Senior Vice President,  Director |       | March 31, 2009 |
| Stephen P. Nivens             |       |                             |       |                |
|                          |       |                             |       |                |
| /s/ David S. Murray, Jr. |       | Director                         |       | March 31, 2009 |
| David S. Murray, Jr.     |       |                             |       |                |
|                          |       |                             |       |                |
| /s/ E. Daniel Scott           |       | Director                         |       | March 31, 2009 |
| E. Daniel Scott               |       |                             |       |                |
|                          |       |                             |       |                |
| /s/ Nitin C. Shah             |       | Director                         |       | March 31, 2009 |
| Nitin C. Shah                 |       |                             |       |                |
|                          |       |                             |       |                |
| /s/ J. Larry Stroud           |       | Director                         |       | March 31, 2009 |
| J. Larry Stroud               |       |                             |       |                |
|                          |       |                             |       |                |
| /s/ John D. Thompson          |       | Director                         |       | March 31, 2009 |
| John D. Thompson              |       |                             |       |                |
|                          |       |                             |       |                |
| /s/ Charlie T. Lovering       |       | Chief Financial Officer,  Chief  |       | March 31, 2009 |
| Charlie T. Lovering           |       | Executive Officer,  Director     |       |                |

 

74

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| /s/ Harry Michael White |   | Director |   | March 31, 2009 |
|-------------------------|--------|----------|--------|---------------------|
| Harry Michael White     |   |     |   |                |
|                    |   |     |   |                |
|                    |   |     |   |                |
| /s/ Samuel M. Corley    |   | Director |   | March 31, 2009 |
| Samuel M. Corley        |   |     |   |                |
|                    |   |     |   |                |
|                    |   |     |   |                |
| /s/ J. Kevin Reeley     |   | Director |   | March 31, 2009 |
| J. Kevin Reeley         |   |     |   |                |

 

75

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**EXHIBIT INDEX**

 
| **Exhibit** | ** ** | **Description**                                                                                                                                                                                                                                                                             |
|-------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **  | ** ** | ** **                                                                                                                                                                                                                                                                                  |
| 3.1.        |       | Articles of Incorporation (incorporated by reference to Exhibit 3.1  of the Company’s Form SB-2, File No. 333-131931)                                                                                                                                                   |
|        |       |                                                                                                                                                                                                                                                                                        |
| 3.2         |       | Articles of Amendment to Articles of Incorporation  (incorporated by reference to Exhibit 3.2 of the Company’s  Form SB-2, File No. 333-131931).                                                                                                                        |
|        |       |                                                                                                                                                                                                                                                                                        |
| 3.3         |       | Articles of Amendment to the Company’s Restated  Articles of Incorporation establishing the terms of the Series A  Preferred Stock (incorporated by reference to Exhibit 3.1 of the  Company’s Form 8-K filed on January 12, 2009).                           |
|        |       |                                                                                                                                                                                                                                                                                        |
| 3.4         |       | Articles of Amendment to the Company’s Restated  Articles of Incorporation establishing the terms of the Series B  Preferred Stock (incorporated by reference to Exhibit 3.2 of the  Company’s Form 8-K filed on January 12, 2009).                           |
|        |       |                                                                                                                                                                                                                                                                                        |
| 3.5         |       | Bylaws (incorporated by reference to Exhibit 3.3 of the  Company’s Form SB-2, File No. 333-131931).                                                                                                                                                                     |
|        |       |                                                                                                                                                                                                                                                                                        |
| 4.1.        |       | See Exhibits 3.1 and 3.2 for provisions in Congaree  Bancshares, Inc.’s Articles of Incorporation and Bylaws defining the  rights of holders of the common stock (incorporated by reference to Exhibit 4.1  of the Company’s Form SB-2, File No. 333-131931). |
|        |       |                                                                                                                                                                                                                                                                                        |
| 4.2.        |       | Form of certificate of common stock (incorporated by  reference to Exhibit 4.2 of the Company’s Form SB-2, File  No. 333-131931).                                                                                                                                       |
|        |       |                                                                                                                                                                                                                                                                                        |
| 4.3         |       | Warrant to Purchase up to 164  shares of Preferred Stock (incorporated by reference to Exhibit 4.1 of  the Company’s Form 8-K filed on January 12, 2009).                                                                                                               |
|        |       |                                                                                                                                                                                                                                                                                        |
| 4.4         |       | Form of Series A Preferred Stock  Certificate (incorporated by reference to Exhibit 4.2 of the Company’s  Form 8-K filed on January 12, 2009).                                                                                                                |
|        |       |                                                                                                                                                                                                                                                                                        |
| 4.5         |       | Form of Series B Preferred Stock  Certificate (incorporated by reference to Exhibit 4.3 of the Company’s  Form 8-K filed on January 12, 2009).                                                                                                                |
|        |       |                                                                                                                                                                                                                                                                                        |
| 10.1        |       | Employment Agreement between Congaree Bancshares, Inc. and F.  Ray Harvin Jr., dated February 15, 2006(incorporated by  reference to Exhibit 10.1 of the Company’s Form SB-2, File  No. 333-131931).*                                                         |
|        |       |                                                                                                                                                                                                                                                                                        |
| 10.2        |       | Employment  Agreement between Congaree Bancshares, Inc. and Charlie T. Lovering dated  September 14, 2006 (incorporated by reference to Exhibit 10.1 of the  Company’s Form 8-K filed September 14, 2006).*                                                                  |
| ** **  | ** ** | ** **                                                                                                                                                                                                                                                                                  |
| 10.3        |       | Employment Agreement between Congaree Bancshares, Inc. and  Stephen P. Nivens dated February 15, 2006 (incorporated by  reference to Exhibit 10.2 of the Company’s Form SB-2, File  No. 333-121485).*                                                         |
|        |       |                                                                                                                                                                                                                                                                                        |
| 10.4        |       | Form of Stock Warrant Agreement (incorporated by  reference to Exhibit 10.5 of the Company’s Form SB-2, File  No. 333-131931).*                                                                                                                                         |
|        |       |                                                                                                                                                                                                                                                                                        |
| 10.5        |       | Congaree Bancshares, Inc. 2007 Stock  Incentive Plan.*                                                                                                                                                                                                                                 |
|        |       |                                                                                                                                                                                                                                                                                        |
| 10.6        |       | Amendment No. 1 to the Congaree  Bancshares, Inc. 2007 Stock Incentive Plan adopted October 15, 2008  (incorporated by reference to the Company’s Form 10-Q as  Exhibit 10.1 for the period ended September 30, 2008).                                   |
|        |       |                                                                                                                                                                                                                                                                                        |
| 10.7        |       | Letter Agreement, dated January 9, 2009,  including the Side Letter Agreement and Securities Purchase Agreement –  Standard Terms incorporated by reference therein, between the Company and the  United                                                                          |

 

76

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|   |   | States Department of the Treasury (incorporated by  reference to Exhibit 10.1 of the Company’s Form 8-K filed on  January 12, 2009).                                                                                                                               |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                   |
| 10.8   |   | Form of Waiver, executed by each of  Messrs. F. Harvin Ray, Jr., Charlie T. Lovering, Jr. and  Stephen P. Nivens (incorporated by reference to Exhibit 10.2 of the  Company’s Form 8-K filed on January 12, 2009).                             |
|   |   |                                                                                                                                                                                                                                                                                   |
| 109    |   | Form of Letter Agreement, executed by each of  Messrs. F. Harvin Ray, Jr., Charlie T. Lovering, Jr. and  Stephen P. Nivens with the Company (incorporated by reference to  Exhibit 10.3 of the Company’s Form 8-K filed on January 12,  2009). |
|   |   |                                                                                                                                                                                                                                                                                   |
| 21.1   |   | Subsidiaries  of the Company.                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                   |
| 24.1   |   | Power of Attorney (filed as part of the signature  page herewith).                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                   |
| 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.                                                                                                                                                                                                                                                      |

 

77

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