**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-KSB/A**

 

**(MarkOne)**
| **x**      | ** ** | **Annual  Report Under Section 13 Or 15(d) of The Securities Exchange Act Of  1934**                                                                                                  |
|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                                                                      |
| ** ** | ** ** | **For  The Fiscal Year Ended: December 31, 2007.**                                                                                                                                         |
| ** ** | ** ** | ** **                                                                                                                                                                                      |
| **o**      | ** ** | **Transition  Report Under Section 13 Or 15 (d) Of The Securities Exchange Act Of  1934**                                                                                             |
| ** ** | ** ** | ** **                                                                                                                                                                                      |
| ** ** | ** ** | **For  the Transition Period from                             to** |

 

**Commissionfile number 000-52592**

 

**CongareeBancshares, Inc.**

(Exact name ofsmall business issuer as specified in 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’sTelephone Number)

 

Securities registeredunder Section 12(b) of the Exchange Act: **None**

 

Securities registeredunder Section 12(g) of the Exchange Act:**Common Stock**

 

Check whether the issueris not required to file reports pursuant to Section 13 or 15(d) ofthe Exchange Act  o

 

Check whether the issuer (1) filedall reports required to be filed by Section 13 or 15(d) of theExchange Act during the past 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.  Yes x  No o

 

Check if there is nodisclosure of delinquent filers in response to Item 405 of Regulation S-B inthis form, and no disclosure will be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.  x

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).  Yes o  No x

 

The issuer’s revenue forits most recent fiscal year was $3,261,671.  As of March 31, 2008,1,764,439 shares of Common Stock were issued and outstanding.

 

The aggregate marketvalue of the Common Stock held by non-affiliates (shareholders holding lessthan 5% of an outstanding class of stock, excluding directors and executiveofficers) of the Company on March 20, 2008 was $10.00.  Because thereis not an active trading market for the Common Stock, we have used our bookvalue of $7.97 as of March 20, 2008 to calculate our public float.

 

Transitional SmallBusiness Disclosure Format.  (Check one):  Yes o  No x

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 
| Proxy Statement for the  Annual Meeting of Shareholders |   | Part III  (Portions of Items 9-12 and 14) |
|---------------------------------------------------------|--------|------------------------------------------------|
| to be held on  May 14, 2008                        |   |                                           |

 

 

 

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**Restatement**

 

This filing has been amended in Parts 1, 6, 7 and 8 to restate ourconsolidated financial statements related to income taxes.  The Company received a Comment Letter fromthe Securities and Exchange Commission in January 2009, and based on theirviews and the Company’s re-evaluation, are restating income taxes.  The Company has determined that it is morelikely than not it will not realize all of its net deferred tax assets within areasonable period of time as of the period ended December 31, 2007 and hasrestated its financial statements to add a valuation allowance that offsets thepreviously recorded deferred tax benefit of $414,262 for the year ended December 31,2006 and the restatement eliminates the previously recorded deferred taxbenefit of $982,682 for the year ended December 31, 2007.  All amounts that were affected related tothis restatement have been revised accordingly.

 

**Part I**

 

**Item1.  Description of Business**

 

This Report containsstatements which constitute forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933 and the Securities Exchange Act of 1934. Forward-looking statements may relate to our financial condition, results ofoperation, plans, objectives, or future performance.  These statements arebased on many assumptions and estimates and are not guarantees of futureperformance.  Our actual results may differ materially from thoseanticipated in any forward-looking statements, as they will depend on manyfactors about which we are unsure, including many factors which are beyond ourcontrol.  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 risksand uncertainties include, but are not limited to, those described below under “RiskFactors” and the following:

 
| · | significant increases  in competitive pressure in the banking and financial services industries;                                                                                                                        |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · | changes in the interest  rate environment which could reduce anticipated or actual margins;                                                                                                                             |
| · | changes in political  conditions or the legislative or regulatory environment;                                                                                                                                          |
| · | general economic  conditions, either nationally or regionally and especially in our primary  service area, becoming less favorable than expected, resulting in, among  other things, a deterioration in credit quality; |
| · | changes occurring in  business conditions and inflation;                                                                                                                                                                |
| · | changes in technology;                                                                                                                                                                                                  |
| · | changes in monetary and  tax policies;                                                                                                                                                                                  |
| · | the level of allowance  for loan loss;                                                                                                                                                                                  |
| · | the rate of  delinquencies and amounts of charge-offs;                                                                                                                                                                  |
| · | the rates of loan  growth;                                                                                                                                                                                              |
| · | adverse changes in asset  quality and resulting credit risk-related losses and expenses;                                                                                                                                |
| · | loss of consumer  confidence and economic disruptions resulting from terrorist activities;                                                                                                                              |
| · | changes in the  securities markets; and                                                                                                                                                                                 |
| · | other risks and  uncertainties detailed from time to time in our filings with the Securities  and Exchange Commission (“SEC”).                                                                                |

 

We undertake noobligation to publicly update or revise any forward-looking statements, whetheras a result of new information, future events or otherwise.  In light ofthese risks, uncertainties, and assumptions, the forward-looking eventsdiscussed in this report might not occur.

 

**General**

 

Congaree Bancshares, Inc.(the “Company”) is a South Carolina corporation organized to operate as a bankholding company pursuant to the Federal Bank Holding Company Act of 1956 andthe South Carolina Bank Holding Company Act, and to own and control all of thecapital stock of Congaree State Bank (the “Bank”). The Bank currently maintainsa main office in Cayce, South Carolina.  Since our inception in November 2005and before our opening the Bank for business on October 16, 2006, weengaged in organizational and pre-opening activities necessary to obtainregulatory approvals and to prepare our subsidiary bank to commence business asa financial institution. We completed the renovation of our Cayce office at1201 Knox Abbott Drive, Cayce, South Carolina and moved our headquarters andopened a full service banking office at this location on May 14, 2007.

 

Our assets consistprimarily of our investment in the Bank and liquid investments. Our primaryactivities are conducted through the Bank. As of December 31, 2007, ourconsolidated total assets were $78,443,677, our consolidated total loans were$54,736,304, our consolidated total deposits were $60,279,810, and our totalshareholders’ equity was approximately $12,935,788.

 

Our net income isdependent primarily on our net interest income, which is the difference betweenthe interest income earned on loans, investments, and other interest-earningassets and the interest paid on deposits and other interest-bearingliabilities.  To a lesser extent, our net income also is affected by ournoninterest income derived principally from service charges and fees and incomefrom the sale and/or servicing of financial assets such as loans andinvestments, as well as the level of noninterest expenses such as salaries,employee benefits and occupancy costs.

 

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Our operations aresignificantly affected by prevailing economic conditions, competition, and themonetary, fiscal, and regulatory policies of governmental agencies. Lendingactivities are influenced by a number of factors, including the general creditneeds of individuals and small and medium-sized businesses in our market areas,competition among lenders, the level of interest rates, and the availability offunds. Deposit flows and costs of funds are influenced by prevailing marketrates of interest, primarily the rates paid on competing investments, accountmaturities, and the levels of personal income and savings in our market areas.

 

**MarketingFocus**

 

Congaree State Bank is alocally-owned and operated bank organized to serve consumers and small- tomid-size businesses and professional concerns.  A primary reason foroperating the bank lies in our belief that a community-based bank, with apersonal focus, can better identify and serve local relationship banking needsthan can a branch or subsidiary of larger outside banking organizations. We believe that we can be successful by offering a higher level of customerservice and a management team more focused on the needs of the community thanmost of our competitors.  We believe that this approach will beenthusiastically supported by the community.  Our future profitability,however, is dependent on a number of factors, including the continued successof the economy and the successful implementation of our businessstrategies.  No assurance can be given that economic conditions willremain favorable in our market or that we successfully achieve or maintainprofitability in the future.

 

**BankingServices**

 

The Bank is primarilyengaged in the business of accepting demand and time deposits and providingcommercial, consumer and mortgage loans to the general public.  Deposits ofthe Bank are insured up to $100,000 by the Federal Deposit InsuranceCorporation (“FDIC”).  Other services which the Bank offers include onlinebanking, commercial cash management, remote deposit capture, safe depositboxes, bank official checks, traveler’s checks, and wire transfer capabilities.

 

**Locationand Service Area**

 

Our primary service areaconsists of Lexington and Richland Counties, with a primary focus on an areawithin a 15 mile radius of our office in West Columbia, South Carolina. Our Sunset office is located in West Columbia on a major artery that connectsColumbia with Lexington.  We opened the Sunset office in January,2008.  The site is located approximately one mile east of the LexingtonMedical Center and provides excellent visibility for the Bank.  In May,2007, we opened a new branch and administration office at 1201 Knox AbbotDrive, Cayce, South Carolina.  Our anticipated expansion plans includeopening an additional branch strategically located in our primary service areaby the end of 2008.  This branch will extend the market reach of our bank,and it will increase our personal service delivery capabilities to all of ourcustomers.  We plan to take advantage of existing contacts andrelationships with individuals and companies in this area to more effectivelymarket the services of the bank.

 

Our primary service areaconsists of Lexington and Richland Counties, South Carolina.  With itscentral location in the state and convenient access to I-20, I-26, and I-77,this area is considered one of the fastest growing areas in SouthCarolina.  Home to the state capital, the University of South Carolina,and a variety of service-based and light manufacturing companies, this areaprovides a growing and diverse economy.  Lexington Medical Center,Lexington County’s largest employer, has approximately 3,800 employees andcontinues to expand.  The other top employers in Lexington County includeMichelin Tire Corporation, Allied-Signal Corporation, United Parcel Service,and NCR Corporation.  The amenities and opportunities that our primaryservice area offers are wide-ranging from housing, education, healthcare,shopping, recreation, and culture.  We believe these factors make thequality of life in the area attractive.

 

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Our primary service areahas also experienced solid population growth.  Since 1950, the populationin Lexington County has increased over 380%.  Based on U.S. Census data,West Columbia is the largest city in Lexington County with approximately 13,000residents in 2000, representing a growth rate of approximately 23% from 1990 to2000.  This significantly outpaced the rates of population growth of theState of South Carolina and the United States during this period which wereapproximately 15% and 13%, respectively.  Lexington County shared similarpopulation growth.  From 1990 to 2000, Lexington County’s growth rate ofapproximately 29% ranked in the top five of all counties in SouthCarolina.  Together, Lexington and Richland Counties had a population ofover 536,000 as of the 2000 census, which is expected to increase toapproximately 600,000 by 2010, or 12%.  Within a 15 mile radius of ourproposed main bank, the population grew at a rate of approximately 14% between1990 and 2000.  This growth in population has contributed to a significantincrease in construction activity in the area.  According to the CentralMidlands Council of Governments, new single family housing units approved forconstruction in Lexington and Richland Counties increased from 2,172 in 1990 to4,941 in 2004, an increase of over 127%.  We believe that these trendswill continue and presents a growth opportunity for our bank.  Ultimately,the success of our bank will depend on the economy of the community, and aneconomic downturn would hurt our business.  We believe that thedemographic factors in Lexington and Richland Counties make it a desirablemarket in which to grow our bank.

 

**LendingActivities**

 

We emphasize a range oflending services, including real estate, commercial, and equity-line andconsumer loans to individuals, small- to medium-sized businesses, andprofessional concerns that are located in or conduct a substantial portion oftheir business in our bank’s primary service area.  We compete for theseloans with competitors who are well established in our service area and havegreater resources and lending limits.  As a result, we may have to chargelower interest rates to attract borrowers.

 

The well establishedbanks in our service area will likely make proportionately more loans tomedium- to large-sized businesses than we will.  Many of the bank’santicipated commercial loans will likely be made to small- to medium-sizedbusinesses which may be less able to withstand competitive, economic, and financialconditions than larger borrowers.

 

*LoanApproval and Review.*  Certain credit risks are inherentin making loans.  These include prepayment risks, risks resulting fromuncertainties in the future value of collateral, risks resulting from changesin economic and industry conditions, and risks inherent in dealing withindividual borrowers.  We attempt to mitigate repayment risks by adheringto internal credit policies and procedures.  The bank’s loan approvalpolicies provide for various levels of officer lending authority.  Whenthe amount of aggregate loans to a single borrower exceeds any individualofficer’s lending authority, the loan request is considered and approved by anofficer with a higher lending limit or the board of directors’ loan committee. The bank does not make any loans to any director of the bank unless the loan isapproved by the board of directors of the bank and is made on terms not morefavorable to the person than would be available to a person not affiliated withthe bank.  The bank currently adheres to Federal National MortgageAssociation and Federal Home Loan Mortgage Corporation guidelines in itsmortgage loan review process, but may choose to alter this policy in thefuture.  The bank expects to sell residential mortgage loans that itoriginates in the secondary market.

 

*Allowancefor Loan Losses.*  We maintain an allowance for loanlosses, which we establish through a provision for loan losses charged againstincome.  We charge loans against this allowance when we believe that thecollectibility of the principal is unlikely.  The allowance is anestimated amount that we believe is adequate to absorb losses inherent in theloan portfolio based on evaluations of its collectibility.  Our allowancefor loan losses is approximately 1.00% of the average outstanding balance ofour loans, based on our consideration of several factors, including regulatoryguidelines, mix of our loan portfolio, and evaluations of local economicconditions as well as peer data.  Over time, we will periodicallydetermine the amount of the allowance based on our consideration of severalfactors, including:

 
| · | an ongoing review of  the quality, mix, and size of our overall loan portfolio;                                          |
|--------|--------------------------------------------------------------------------------------------------------------------------|
| · | our historical loan  loss experience;                                                                                    |
| · | evaluation of economic  conditions;                                                                                      |
| · | specific problem loans  and commitments that may affect the borrower’s ability to pay;                              |
| · | regular reviews of loan  delinquencies and loan portfolio quality by our internal auditors and our  bank regulators; and |
| · | the amount and quality  of collateral, including guarantees, securing the loans.                                         |

 

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*LendingLimits.*  The bank’s lending activities are subject to avariety of lending limits imposed by federal law.  In general, the bank issubject to a legal limit on loans to a single borrower equal to 15% of the bank’scapital and unimpaired surplus.  Different limits may apply based on thetype of loan or the nature of the borrower, including the borrower’srelationship to the bank.  These limits will increase or decrease as thebank’s capital increases or decreases.  Unless the bank is able to sellparticipations in its loans to other financial institutions, the bank will notbe able to meet all of the lending needs of loan customers requiring aggregateextensions of credit above these limits.

 

*CreditRisk*.  The principal credit risk associated with eachcategory of loans is the creditworthiness of the borrower.  Borrowercreditworthiness is affected by general economic conditions and the strength ofthe manufacturing, services, and retail market segments.  General economicfactors affecting a borrower’s ability to repay include interest, inflation,and employment rates and the strength of local and national economy, as well asother factors affecting a borrower’s customers, suppliers, and employees.

 

*RealEstate Loans. * One of the primary components of our loanportfolio is loans secured by first or second mortgages on real estate. As of December 31, 2007, loans secured by first or second mortgages onreal estate made up approximately $46,122,196, or 83.4% of our loan portfolio.These loans will generally fall into one of two categories: real estate –mortgage and real estate – construction.  These categories are discussedin more detail below, including their specific risks.  Interest rates forall categories may be fixed or adjustable, and will more likely be fixed forshorter-term loans.  The bank will generally charge an origination fee foreach loan.

 

Real estate loans aresubject to the same general risks as other loans.  Real estate loans arealso sensitive to fluctuations in the value of the real estate securing theloan.  On first and second mortgage loans we typically do not advance morethan regulatory limits.  We will require a valid mortgage lien on all realproperty loans along with a title lien policy which insures the validity andpriority of the lien.  We will also require borrowers to obtain hazardinsurance policies and flood insurance, if applicable.  Additionally,certain types of real estate loans have specific risk characteristics that varyaccording to the collateral type securing the loan and the terms and repaymentsources for the loan.

 

We will have the abilityto originate some real estate loans for sale into the secondary market. We can limit our interest rate and credit risk on these loans by locking theinterest rate for each loan with the secondary investor and receiving theinvestor’s underwriting approval prior to originating the loan.

 

·                    *Real Estate - Mortgage*.  Loanssecured by real estate mortgages are the principal component of our loanportfolio. These loans generally fall into one of two categories: residentialreal estate loans and commercial real estate loans.

 

·                    *Residential Real Estate Loans. * At December 31,2007, our individual residential real estate loans ranged in size from $120,000to $975,000, with an average loan size of approximately $385,000.  Theseloans generally have longer terms of up to 30 years.  We offer fixed andadjustable rate mortgages, and we intend to sell most, if not all, of theresidential real estate loans that we generate in the secondary market soonafter we originate them.  We do not intend to retain servicing rights forthese loans.  Inherent in residential real estate loans’ credit risk isthe risk that the primary source of repayment, the residential borrower, willbe insufficient to service the debt.  If a real estate loan is in default,we also run the risk that the value of a residential real estate loan’s securedreal estate will decrease, and thereby be insufficient to satisfy theloan.  To mitigate these risks, we will evaluate each borrower on anindividual basis and attempt to determine its credit profile.  By sellingthese loans in the secondary market, we can significantly reduce our exposureto credit risk because the loans will be underwritten through a third partyagent without any recourse against the bank.  At December 31, 2007,residential real estate loans (other than construction loans) totaled$3,803,706, or 6.9% of our loan portfolio.

 

·                    *Commercial Real Estate Loans*.  At December 31,2007, our individual commercial real estate loans ranged in size from $45,000to $1,700,000, with an average loan size of approximately $325,000. Commercial real estate loans generally have terms of five years or less,although payments may be structured on a longer amortization basis. Inherent in commercial real estate loans’ credit risk is the risk that theprimary source of repayment, the operating commercial real estate company, willbe insufficient to service the debt.  If a real estate loan is in default,we also run the risk that the value of a

 

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commercial real estateloan’s secured real estate will decrease, and thereby be insufficient tosatisfy the loan.  To mitigate these risks, we evaluate each borrower onan individual basis and attempt to determine its business risks and creditprofile.  We attempt to reduce credit risk in the commercial real estateportfolio by emphasizing loans on owner-occupied office and retail buildingswhere the loan-to-value ratio is established by independent appraisals. We typically review the personal financial statements of the principal ownersand require their personal guarantees.  These reviews often reveal secondarysources of payment and liquidity to support a loan request.  At December 31,2007, commercial real estate loans (other than construction loans) totaled$22,048,484, or 39.9% of our loan portfolio.

 

·                    *Real Estate - Construction. * We offeradjustable and fixed rate residential and commercial construction loans tobuilders and developers and to consumers who wish to build their ownhome.  The term of construction and development loans will generally belimited to 18 months, although payments may be structured on a longeramortization basis.  Most loans will mature and require payment in fullupon the sale of the property.  Construction and development loansgenerally carry a higher degree of risk than long term financing of existingproperties.  Repayment usually depends on the ultimate completion of theproject within cost estimates and on the sale of the property.  Specificrisks include:

 
| · | cost overruns;                                                     |
|--------|--------------------------------------------------------------------|
| · | mismanaged  construction;                                          |
| · | inferior or improper  construction techniques;                     |
| · | economic changes or downturns  during construction;                |
| · | a downturn in the real  estate market;                             |
| · | rising interest rates  which may prevent sale of the property; and |
| · | failure to sell  completed projects in a timely manner.            |

 

We attempt to reduce riskby obtaining personal guarantees where possible, and by keeping theloan-to-value ratio of the completed project below specified percentages. We may also reduce risk by selling participations in larger loans to otherinstitutions when possible.  At December 31, 2007, total constructionloans amounted to $8,188,004, or 14.8% of our loan portfolio.

 

*CommercialLoans*.  The bank makes loans for commercial purposes invarious lines of businesses. We focus our efforts on commercial loans of lessthan $1,000,000.  Equipment loans will typically be made for a term offive years or less at fixed or variable rates, with the loan fully amortizedover the term and secured by the financed equipment.  Working capitalloans typically 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 accounts receivable or inventory,principal is typically repaid as the assets securing the loan are convertedinto cash, and in other cases principal is typically due at maturity. Trade letters of credit, standby letters of credit, and foreign exchange arehandled through a correspondent bank as agent for the bank. Commercial loansprimarily have risk that the primary source of repayment, the borrowing business,will be insufficient to service the debt.  Often this occurs as the resultof changes in local economic conditions or in the industry in which theborrower operates which impact cash flow or collateral value.

 

We also offer smallbusiness loans utilizing government enhancements such as the Small BusinessAdministration’s 7(a) and SBA’s 504 programs.  These loans aretypically partially guaranteed by the government which may help to reduce thebank’s risk.  Government guarantees of SBA loans will not exceed 80% ofthe loan value, and will generally be less.  At December 31, 2007,commercial loans amounted to $7,505,415, or 13.6% of our loan portfolio.

 

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*Equityand Consumer Loans*.  The bank makes a variety of loansto individuals for personal and household purposes, including secured andunsecured installment loans and revolving lines of credit such as creditcards.  Installment loans typically carry balances of less than $50,000and are amortized over periods up to 60 or more months.  Consumer loansmay be offered on a single maturity basis where a specific source of repaymentis available.  Revolving loan products typically require monthly paymentsof interest and a portion of the principal.

 

Consumer loans aregenerally considered to have greater risk than first or second mortgages onreal estate because the value of the secured property may depreciate rapidly,they are often dependent on the borrower’s employment status as the sole sourceof repayment, and some of them are unsecured.  To mitigate these risks, weanalyze selective underwriting criteria for each prospective borrower, whichmay include the borrower’s employment history, income history, credit bureaureports, or debt to income ratios.  If the consumer loan is secured byproperty, such as an automobile loan, we also attempt to offset the risk ofrapid depreciation of the collateral with a shorter loan amortizationperiod.  Despite these efforts to mitigate our risks, consumer loans havea higher rate of default than real estate loans.  For this reason, we alsoattempt to reduce our loss exposure to these types of loans by limiting theirsizes relative to other types of loans.

 

We also offer home equityloans.  Our underwriting criteria for and the risks associated with homeequity loans and lines of credit will generally be the same as those for firstmortgage loans.  Home equity lines of credit typically have terms of 15years or less, typically carry balances less than $125,000, and may extend upto 90% of the available equity of each property. At December 31, 2007,individual home equity lines of credit, which are secured by real estate,amounted to $12,082,002, or 21.9% of our loan portfolio. Consumer loans whichare not secured by real estate amounted to $1,661,293, or 3.0% of our loanportfolio.

 

*RelativeRisks of Loans*.  Each category of loan has a differentlevel of credit risk.  Real estate loans are generally safer than loanssecured by other assets because the value of the underlying security, realestate, is generally ascertainable and does not fluctuate as much as some otherassets.  Certain real estate loans are less risky than others. Residential real estate loans are generally the least risky type of real estateloan, followed by commercial real estate loans and construction and developmentloans.  Commercial loans, which can be secured by real estate or otherassets, or which can be unsecured, are generally more risky than real estateloans, but less risky than consumer loans.  Finally, consumer loans, whichcan also be secured by real estate or other assets, or which can also beunsecured, are generally considered to be the most risky of these categories ofloans.  Any type of loan which is unsecured is generally more risky than securedloans.  These levels of risk are general in nature, and many factorsincluding the creditworthiness of the borrower or the particular nature of thesecured asset may cause any type of loan to be more or less risky thananother.  Additionally, these levels of risk are limited to an analysis ofcredit risk, and they do not take into account other risk factors associatedwith making loans such as the interest rate risk inherent in long-term,fixed-rate loans.

 

**DepositServices**

 

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 time certificates are typically tailored to ourprimary service area at competitive rates.  In addition, we offer certainretirement account services, including IRAs.  We solicit these accountsfrom individuals, businesses, and other organizations.

 

**OtherBanking Services**

 

We offer safe depositboxes, cashier’s checks, banking by mail, direct deposit of payroll and socialsecurity checks, U.S. Savings Bonds, and travelers checks.  The bank isassociated with the Intercept Switch, Pulse, MasterCard, Cirrus and Plus ATMnetworks that may be used by the bank’s customers throughout the country. We believe that by being associated with a shared network of ATMs, we arebetter able to serve our customers and will be able to attract customers whoare accustomed to the convenience of using ATMs.  We also offer a debitcard and credit card services through a correspondent bank as an agent for thebank.  We anticipate that the bank eventually may offer other bankservices including, lines of credit, 24-hour telephone banking, and onlinebanking.  We do not expect the bank to exercise trust powers during itsinitial years of operation.

 

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**Competition**

 

The Columbia/WestColumbia/Lexington market is highly competitive, with all of the largest banksin the state, as well as super regional 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 andsavings associations, we compete with other financial institutions includingsecurities firms, insurance companies, credit unions, leasing companies andfinance companies.  Size gives larger banks certain advantages in competingfor business from large corporations.  These advantages include higherlending limits and the ability to offer services in other areas of SouthCarolina.  As a result, we do not generally attempt to compete for thebanking relationships of large corporations, but concentrate our efforts onsmall- to medium-sized businesses and individuals.  We believe we willcompete effectively in this market by offering quality and personal service.

 

**Employees**

 

As of March 21,2008, we had 42 full-time employees and 3 part-time employees.

 

**SUPERVISIONAND REGULATION**

 

Both Congaree Bancshares, Inc.,and Congaree State Bank are subject to extensive state and federal bankingregulations that impose restrictions on and provide for general regulatoryoversight of their operations.  These laws generally are intended toprotect depositors and not shareholders.  The following summary isqualified by reference to the statutory and regulatory provisionsdiscussed.  Changes in applicable laws or regulations may have a materialeffect on our business and prospects.  Our operations may be affected bylegislative changes and the policies of various regulatory authorities. We cannot predict the effect that fiscal or monetary policies, economiccontrol, or new federal or state legislation may have on our business andearnings in the future.

 

The following discussionis not intended to be a complete list of all the activities regulated by thebanking laws or of the impact of such laws and regulations on ouroperations.  It is intended only to briefly summarize some materialprovisions.

 

**CongareeBancshares, Inc.,**

 

We own 100% of theoutstanding capital stock of the bank, and therefore we are considered to be abank holding company under the federal Bank Holding Company Act of 1956 (the “BankHolding Company Act”).  As a result, we are primarily subject to thesupervision, examination and reporting requirements of the Board of Governorsof the Federal Reserve (the “Federal Reserve”) under the Bank Holding CompanyAct and its regulations promulgated thereunder.  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 BankHolding Company Act, a bank holding company is generally permitted to engagein, or acquire direct or indirect control of more than 5% of the voting sharesof any company engaged in, the following activities:

 
| · | banking or managing or  controlling banks; and                                                                                                |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                          |
| · | furnishing services to  or performing services for our subsidiaries; and                                                                      |
|   |                                                                                                                                          |
| · | any activity that the  Federal Reserve determines to be so closely related to banking as to be a  proper incident to the business of banking. |

 

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Activities that theFederal Reserve has found to be so closely related to banking as to be a properincident to the business of banking include:

 
| · | factoring accounts  receivable;                                                                                                       |
|--------|---------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                  |
| · | making, acquiring,  brokering or servicing loans and usual related activities;                                                        |
|   |                                                                                                                                  |
| · | leasing personal or  real property;                                                                                                   |
|   |                                                                                                                                  |
| · | operating a non-bank  depository institution, such as a savings association;                                                          |
|   |                                                                                                                                  |
| · | trust company  functions;                                                                                                             |
|   |                                                                                                                                  |
| · | financial and  investment advisory activities;                                                                                        |
|   |                                                                                                                                  |
| · | conducting discount  securities brokerage activities;                                                                                 |
|   |                                                                                                                                  |
| · | underwriting and  dealing in government obligations and money market instruments;                                                     |
|   |                                                                                                                                  |
| · | providing specified  management consulting and counseling activities;                                                                 |
|   |                                                                                                                                  |
| · | performing selected  data processing services and support services;                                                                   |
|   |                                                                                                                                  |
| · | acting as agent or  broker in selling credit life insurance and other types of insurance in  connection with credit transactions; and |
|   |                                                                                                                                  |
| · | performing selected  insurance underwriting activities.                                                                               |

 

As a bank holding companywe also can elect to be treated as a “financial holding company,” which wouldallow us engage in a broader array of activities.  In sum, a financialholding company can engage in activities that are financial in nature orincidental or complementary to financial activities, including insuranceunderwriting, sales and brokerage activities, providing financial andinvestment advisory services, underwriting services and limited merchantbanking activities.  We have not sought financial holding company status,but may elect such status in the future as our business matures.  If wewere to elect in writing for financial holding company status, each insureddepository institution we control would have to be well capitalized, wellmanaged and have at least a satisfactory rating under the CRA (discussedbelow).

 

The Federal Reserve hasthe authority to order a bank holding company or its subsidiaries to terminateany of these activities or to terminate its ownership or control of anysubsidiary when it has reasonable cause to believe that the bank holdingcompany’s continued ownership, activity or control constitutes a serious riskto the financial safety, soundness or stability of it or any of its banksubsidiaries.

 

***Change in Control****. * In addition, and subject tocertain exceptions, the Bank Holding Company Act and the Change in Bank ControlAct, together with regulations promulgated thereunder, require Federal Reserveapproval prior to any person or company acquiring “control” of a bank holdingcompany.  Moreover, the South Carolina Board of Financial Institutionsalso must approve an acquisition of a South Carolina bank holdingcompany.  Control is conclusively presumed to exist if an individual orcompany acquires 25% or more of any class of voting securities of a bankholding company.  Control is rebuttably presumed to exist if a personacquires 10% or more, but less than 25%, of any class of voting securities andeither:

 
| · | the company has  registered securities under Section 12 of the Securities Exchange Act of  1934; or          |
|--------|-------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                              |
| · | no other person owns a  greater percentage of that class of voting securities immediately after the  transaction. |

 

Our common stockis registered under Section 12 of the Securities Exchange Act of1934.  Any shareholder of 10% or more, but less than 25% of any class ofour voting securities would be required to either file as a controllingshareholder of the company or rebut the presumption of control in accordancewith Federal Reserve regulations.  The regulations provide a procedure forrebutting control when ownership of any class of voting securities is below25%.

 

8

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***Source of Strength****.*  In accordance with Federal ReserveBoard policy, we are expected to act as a source of financial strength to thebank and to commit resources to support the bank in circumstances in which wemight 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 Bank Holding Company Act, the FederalReserve Board may require a bank holding company to terminate any activity orrelinquish control of a nonbank subsidiary, other than a nonbank subsidiary ofa bank, upon the Federal Reserve Board’s determination that such activity orcontrol constitutes a serious risk to the financial soundness or stability ofany depository institution subsidiary of the bank holding company. Further, federal bank regulatory authorities have additional discretion torequire 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 holdingcompany to a subsidiary bank are subordinate in right of payment to depositsand certain other indebtedness of the 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 same as those that apply to the bank andare described below under “Congaree State Bank - Capital Regulations.” Subject to our capital requirements and certain other restrictions, we are ableto borrow money to make a capital contribution to the bank, and these loans maybe repaid from dividends paid from the bank to the Company.  Our abilityto pay dividends depends on the bank’s ability to pay dividends to us, which issubject to regulatory restrictions as described below in “Congaree State Bank -Dividends.”  We are also able to raise capital for contribution to thebank by issuing securities without having to receive regulatory approval,subject to compliance with federal and state securities laws.

 

***South Carolina State Regulation.*** As a South 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 not required to obtain the approval of theSouth Carolina Board of Financial Institutions prior to acquiring the capitalstock of a national bank, but we must notify them at least 15 days prior todoing so.  We must receive the Board’s approval prior to engaging in theacquisition of a South Carolina state chartered bank or another South Carolinabank holding company.

 

**CongareeState Bank**

 

The bank operates as astate bank incorporated under the laws of the State of South Carolina and issubject to examination by the South Carolina Board of Financial Institutions.

 

The South Carolina Boardof Financial Institutions and the FDIC regulate or monitor virtually all areasof the bank’s operations, including:

 
| · | security devices and  procedures;              |
|--------|------------------------------------------------|
|   |                                           |
| · | adequacy of  capitalization and loss reserves; |
|   |                                           |
| · | loans;                                         |
|   |                                           |
| · | investments;                                   |
|   |                                           |
| · | borrowings;                                    |
|   |                                           |
| · | deposits;                                      |
|   |                                           |
| · | mergers;                                       |

 

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| · | 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 safe lending and deposit gathering practices. |

 

The South Carolina Boardof Financial Institutions requires the bank to maintain specified capitalratios and imposes limitations on the bank’s aggregate investment in realestate, bank premises, and furniture and fixtures.  The South CarolinaBoard of Financial Institutions also requires the bank to prepare quarterlyreports on the bank’s financial condition in compliance with its minimumstandards and procedures.

 

All insured institutionsmust undergo regular on site examinations by their appropriate bankingagency.  The cost of examinations of insured depository institutions andany affiliates may be assessed by the appropriate agency against eachinstitution or affiliate as it deems necessary or appropriate.  Insuredinstitutions are required to submit annual reports to the FDIC, their federalregulatory agency, and their state supervisor when applicable.  The FDIC hasdeveloped a method for insured depository institutions to provide supplementaldisclosure of the estimated fair market value of assets and liabilities, to theextent feasible and practicable, in any balance sheet, financial statement,report of condition or any other report of any insured depositoryinstitution.  The FDIC Improvement Act also requires the federal bankingregulatory agencies to prescribe, by regulation, standards for all insureddepository institutions and depository institution 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.                          |

 

***Prompt Corrective Action. *** As aninsured depository institution, the bank is required to comply with the capitalrequirements promulgated under the Federal Deposit Insurance Act and theregulations thereunder, which set forth five capital categories, each withspecific regulatory consequences.  Under these regulations, the categoriesare:

 

·                                               WellCapitalized - The institution exceeds the required minimum level for eachrelevant 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.

 

·                                               AdequatelyCapitalized - The institution meets the required minimum level for eachrelevant capital measure.  No capital distribution may be made that wouldresult in the institution becoming undercapitalized.  An adequatelycapitalized institution is one (i) having a total capital ratio of 8% orgreater, (ii) having a tier 1 capital ratio of 4% or greater and (iii) havinga leverage capital ratio of 4% or greater or a leverage capital ratio of 3% orgreater if the institution is rated composite 1 under the CAMELS (Capital,Assets, Management, Earnings, Liquidity and Sensitivity to market risk) ratingsystem.

 

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·                                               Undercapitalized- The institution fails to meet the required minimum level for any relevantcapital measure.  An undercapitalized institution is one (i) having atotal capital ratio of less than 8% or (ii) having a tier 1 capital ratioof less than 4% or (iii) having a leverage capital ratio of less than 4%,or if the institution is rated a composite 1 under the CAMELS rating system, aleverage capital ratio of less than 3%.

 

·                                               SignificantlyUndercapitalized - The institution is significantly below the required minimumlevel for any relevant capital measure.  A significantly undercapitalizedinstitution is one (i) having a total capital ratio of less than 6% or (ii) havinga tier 1 capital ratio of less than 3% or (iii) having a leverage capitalratio of less than 3%.

 

·                                               CriticallyUndercapitalized - The institution fails to meet a critical capital level setby the appropriate federal banking agency.  A critically undercapitalizedinstitution is one having a ratio of tangible equity to total assets that isequal to or less than 2%.

 

If the FDIC determines,after notice and an opportunity for hearing, that the bank is in an unsafe orunsound condition, the regulator is authorized to reclassify the bank to thenext lower capital category (other than critically undercapitalized) andrequire the submission of a plan to correct the unsafe or unsound condition.

 

If the bank is not wellcapitalized, it cannot accept brokered deposits without prior FDIC approvaland, if approval is granted, cannot offer an effective yield in excess of 75basis points on interests paid on deposits of comparable size and maturity insuch institution’s normal market area for deposits accepted from within its normalmarket area, or national rate paid on deposits of comparable size and maturityfor deposits accepted outside the bank’s normal market area.  Moreover, ifthe bank becomes less than adequately capitalized, it must adopt a capitalrestoration plan acceptable to the FDIC.  The bank also would becomesubject to increased regulatory oversight, and is increasingly restricted inthe scope of its permissible activities.  Each company having control overan undercapitalized institution also must provide a limited guarantee that theinstitution will comply with its capital restoration plan.  Except underlimited circumstances consistent with an accepted capital restoration plan, anundercapitalized institution may not grow.  An undercapitalized institutionmay not acquire another institution, establish additional branch offices orengage in any new line of business unless determined by the appropriate Federalbanking agency to be consistent with an accepted capital restoration plan, orunless the FDIC determines that the proposed action will further the purpose ofprompt corrective action.  The appropriate federal banking agency may takeany action authorized for a significantly undercapitalized institution if anundercapitalized institution fails to submit an acceptable capital restorationplan or fails in any material respect to implement a plan accepted by theagency.  A critically undercapitalized institution is subject to having areceiver or conservator appointed to manage its affairs and for loss of its charterto conduct banking activities.

 

An insured depositoryinstitution may not pay a management fee to a bank holding company controllingthat institution or any other person having control of the institution if,after making the payment, the institution, would be undercapitalized.  Inaddition, an institution cannot make a capital distribution, such as a dividendor other distribution that is in substance a distribution of capital to theowners of the institution if following such a distribution the institutionwould be undercapitalized.  Thus, if payment of such a management fee orthe making of such would cause the bank to become undercapitalized, it couldnot pay a management fee or dividend to us.

 

As of December 31,2007, the bank was deemed to be “well capitalized.”

 

***Standards for Safety and Soundness.    ***The Federal Deposit Insurance Act also requires the federal banking regulatoryagencies to prescribe, by regulation or guideline, operational and managerialstandards 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 forcompensation, fees and benefits.  The federal banking agencies haveadopted regulations and Interagency Guidelines Prescribing Standards for Safetyand Soundness to implement these required standards. These guidelines set forththe safety and soundness standards that the federal banking agencies use toidentify and address problems at insured depository institutions before capitalbecomes impaired.  Under the regulations, if the FDIC determines that thebank fails to meet any standards prescribed by the guidelines, the agency mayrequire the bank to submit to the agency an acceptable plan to achievecompliance with the standard, as required by the FDIC.  The finalregulations establish deadlines for the submission and review of such safetyand soundness compliance plans.

 

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***Deposit Insurance and Assessments.***  Deposits at the bank are insured by the Deposit Insurance Fund (the“DIF”) as administered by the FDIC, up to the applicable limits established bylaw - generally $100,000 per accountholder and $250,000 for certain retirementaccountholders.   In November 2006, the FDIC adopted finalregulations that set the deposit insurance assessment rates that took effect in2007.  The FDIC uses a risk-based assessment system that assigns insureddepository institutions to one of four risk categories based on three primarysources of information - supervisory risk ratings for all institutions,financial ratios for most institutions, including the company, and long-termdebt issuer ratings for large institutions that have such ratings.  Thenew premium rate structure imposes a minimum assessment of from five to sevencents for every $100 of domestic deposits on institutions that are assigned tothe lowest risk category.  This category is expected to encompasssubstantially all insured institutions, including the bank.  A one timeassessment credit is available to offset up to 100% of the 2007assessment.  Any remaining credit can be used to offset up to 90% ofsubsequent annual assessments through 2010.  For institutions assigned tohigher risk categories, the premium that took effect in 2007 ranges from tencents to forty-three cents per $100 of deposits.

 

The FDIC also collects adeposit-based assessment from insured financial institutions on behalf of TheFinancing Corporation (FICO).  The funds from these assessments are usedto service debt issued by FICO in its capacity as a financial vehicle for theFederal Savings and Loan Insurance Corporation.  The FICO assessmentrate is set quarterly and in 2006 ranged from 1.32 cents to 1.24 cents per $100of assessable deposits.  For the first quarter of 2007, the FICOassessment rate was 1.22 cents per $100 of assessable deposits.

 

***Transactions with Affiliates and Insiders.*** The company is a legal entity separate and distinct from the bank and its othersubsidiaries.  Various legal limitations restrict the bank from lending orotherwise supplying funds to the company or its non-bank subsidiaries. The company and the bank are subject to Sections 23A and 23B of the FederalReserve Act and Federal Reserve Regulation W.  Section 23A of theFederal Reserve Act places limits on the amount of loans or extensions ofcredit 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.  The aggregate of all covered transactionsis limited in amount, as to any one affiliate, to 10% of the bank’s capital andsurplus and, as to all affiliates combined, to 20% of the bank’s capital andsurplus.  Furthermore, within the foregoing limitations as to amount, eachcovered transaction must meet specified collateral requirements.  The bankis forbidden to purchase low quality assets from an affiliate.

 

Section 23B of theFederal Reserve Act, among other things, prohibits an institution from engagingin certain transactions with certain affiliates unless the transactions are onterms substantially the same, or at least as favorable to such institution orits subsidiaries, as those prevailing at the time for comparable transactionswith 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 ofcredit (i) must be made on substantially the same terms, includinginterest rates and collateral, as those prevailing at the time for comparabletransactions with third parties and (ii) must not involve more than thenormal risk of repayment or present other unfavorable features.

 

Regulation W generallyexcludes all non-bank and non-savings association subsidiaries of banks fromtreatment as affiliates, except to the extent that the Federal Reserve Boarddecides to treat these subsidiaries as affiliates. The regulation also limitsthe amount of loans that can be purchased by a bank from an affiliate to notmore than 100% of the bank’s capital and surplus.

 

***Branching****.*  Under current South Carolina law, we may open branchoffices throughout South Carolina with the prior approval of the South CarolinaBoard of Financial Institutions.   In addition, with prior regulatoryapproval, the bank will be able to acquire existing banking operations in SouthCarolina.  Furthermore, federal legislation has been passed that permitsinterstate branching by banks if allowed by state law, and interstate mergingby banks.  However, South Carolina law, with limited exceptions, currentlypermits branching across state lines only through interstate mergers.

 

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***Anti-Tying Restrictions. *** Underamendments to the Bank Holding Company Act and Federal Reserve regulations, abank is prohibited from engaging in certain tying or reciprocity arrangementswith its customers.  In general, a bank may not extend credit, lease, sellproperty, or furnish any services or fix or vary the consideration for these onthe condition that (i) the customer obtain or provide some additionalcredit, property, or services from or to the bank, the bank holding company orsubsidiaries thereof or (ii) the customer may not obtain some othercredit, property, or services from a competitor, except to the extentreasonable conditions are imposed to assure the soundness of the creditextended.  Certain arrangements are permissible: a bank may offercombined-balance products and may otherwise offer more favorable terms if acustomer obtains two or more traditional bank products; and certain foreigntransactions are exempt from the general rule.  A bank holding company orany bank affiliate also is subject to anti-tying requirements in connectionwith electronic benefit transfer services.

 

***Community Reinvestment Act****.*  The Community Reinvestment Actrequires that, in connection with examinations of financial institutions withintheir respective jurisdictions, a financial institution’s primary regulator,which is the FDIC for the bank, shall evaluate the record of each financialinstitution in meeting the credit needs of its local community, including lowand moderate income neighborhoods.  These factors are also considered inevaluating mergers, acquisitions, and applications to open a branch orfacility.  Failure to adequately meet these criteria could imposeadditional requirements and limitations on our bank.  Additionally, wemust publicly disclose the terms of various Community Reinvestment Act-relatedagreements.

 

***Finance Subsidiaries.***  Under theGramm-Leach-Bliley Act (the “GLBA”), subject to certain conditions imposed bytheir 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 imposesseveral safeguards and restrictions on financial subsidiaries, including thatthe parent bank’s equity investment in the financial subsidiary be deductedfrom the bank’s assets and tangible equity for purposes of calculating the bank’scapital adequacy.  In addition, the GLBA imposes new restrictions ontransactions between a bank and its financial subsidiaries similar torestrictions applicable to transactions between banks and non-bank affiliates.

 

***Consumer Protection Regulations.*** Activities of the bank are subject to a variety of statutes andregulations designed to protect consumers.  Interest and other chargescollected or contracted for by the bank are subject to state usury laws andfederal laws concerning interest rates.  The bank’s loan operations arealso subject to federal laws applicable to credit transactions, such as the:

 

·                  The federalTruth-In-Lending Act, governing disclosures of credit terms to consumerborrowers;

 

·                  The Home Mortgage Disclosure Act of1975, requiring financial institutions to provide information to enable thepublic and public officials to determine whether a financial institution isfulfilling its obligation to help meet the housing needs of the community itserves;

 

·                  The Equal Credit Opportunity Act,prohibiting discrimination on the basis of race, creed or other prohibitedfactors in extending credit;

 

·                  The Fair Credit Reporting Act of1978, as amended by the Fair and Accurate Credit Transactions Act, governingthe use and provision of information to credit reporting agencies, certainidentity theft protections and certain credit and other disclosures;

 

·                  The Fair Debt Collection Act,governing the manner in which consumer debts may be collected by collectionagencies; and

 

·                  The Rules and regulations of thevarious federal agencies charged with the responsibility of implementing thesefederal laws.

 

The deposit operations ofthe bank also are subject to:

 

·                     the Right to Financial PrivacyAct, which imposes a duty to maintain confidentiality of consumer financialrecords and prescribes procedures for complying with administrative subpoenasof financial records; and

 

13

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·                     the Electronic Funds Transfer Actand Regulation E issued by the Federal Reserve Board to implement that Act,which governs automatic deposits to and withdrawals from deposit accounts andcustomers’ rights and liabilities arising from the use of automated tellermachines and other electronic banking services.

 

***Enforcement Powers.***  The bank andits “institution-affiliated parties,” including its management, employees,agents, independent contractors, and consultants such as attorneys andaccountants 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.  Civil penalties may be as high as$1,000,000 a day for such violations.  Criminal penalties for somefinancial institution crimes have been increased to twenty years.  Inaddition, regulators are provided with greater flexibility to commence enforcementactions against institutions and institution-affiliated parties.  Possibleenforcement actions include the termination of deposit insurance. Furthermore, banking agencies’ power to issue cease-and-desist orders wereexpanded.  Such orders may, among other things, require affirmative actionto correct any harm resulting from a violation or practice, includingrestitution, reimbursement, indemnifications or guarantees against loss. A financial institution may also be ordered to restrict its growth, dispose ofcertain assets, rescind agreements or contracts, or take other actions asdetermined by the ordering agency to be appropriate.

 

***Anti-Money Laundering. *** Financialinstitutions must maintain anti-money laundering programs that includeestablished internal policies, procedures, and controls; a designatedcompliance officer; an ongoing employee training program; and testing of theprogram by an independent audit function. The company and the bank are alsoprohibited from entering into specified financial transactions and accountrelationships and must meet enhanced standards for due diligence and “knowingyour customer” in their dealings with foreign financial institutions andforeign customers.  Financial institutions must take reasonable steps to conductenhanced scrutiny of account relationships to guard against money launderingand to report any suspicious transactions, and recent laws provide lawenforcement authorities with increased access to financial informationmaintained by banks.  Anti-money laundering obligations have beensubstantially strengthened as a result of the USA Patriot Act, enacted in 2001and renewed in 2006.  Bank regulators routinely examine institutions forcompliance with these obligations and are required to consider compliance inconnection with the regulatory review of applications.  The regulatoryauthorities have been active in imposing “cease and desist” orders and moneypenalty sanctions against institutions found to be violating these obligations.

 

***USA PATRIOT Act.*  **The USA PATRIOTAct became effective on October 26, 2001, amended, in part, the bankSecrecy Act, and provides, in part, for the facilitation of information sharingamong governmental entities and financial institutions for the purpose ofcombating terrorism and money laundering by enhancing anti-money laundering andfinancial transparency laws, as well as enhanced information collection toolsand enforcement 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 regulatorsroutinely examine institutions for compliance with these obligations and arerequired to consider compliance in connection with the regulatory review ofapplications.

 

Under the USA PATRIOTAct, the Federal Bureau of Investigation (“FBI”) can send our bankingregulatory agencies lists of the names of persons suspected of involvement interrorist activities.  The bank can be requested, to search its recordsfor any relationships or transactions with persons on those lists.  If thebank finds any relationships or transactions, it must file a suspiciousactivity report and contact the FBI.

 

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The Office of ForeignAssets Control (“OFAC”), which is a division of the U.S. Department of theTreasury, is responsible for helping to insure that United States entities do notengage in transactions with “enemies” of the United States, as defined byvarious Executive Orders and Acts of Congress.  OFAC has sent, and willsend, our banking regulatory agencies lists of names of persons andorganizations suspected of aiding, harboring or engaging in terroristacts.  If the bank finds a name on any transaction, account or wiretransfer that is on an OFAC list, it must freeze such account, file asuspicious activity report and notify the FBI.  The bank has appointed an OFACcompliance officer to oversee the inspection of its accounts and the filing ofany notifications.  The bank actively checks high-risk OFAC areas such asnew accounts, wire transfers and customer files.  The bank performs thesechecks utilizing software, which is updated each time a modification is made tothe lists provided by OFAC and other agencies of Specially Designated Nationalsand Blocked Persons.

 

***Privacy and Credit Reporting*. **Financial institutions are required to disclose their policies for collecting andprotecting confidential information.  Customers generally may preventfinancial institutions from sharing nonpublic personal financial informationwith nonaffiliated third parties except under narrow circumstances, such as theprocessing of transactions requested by the consumer or when the financialinstitution is jointly sponsoring a product or service with a nonaffiliatedthird party.  Additionally, financial institutions generally may notdisclose consumer account numbers to any nonaffiliated third party for use intelemarketing, direct mail marketing or other marketing to consumers.  Itis the bank’s policy not to disclose any personal information unless requiredby law.

 

Like other lendinginstitutions, the bank utilizes credit bureau data in its underwritingactivities.  Use of such data is regulated under the Federal CreditReporting Act on a uniform, nationwide basis, including credit reporting,prescreening, sharing of information between affiliates, and the use of creditdata.  The Fair and Accurate Credit Transactions Act of 2003 (the “FACTAct”) authorizes states to enact identity theft laws that are not inconsistentwith the conduct required by the provisions of the FACT Act.

 

***Payment of Dividends.*** A South Carolinastate bank may not pay dividends from its capital.  All dividends must bepaid out of undivided profits then on hand, after deducting expenses, includingreserves for losses and bad debts.  The bank is authorized to pay cashdividends up to 100% of net income in any calendar year without obtaining theprior approval of the South Carolina Board of Financial Institutions, providedthat the bank received a composite rating of one or two at the last federal orstate 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 the Federal Deposit Insurance CorporationImprovement Act, the bank may not pay a dividend if, after paying the dividend,the bank would be undercapitalized.

 

***Check 21.***  The Check Clearing forthe 21st Century Act gives “substitute checks,” such as a digital image of acheck and copies made from that image, the same legal standing as the originalpaper check.  Some of the major provisions include:

 

·                              allowingcheck truncation without making it mandatory;

 

·                              demandingthat every financial institution communicate to account holders in writing adescription of its substitute check processing program and their rights underthe law;

 

·                              legalizingsubstitutions for and replacements of paper checks without agreement fromconsumers;

 

·                              retainingin place the previously mandated electronic collection and return of checksbetween financial institutions only when individual agreements are in place;

 

·                              requiringthat when accountholders request verification, financial institutions producethe original check (or a copy that accurately represents the original) anddemonstrate that the account debit was accurate and valid; and

 

·                              requiringthe re-crediting of funds to an individual’s account on the next business dayafter a consumer proves that the financial institution has erred.

 

15

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***Effect of Governmental Monetary Policies*.** Our earnings are affected by domestic economic conditions and the monetary andfiscal policies of the United States government and its agencies.  TheFederal Reserve bank’s monetary policies have had, and are likely to continueto have, an important impact on the operating results of commercial banksthrough its power to implement national monetary policy in order, among otherthings, to curb inflation or combat a recession.  The monetary policies ofthe Federal 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 predict the nature or impact of futurechanges in monetary and fiscal policies.

 

***Proposed Legislation and Regulatory Action*.** New regulations and statutes are regularly proposed that contain wide-rangingproposals for altering the structures, regulations, and competitive relationshipsof the nation’s financial institutions.  We cannot predict whether or inwhat form any proposed regulation or statute will be adopted or the extent towhich our business may be affected by any new regulation or statute.

 

**RiskFactors**

 

***We expect to incur losses for at least our first two years,and there is a risk we may never become profitable.***

 

Our bank is a de novobank that began operations in October 2006.  As is typical with mostnew banks, we incurred substantial start-up expenses and are still operatingwith an accumulated deficit.  In order for us to become profitable, wewill need to attract a large number of customers to deposit and borrowmoney.  This will take time.  Our future profitability is dependenton numerous factors including the continued success of the economy of thecommunity and favorable government regulation.  While the economy in thisarea has been strong in recent years, an economic downturn in the area wouldhurt our business.  We are also a highly regulated institution.  Ourability to grow and achieve profitability may be adversely affected by stateand federal regulations that limit a bank’s right to make loans, purchasesecurities, and pay dividends.  Although we expect to become profitable inour third year, there is a risk that a deterioration of the local economy oradverse government regulation and other factors could affect our plans.

 

In addition, although wehave grown rapidly since opening in October 2006, we may not be able tosustain this rate of growth and may not even be able to grow our business atall.  Because of our relatively small size and short operating history, itwill be difficult for us to generate similar asset growth rates as we continueto expand, and consequently our historical results of operations are notnecessarily indicative of our future operations.  If we experience asignificant decrease in our rate of growth, our results of operations andfinancial condition may be adversely affected because a high percentage of ouroperating costs are fixed expenses.

 

***Our decisions regarding credit risk and reserves for loanlosses may materially and adversely affect our business.***

 

Making loans and otherextensions of credit is an essential element of our business.  Although weseek to mitigate risks inherent in lending by adhering to specific underwritingpractices, our loans and other extensions of credit may not be repaid. The risk of nonpayment is affected by a number of factors, including:

 

·                    the durationof the credit;

·                    credit risksof a particular customer;

·                    changes ineconomic and industry conditions; and

·                    in the case ofa collateralized loan, risks resulting from uncertainties about the futurevalue of the collateral.

 

We attempt to maintain anappropriate allowance for loan losses to provide for potential losses in ourloan portfolio.  We periodically determine the amount of the allowancebased on consideration of several factors, including:

 

·                    an ongoingreview of the quality, mix, and size of our overall loan portfolio;

·                    our historicalloan loss experience;

·                    evaluation ofeconomic conditions;

·                    regularreviews of loan delinquencies and loan portfolio quality; and

·                    the amount andquality of collateral, including guarantees, securing the loans.

 

16

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There is no precisemethod of predicting credit losses since any estimate of loan losses isnecessarily subjective and the accuracy of the estimate depends on the outcomeof future events.  Therefore, we face the risk that charge-offs in futureperiods will exceed our allowance for loan losses and that additional increasesin the allowance for loan losses will be required.  Additions to theallowance for loan losses would result in an increase of our net loss, andpossibly a decrease in our capital.

 

While we generallyunderwrite the loans in our portfolio in accordance with our own internalunderwriting guidelines and regulatory supervisory guidelines, in certaincircumstances we have made loans which exceed either our internal underwritingguidelines, supervisory guidelines, or both.  As of December 31,2007, approximately $1,137,180 of our loans, or 7.9% of our bank’s capital, hadloan-to-value ratios that exceeded regulatory supervisory guidelines.  Inaddition, supervisory limits on commercial loan to value exceptions are set at30% of our bank’s capital.  At December 31, 2007, we had $241,773 incommercial loans that exceeded the supervisory loan to value ratio.  Thenumber of loans in our portfolio with loan-to-value ratios in excess ofsupervisory guidelines, our internal guidelines, or both could increase therisk of delinquencies and defaults in our portfolio.

 

***Our real estate portfolios are exposed to weakness in theU.S. housing markets and the overall state of the economy.***

 

The declines in homeprices in many markets across the U.S., along with the reduced availability ofmortgage credit, have resulted in sharp increases in delinquencies and lossesin our portfolios of broker-originated, out-of-footprint home equity lines andloans, nonprime mortgages, and loans related to residential real estateconstruction and development. Further declines in home prices coupled with aneconomic recession and associated rises in unemployment levels could drivelosses beyond that which is provided for in the allowance for loan losses. Inthat event, our earnings and capital could be adversely affected.

 

***Changes in prevailing interest rates are likely to reduceour profitability.***

 

Our results of operationsdepend in large part upon the level of our net interest income, which is thedifference between interest income from interest-earning assets, such as loansand mortgage-backed securities, and interest expense on interest-bearingliabilities, such as deposits and other borrowings.  Depending on the termsand maturities of our assets and liabilities, a significant change in interestrates could have a material adverse effect on our profitability.  Manyfactors cause changes in interest rates, including governmental monetarypolicies and domestic and international economic and politicalconditions.  While we intend to manage the effects of changes in interestrates by adjusting the terms, maturities, and pricing of our assets andliabilities, our efforts may not be effective and our financial condition and resultsof operations could suffer.  The Federal Reserve rapidly reducedshort-term interest rates in the first quarter of 2008 by 200 basispoints.  We anticipate that these reductions will continue in 2008. These rate cuts will adversely affect our profitability in 2008, as our assetsgenerally reprice sooner than our liabilities.  In the long term, we couldbenefit from a low interest rate environment; however, no assurance can begiven that the Federal Reserve will continue to decrease interest rates orwhether it will increase rates, or what results such changes will have on ourperformance.

 

***We may have higher loan losses than we have allowed for inour allowance for loan losses.***

 

Our loan losses couldexceed our allowance for loan losses.  Our average loan size continues toincrease and reliance on our historic allowance for loan losses may not beadequate.  Approximately 28.3% of our loan portfolio is composed ofconstruction, commercial mortgage and commercial loans. Repayment of such loansis generally considered riskier than residential mortgage loans.  Industryexperience shows that a portion of loans will become delinquent and a portionof loans will require partial or entire 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.

 

17

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***Lack of seasoning of our loan portfolio may increase therisk of credit defaults in the future.***

 

Due to our shortoperating history, all of the loans in our loan portfolio and of our lendingrelationships are of relatively recent origin.  In general, loans do notbegin to show signs of credit deterioration or default until they have beenoutstanding for some period of time, a process we refer to as “seasoning.” As a result, a portfolio of older loans will usually behave more predictablythan a newer portfolio.  Because our loan portfolio is relatively new, thecurrent level of delinquencies and defaults may not be representative of thelevel that will prevail when the portfolio becomes more seasoned, which may behigher 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.

 

***An economic downturn, especially one affecting the Lexingtonand Richland County areas, could reduce our customer base, our level ofdeposits, and demand for financial products such as loans.***

 

Our success significantlydepends upon the growth in population, income levels, deposits, and housingstarts in our markets, especially in Lexington and Richland Counties.  Ifthe communities in which we operate do not grow, or if prevailing economicconditions locally or nationally are unfavorable, our business may notsucceed.  An economic downturn would likely contribute to the deteriorationof the quality of our loan portfolio and reduce our level of deposits, which inturn would hurt our business.  Interest received on loans represented68.15% of our interest income for the year ended December 31, 2007. If an economic downturn occurs in the economy as a whole, or especially in theLexington or Richland County area, borrowers may be less likely to repay theirloans as scheduled.  Moreover, the value of real estate or othercollateral that may secure our loans could be adversely affected.  Unlike manylarger institutions, we are not able to spread the risks of unfavorable localeconomic conditions across a large number of diversified economies.  Aneconomic downturn could, therefore, result in losses that materially andadversely affect our business.

 

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

 

We target the banking andfinancial services needs of small and medium-sized business.  Thesebusinesses generally have fewer financial resources in terms of capitalborrowing capacity than larger entities.  If general economic conditionsnegatively impact these businesses in the markets in which we operate, ourbusiness, financial condition and results of operations may be adverselyaffected.

 

***We expect that a significant portion of our loan portfoliowill be secured by real estate, and events that negatively impact the realestate market could hurt our business.***

 

A significant portion ofour loan portfolio is secured by real estate.  As of December 31,2007, 83.42% of our loans had real estate as a primary or secondary componentof collateral.  The real estate collateral in each case provides analternate source of repayment in the event of default by the borrower and maydeteriorate in value during the time the credit is extended.  A furtherweakening of the real estate market in our primary market area could result inan increase in the number of borrowers who default on their loans and areduction in the value of the collateral securing their loans, which in turncould have an adverse effect on our profitability and asset quality.  Ifwe are required to liquidate the collateral securing a loan to satisfy the debtduring a period of reduced real estate values, our earnings and capital couldbe adversely affected.  Acts of nature, including hurricanes, tornados,earthquakes, fires and floods, which may cause uninsured damage and other lossof value to real estate that secures these loans, may also negatively impactour financial condition.

 

***We depend on the accuracy and completeness of informationabout clients and counterparties and our financial condition could be adverselyaffected if we rely on misleading information.***

 

In deciding whether toextend credit or to enter into other transactions with clients andcounterparties, we may rely on information furnished to us by or on behalf ofclients and counterparties, including financial statements and other financialinformation. We also may rely on representations of clients and counterpartiesas to the accuracy and completeness of that information and, with respect tofinancial statements, on reports of independent auditors. For example, indeciding whether to extend credit to clients, we may assume that a customer’saudited financial statements conform with GAAP and present fairly, in allmaterial respects, the financial condition, results of operations and cashflows of the customer. Our financial condition and results of operations couldbe negatively affected to the extent we rely on financial statements that donot comply with GAAP or are materially misleading.

 

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***We are dependent on key individuals and the loss of one ormore of these key individuals could curtail our growth and adversely affect ourprospects.***

 

F. Harvin Ray, Jr.,our chief executive officer, has extensive and long-standing ties within ourprimary service areas and provides us with an important medium through which tomarket our products and services.  If we lose the services of Mr. Ray,he could be difficult to replace and our business and development could bematerially and adversely affected.

 

Our success also depends,in part, on our continued ability to attract and retain experienced loanoriginators, as well as other management personnel.  Competition forpersonnel is intense, and we may not be successful in attracting or retainingqualified personnel.  Our failure to compete for these personnel, or theloss of the services of several of such key personnel, could adversely affectour growth strategy and seriously harm our business, results of operations, andfinancial condition.

 

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

 

The Sarbanes-Oxley Act of2002, and the related rules and regulations promulgated by the Securitiesand Exchange Commission that are now applicable to us, have increased thescope, complexity, and cost of corporate governance, reporting, and disclosurepractices.  We have experienced, and we expect to continue to experience,greater compliance costs, including costs related to internal controls, as aresult of the Sarbanes-Oxley Act.  For example, for the year ended December 31,2009 (assuming the one-year extension recently proposed by the SEC becomeseffective), our independent registered public accounting firm will be requiredto attest to our internal control over financial reporting, in addition to ourmanagement’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.  Inthe event that we are unable to maintain or achieve compliance with the Sarbanes-OxleyAct and related rules, we may be adversely affected.

 

If we are unable toreceive a positive attestation from our independent registered publicaccounting firm for the year ending December 31, 2009 (assuming theone-year extension recently proposed by the SEC becomes effective) then wecould be subject to scrutiny by regulatory authorities, the trading price ofour common stock could decline and our ability to obtain any necessary equityor debt 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, these necessary costs are proportionatelyhigher for a company of our size and will affect our profitability more thanthat of some of our larger competitors.

 

***We are subject to extensive regulation that could limit orrestrict our activities.***

 

We operate in a highlyregulated industry and are subject to examination, supervision, andcomprehensive regulation by various regulatory agencies.  Our compliancewith these regulations is costly and restricts certain of our activities,including payment of dividends, mergers and acquisitions, investments, loansand interest rates charged, interest rates paid on deposits, and locations ofoffices.  We are also subject to capitalization guidelines established byour regulators, which require us to maintain adequate capital to support ourgrowth.

 

The laws and regulationsapplicable to the banking industry could change at any time, and we cannotpredict the effects of these changes on our business and profitability. Because government regulation greatly affects the business and financialresults of all commercial banks and bank holding companies, our cost ofcompliance could adversely affect our ability to operate profitably.

 

Although we are subjectto extensive and comprehensive regulation by various banking regulatoryagencies 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.  Theseagencies do not consider preserving or maximizing the investment made by thecompany’s investors when regulating the bank’s activities.

 

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The Sarbanes-Oxley Act of2002, and the related rules and regulations promulgated by the Securitiesand Exchange Commission that are applicable to us, will increase the scope,complexity, and cost of corporate governance, reporting, and disclosurepractices.  We have experienced, and we expect to continue to experience,significant compliance costs, including costs related to internal controls, asa result of the Sarbanes-Oxley Act.

 

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

 

We are required byregulatory authorities to maintain adequate levels of capital to support ouroperations.  To support our continued growth, we may need to raiseadditional capital.  Our ability to raise additional capital, if needed,will depend in part on conditions in the capital markets at that time, whichare outside our control.  Accordingly, we cannot assure you of our abilityto raise additional capital, if needed, on terms acceptable to us.  If wecannot raise additional capital when needed, our ability to further expand ouroperations through internal growth and acquisitions could be materiallyimpaired.  In addition, if we decide to raise additional equity capital,your interest could be diluted.

 

***We face strong competition for clients, which could preventus from obtaining clients and may cause us to pay higher interest rates toattract deposits.***

 

The banking business ishighly competitive, and we experience competition in our market from many otherfinancial institutions.  We compete with commercial banks, credit unions,savings and loan associations, mortgage banking firms, consumer financecompanies, securities brokerage firms, insurance companies, money market funds,and other mutual funds, as well as other super-regional, national, andinternational financial institutions that operate offices in our primary marketareas and elsewhere.  We compete with these institutions both inattracting deposits and in making loans.  In addition, we have to attractour client base from other existing financial institutions and from newresidents.  Many of our competitors are well-established, larger financialinstitutions.  These institutions offer some services, such as extensiveand established branch networks, that we do not provide.  There are also anumber of other relatively new community banks in our market that share ourgeneral marketing focus on small- to medium-sized businesses andindividuals.  There is a risk that we will not be able to competesuccessfully with other financial institutions in our market, and that we mayhave to pay higher interest rates to attract deposits, resulting in reducedprofitability.  In addition, competitors that are not depositoryinstitutions are generally not subject to the extensive regulations that applyto us.

 

***We will face risks with respect to future expansion andacquisitions or mergers.***

 

Although we do not haveany current plans to do so, we may seek to acquire other financial institutionsor parts of those institutions.  We may also expand into new markets orlines of business or offer new products or services.  These activitieswould involve a number of risks, including:

 

·                    the potentialinaccuracy of the estimates and judgments used to evaluate credit, operations,management, and market risks with respect to a target institution;

 

·                    the time andcosts of evaluating new markets, hiring or retaining experienced local management,and opening new offices and the time lags between these activities and thegeneration of sufficient assets and deposits to support the costs of theexpansion;

 

·                    the incurrenceand possible impairment of goodwill associated with an acquisition and possibleadverse effects on our results of operations; and

 

·                    the risk ofloss of key employees and customers.

 

We have never acquiredanother institution before, so we lack experience in handling any of theserisks.  There is the risk that any expansion effort will not besuccessful.

 

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***There is no public market for our shares, and we do notbelieve that we have enough shareholders or outstanding shares to support anactive trading market, even if we are eventually listed on a recognized tradingexchange.***

 

There is currently noestablished market for our common stock.  We do not expect to qualify forlisting on NASDAQ or any other exchange for at least several years.  Wewould need a sponsoring broker-dealer to match buy and sell orders for ourcommon stock in order to be listed on the OTC Bulletin Board.  Wecurrently do not have, and we are uncertain when we will have, a sponsoringbroker-dealer for our common stock.  Even if we secure a broker-dealer,the trading markets on the OTC Bulletin Board lack the depth, liquidity, andorderliness necessary to maintain a liquid market in our common stock. For these reasons, we do not expect a liquid market for our common stock todevelop for several years, if at all.

 

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**Item 2.   Description of Property.**

** **

Our Sunset office, whichopened in January, 2008 is located at the intersection of Sunset Boulevard andKim Street approximately one mile east of the Lexington Medical Center. Our address is 2023 Sunset Boulevard, West Columbia, South Carolina29169.  The building is approximately 4,100 square feet on a site that isapproximately 1.5 acres in size and is a full service banking facility with 3drive-thru lanes and a drive-thru ATM.  We also occupy another branch andadministration office located at 1201 Knox Abbot Drive, Cayce, SouthCarolina.  This building is approximately 7,500 square feet inadministration area and approximately 2,100 square feet branch office with adrive in facility.  We also expect to open a third full service branch inour primary service area by the end of 2008.   We have not selected alocation for this office.

 

**Item 3.   Legal Proceedings.**

 

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

 

**Item 4.   Submission of Matters to aVote of Security Holders.**

 

No matter was submittedto a vote of security holders during the fourth quarter of the fiscal yearcovered by this report.

 

**Item 5.   Market for Common Equity andRelated Stockholder Matters.**

 

There is no establishedmarket for our common stock. We do not expect to qualify for listing on Nasdaqor any other exchange for at least several years.  We are currentlyconsidering whether to seek a sponsoring broker-dealer to match buy and sellorders for our common stock in order to be quoted on the OTC Bulletin Board.Even if we become quoted, the trading markets on the OTC Bulletin Board lackthe depth, liquidity, and orderliness necessary to maintain a liquid market.The decision of whether to seek a sponsoring broker-dealer has not yet beenmade and remains wholly within our discretion.

 

Trading and quotations ofthe common stock have been limited and sporadic.  Management is not awareof the prices at which all shares of stock have been traded.  The onlytrades of which the Company is aware were $10.00 per share.

 

As of March 1, 2008,there were 1,764,439 shares of common stock outstanding held by approximately1,832 shareholders of record.  All of our currently issued and outstandingcommon stock was issued in our initial public offering which was completed on October 16,2006.  The price per share in our initial public offering was$10.00.  We are not aware of any trades of our common stock.

 

We have not declared orpaid any cash dividends on our common stock since our inception. For theforeseeable future we do not intend to declare cash dividends. We intend toretain earnings to grow our business and strengthen our capital base. Ourability 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.

 

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**Item6.   Management’s Discussion and Analysis or Plan of Operation.**

** **

**General**

** **

Our bank opened forbusiness in October 2006. Accordingly, the year ended December 31,2006 included approximately three months of banking operations. The comparisonof the years ended December 31, 2007 and December 31, 2006 should beread in that context.  From January 1, 2006 to October 15, 2006,we engaged in pre-opening activities, including, without limitation, thepursuit of regulatory approvals from the FDIC and the South Carolina Board ofFinancial Institutions to charter the bank and from the Federal Reserve tobecome a bank holding company.

 

Like most communitybanks, we derive most of our income from interest we receive on our loans andinvestments. Our primary source of funds for making these loans and investmentsis our deposits, on which we pay interest. Consequently, one of the keymeasures of our success is our amount of net interest income, or the differencebetween the income on our interest-earning assets, such as loans andinvestments, and the expense on our interest-bearing liabilities, such asdeposits, also known as net interest margin. Another key measure is the spreadbetween the yield we earn on these interest-earning assets and the rate we payon our interest-bearing liabilities, which is referred to as net interestspread.

 

There are risks inherentin all loans, so we maintain an allowance for loan losses to absorb probablelosses on existing loans that may become uncollectible. We establish andmaintain this allowance by charging a provision for loan losses against ouroperating earnings. In the following section we have included a detaileddiscussion of this process.

 

In addition to earninginterest on our loans and investments, we earn income through fees and otherexpenses we charge to our clients. We describe the various components of thisnon-interest income, as well as our non-interest expense, in the followingdiscussion.

 

The following discussionand analysis also identifies significant factors that have affected ourfinancial position and operating results during the periods included in theaccompanying financial statements. We encourage you to read this discussion andanalysis in conjunction with our financial statements and the other statisticalinformation included in this report.

 

**CRITICALACCOUNTING POLICIES**

** **

We have adopted variousaccounting policies that govern the application of accounting principlesgenerally accepted in the United States and with general practices within thebanking industry in the preparation of our financial statements. Oursignificant accounting policies are described in footnote 1 to our auditedconsolidated financial statements as of December 31, 2007, includedherein.

 

Certain accountingpolicies involve significant judgments and assumptions by us that have amaterial impact on the carrying value of certain assets and liabilities. Weconsider 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 the carryingvalues of our assets and liabilities and our results of operations.

 

**Allowancefor Loan Losses**

** **

We believe the allowancefor loan losses is the critical accounting policy that requires the mostsignificant judgment and estimates used in preparation of our consolidatedfinancial statements. Some of the more critical judgments supporting the amountof our allowance for loan losses include judgments about the creditworthinessof borrowers, the estimated value of the underlying collateral, the assumptionsabout cash flow, determination of loss factors for estimating credit losses,the impact of current events, and conditions, and other factors impacting thelevel of probable inherent losses.

 

Under differentconditions or using different assumptions, the actual amount of credit lossesincurred by us may be different from management’s estimates provided in ourconsolidated financial statements. Refer to the

 

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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.

 

**IncomeTaxes**

** **

We use assumptions andestimates in determining income taxes payable or refundable for the currentyear, deferred income tax liabilities and assets for events recognizeddifferently in our financial statements and income tax returns, and income taxexpense. Determining these amounts requires analysis of certain transactionsand interpretation of tax laws and regulations. Management exercises judgmentin evaluating the amount and timing of recognition of resulting tax liabilitiesand assets. These judgments and estimates are reevaluated on a continual basisas regulatory and business factors change. No assurance can be given thateither the tax returns submitted by us or the income tax reported on thefinancial statements will not be adjusted by either adverse rulings by theUnited States Tax Court, changes in the tax code, or assessments made by theInternal Revenue Service. We are subject to potential adverse adjustments,including, but not limited to, an increase in the statutory federal or stateincome tax rates, the permanent nondeductibility of amounts currentlyconsidered deductible either now or in future periods, and the dependency onthe generation of future taxable income, including capital gains, in order toultimately realize deferred income tax assets.

 

**Resultsof Operations**

** **

*General*

* *

Our net loss was$3,488,013 and $672,761 for the years ended December 31, 2007 and 2006,respectively. Net loss before income tax expense of $414,262 was $3,073,751 forthe year ended December 31, 2007, an increase of $1,986,728, or 182.8%,compared to $1,087,023 for the year ended December 31, 2006.  The$1,986,728 increase in net loss before income tax expense resulted from a$3,071,773 increase in noninterest expense, partially offset by increases of$1,447,143 in net interest income and $90,502 in other income. Noninterest income increased from $11,268 for the year ended December 31,2006 to $101,770 for the year ended December 31, 2007.  We alsorecorded a provision for loan losses of $502,600 and $50,000 for the yearsended December 31, 2007 and 2006, respectively.

 

We incurred $847,904 inpre-opening expenses during the period from our inception on November 2,2005 through October 16, 2006, the date our bank opened for business, andonly had approximately three months of banking operations in 2006.  Ourorganizational costs were expensed when incurred in accordance with FASBStatement of Position (SOP) 98-5, “Reporting on the Costs of Start-UpActivities.”

 

*NetInterest Income*

* *

Our primary source ofrevenue is net interest income.  Net interest income is the differencebetween income earned on interest-bearing assets and interest paid on depositsand borrowings 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.  In addition to the volume of andcorresponding interest rates associated with these interest-earning assets andinterest-bearing liabilities, net interest income is affected by the timing ofthe repricing of these interest-earning assets and interest-bearingliabilities.

 

Net interest income was$1,593,231 for the year ended December 31, 2007, an increase of $1,447,143or 990.5% over net interest income of $146,088 for the year ended December 31,2006.  Interest income of $3,159,901 for the year ended December 31,2007 included $2,153,450 on loans, $565,520 on investment securities and$440,931 on federal funds sold.  Loan interest and related fees improved$2,094,049 or 3,525.2% over 2006, due to continued growth in the loan portfoliovolume. Total interest expense of $1,566,670 for the year ended December 31,2007 included $1,500,322 related to deposit accounts and $66,348 on federalfunds purchased and Federal Home Loan Bank borrowings.  Interest expenseon deposits increased $1,467,529, or 4,475.1%, due to continued growth indeposits, primarily certificates of deposit.

 

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The following table setsforth information related to our average balance sheet, average yields onassets, and average costs of liabilities. We derived these yields by dividingincome or expense by the average balance of the corresponding assets orliabilities. We derived average balances from the daily balances throughout theperiods indicated. The net amount of capitalized loan fees is amortized intointerest income over the life of the loans.

 

**AverageBalances, Income and Expenses, Yields and Rates**

**Forthe Years Ended December 31,**

** **
| ** **                                           | ** ** | **2007**             | ** ** | **2006**             | ** **    |
|------------------------------------------------------|------------|----------------------|------------|----------------------|---------------|
| ** **                                           | ** ** | **Average  balance** | ** ** | **Income/  expense** | ** **    | **Yield  /rate** | ** ** | **Average  balance** | ** ** | **Income/  expense** | ** ** | **Yield/  rate** | ** ** |
| **Interest-earning  assets:**                        | ** ** | ** **           | ** ** | ** **           | ** **    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Federal funds  sold                                  |       | $                    | 8,557,961  |                 | $             | 440,931 |   | 5.15 | % | $ | 2,452,940 |   | $ | 143,779 |   | 5.86 | % |
| Investment  securities and FHLB stock                |       | 10,412,377           |       | 565,520              |          | 5.43 |   | 717,604 |   | 37,884 |   | 5.28 |   |
| Loans (1)                                            |       | 26,821,247           |       | 2,153,450            |          | 8.03 |   | 377,122 |   | 59,401 |   | 15.75 |   |
| **Total  interest-earning assets**                   |       | 45,791,585           |       | 3,159,901            |          | 6.90 |   | 3,547,666 |   | 241,064 |   | 6.80 |   |
| Non-earning  assets                                  |       | 2,509,620            |       |                 |          |   |   | 1,064,601 |   |   |   |   |   |
| Total assets                                         |       | $                    | 48,301,205 |                 |          |   |   |   | $ | 4,612,267 |   |   |   |   |   |
|                                                 |       |                 |       |                 |          |   |   |   |   |   |   |   |   |
| **Interest-bearing  liabilities:**                   | ** ** | ** **           | ** ** | ** **           | ** **    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest  checking                                   |       | $                    | 1,969,755  |                 | $             | 30,079 |   | 1.53 | % | $ | 75,416 |   | $ | 1,586 |   | 2.10 | % |
| Savings and  money market                            |       | 15,443,173           |       | 792,748              |          | 5.13 |   | 102,984 |   | 4,512 |   | 4.38 |   |
| Time deposits                                        |       | 14,094,229           |       | 736,814              |          | 5.23 |   | 463,502 |   | 26,696 |   | 5.76 |   |
| Federal funds  purchased and repurchase agreement    |       | 1,553,252            |       | 7,029                |          | 4.27 |   | 860,700 |   | 62,183 |   | 7.22 |   |
| **Total  interest-bearing liabilities**              |       | 33,060,409           |       | 1,566,670            |          | 4.74 |   | 1,502,602 |   | 94,977 |   | 6.32 |   |
| Non-interest  bearing liabilities                    |       | 3,848,730            |       |                 |          |   |   | 411,814 |   |   |   |   |   |
| Shareholders’  equity                           |       | 11,392,066           |       |                 |          |   |   | 2,697,851 |   |   |   |   |   |
| **Total  liabilities and shareholders’ equity** |       | $                    | 48,301,205 |                 |          |   |   |   | $ | 4,612,267 |   |   |   |   |   |
| **Net  interest spread**                             |       |                 |       |                 |          | 2.16 | % |   |   |   |   | 0.48 | % |
| **Net  interest income/margin**                      | ** ** | ** **           |       | **$**                | **1,593,231** |   | 3.48 | % |   |   | **$** | **146,087** |   | 4.12 | % |

 

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(1)  Loan fees,which are immaterial, are included in interest income.  There were nononaccrual loans for either period.

 

Our consolidated net interestmargin for the year ended December 31, 2007 was 3.48%, a decrease of 64basis points from the net interest margin of 4.12% for the year ended December 31,2006.  The net interest margin is calculated by dividing net interestincome by year-to-date average earning assets.  This decrease can beattributed to the costs of our funding sources.  We relied on a highervolume of money market deposits to fund the growth of our loan portfolio in2007.  These deposits are priced higher than core deposits. Additionally,for the first time in 2007, we utilized alternative funding sources of federalfunds purchased. Earning assets averaged $45,791,585 for the year ended December 31,2007, increasing from $3,547,666 for the year ended December 31, 2006. Ournet interest spread was 2.16% for the year ended December 31, 2007. Thenet interest spread is the difference between the yield we earn on ourinterest-earning assets and the rate we pay on our interest-bearingliabilities. In pricing deposits, we consider our liquidity needs, thedirection and levels of interest rates and local market conditions. As such,higher rates have been paid initially to attract deposits.

 

25

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*Rate/VolumeAnalysis*

* *

Net interest income can beanalyzed in terms of the impact of changing interest rates and changing volume.The following table sets forth the effect which the varying levels ofinterest-earning assets and interest-bearing liabilities and the applicablerates had on changes in net interest income for the comparative periodspresented.  Changes attributed to both rate and volume, have beenallocated on a pro rata basis.

* *
| ** **                                        | ** ** | **2007 Compared to 2006** | ** ** |
|---------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                        | ** ** | **Total  Change**                        | ** ** | **Change in  Volume** | ** ** | **Change in  Rate** | ** ** |
| **Interest-earning  assets:**                     | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Federal funds  sold                               |       | $                                        | 297,152    |   | $ | (150,630 | ) | $ | 447,782 |   |
| Investment  securities and FHLB stock             |       | 527,636                                  |       | 398,315 |   | 129,321 |   |
| Loans                                             |       | 2,094,049                                |       | 2,032,720 |   | 61,329 |   |
| **Total  interest income**                        |       | 2,918,837                                |       | 2,280,405 |   | 638,432 |   |
|                                              |       |                                     |       |   |   |   |   |
| **Interest-bearing  liabilities:**                | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest-bearing  deposits                        |       | 1,467,529                                |       | 1,470,491 |   | (2,962 | ) |
| Federal funds  purchased and Repurchase agreement |       | 4,165                                    |       | 29,395 |   | (25,230 | ) |
| **Total  interest expense**                       |       | 1,471,694                                |       | 1,499,886 |   | (28,192 | ) |
| **Net  interest income**                          |       | $                                        | 1,447,143  |   | $ | 780,519 |   | $ | 666,624 |   |

 

*Provisionfor Loan Losses*

* *

We have established anallowance for loan losses through a provision for loan losses charged as anon-cash expense to our statement of operations. We review our loan portfolioperiodically to evaluate our outstanding loans and to measure both theperformance of the portfolio and the adequacy of the allowance for loanlosses.  Please see the discussion below under “Provision and Allowancefor Loan Losses” for a description of the factors we consider in determiningthe amount of the provision we expense each period to maintain this allowance.

 

Our provision for loanlosses for the year ended December 31, 2007 was $502,600, an increase of$452,600 or 905.2% over our provision of $50,000 for the year ended December 31,2006.  The allowance as a percentage of gross loans continues to bemaintained at approximately 1.00% due to management’s continued evaluation ofthe adequacy of the reserve for possible loan losses given the size, mix, andquality of the current loan portfolio. Management also relies on our limitedhistory of past-dues and charge-offs, as well as peer data to determine ourloan loss allowance.

 

*NoninterestIncome*

* *

Noninterest income forthe year ended December 31, 2007 was $101,770 compared to $11,268 for theyear ended December 31, 2006.  Service charges and other fees ondeposit accounts were $23,087 for the year ended December 31, 2007 animprovement of $23,013 over the year ended December 31, 2006 due to anincrease in deposit accounts.  For the year ended December 31, 2007,mortgage loan origination fees were $53,580, an increase of $51,355, or2,308.1% from 2006, as we continued to increase the volume of mortgage loansoriginated.

 

26

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*NoninterestExpenses*

* *

The following table setsforth information related to our noninterest expenses for the year ended December 31,2007 and 2006.

 
| ** **                                             | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------------------------------|------------|----------|------------|----------|------------|
| Compensation and  benefits                             |       | $        | 2,286,714  |     | $          | 593,216 |   |
| Occupancy and  equipment                               |       | 254,131  |       | 155,151  |       |
| Data processing  and related costs                     |       | 276,151  |       | 31,979   |       |
| Marketing,  advertising and shareholder communications |       | 410,419  |       | 27,833   |       |
| Legal and audit                                        |       | 202,532  |       | 75,464   |       |
| Other  professional fees                               |       | 140,197  |       | 80,000   |       |
| Supplies,  postage and telephone                       |       | 111,803  |       | 39,100   |       |
| Insurance                                              |       | 43,583   |       | 27,440   |       |
| Credit related  expenses                               |       | 82,341   |       | —   |       |
| Courier and  armored carrier service                   |       | 1,962    |       | —   |       |
| Regulatory fees  and FDIC insurance                    |       | 38,373   |       | —   |       |
| Other                                                  |       | 417,946  |       | 164,196  |       |
| Total  noninterest expense                             |       | $        | 4,266,152  |     | $          | 1,194,379 |   |

 

Noninterest expense was$4,266,152 for the year ended December 31, 2007 compared to $1,194,379 forthe year ended December 31, 2006.  The most significant component ofnoninterest expense is compensation and benefits, which totaled $2,286,714 forthe year ended December 31, 2007, compared to $593,216 for the year ended December 31,2006. 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$254,131 in 2007 increased from $155,151 in 2006.  Occupancy and equipmentcosts were higher in 2007 due to amortization of leasehold improvements, andother occupancy expenses associated with a second full service branch thatopened in 2007. Data processing and related expense increased from $31,979 in2006 to $276,151 in 2007, primarily due to an increase in our core processorcharges because of the increased volume of new accounts. Legal and audit feesincreased from $75,464 in 2006 to $202,532 in 2007, as a result of complyingwith the Sarbanes-Oxley Act of 2002.  Other professional fees increasedfrom $80,000 in 2006 to $140,197 in 2007, primarily due to a search firm feepaid in conjunction with the hiring of a senior lender during the first quarterof 2007, as well as additional third-party consultant costs incurred forcompliance, loan and internal audit reviews. Supplies, postage and telephoneincreased from $39,100 in 2006 to $111,803 in 2007 as a result of opening a newbranch and the move to the operations center.  Credit related expenseswere $82,341 in 2007 as a result of the bank’s loan growth.  Regulatoryfees and FDIC insurance were $38,373 in 2007 as we began incurring FDICassessments. These assessments are based on deposit levels.

 

*IncomeTax Benefit*

* *

The Company had nocurrently taxable income for the years ended December 31, 2007 and2006.  The Company recorded a deferred tax benefit based on $414,262 on aneffective rate of 34% for the year ended December 31, 2006 and a valuationallowance of $982,682 for the year ended December 31, 2007, effectivelyoffsetting the tax benefit recorded in 2006.

 

***Balance Sheet Review***

*** ***

*General*

* *

At December 31,2007, total assets were $78,443,677 compared to $24,078,121 at December 31,2006, for an increase of $54,365,556, or 225.8%.  The increase in assetsresulted from volume increases in our loan and investment portfolios andrelated increases in our funding sources of deposits and otherborrowings.  Interest-earning assets comprised approximately 89.9% and87.0% of total assets at December 31, 2007 and December 31,2006.  Gross loans totaled $55,288,904, an increase of $50,293,123, or1,006.7% from $4,995,781 at December 31, 2006.  Investment securitieswere $15,101,676, an increase of $10,887,170 or 258.3% from $4,214,506 at December 31,2006.  Investment in overnight federal funds decreased $11,617,000 to$110,000 at December 31, 2007.  During 2007, we moved these fundsinto higher yielding securities available for sale and loans, and at December 31,2007, we were in a federal funds purchased (borrowing) position of$3,658,000.  We completed our permanent headquarters on May 14, 2007and the costs of $1,420,799 included in “building construction in progress” at December 31,2006 were transferred to “property and equipment”, which totaled $1,633,383, atDecember 31, 2007.

 

27

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Deposits totaled$60,279,810 at December 31, 2007, a $52,271,244, or 652.7% increase from$8,008,566 at December 31, 2006. Federal funds purchased were $3,658,000at December 31, 2007.  No amounts were outstanding at December 31,2006.  Shareholders’ equity was $12,935,788 and $16,057,221 at December 31,2007 and December 31, 2006, respectively.

 

*Investments*

* *

At December 31,2007, our available for sale investment securities portfolio was $14,833,432and represented approximately 18.9% of our total assets. Investments increased$10,618,926 from $4,214,506 at December 31, 2006.  Our portfolio consistedof U.S. government sponsored agencies of $6,888,242 and mortgage-backedagencies of $7,945,190.

 

Contractual maturitiesand yields on our investment securities available for sale at December 31,2007 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 to** | ** ** | **Five years**        | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|--------------------|------------|---------------------------|------------|----------------------------|------------|------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                          | ** ** | **one year**  | ** ** | **five years**       | ** ** | **to ten years** | ** ** | **Over ten years** | ** ** | **Total**  | ** ** |
| **2007**                            | ** ** | **Amount**         | ** ** | **Yield**                 | ** ** | **Amount**                 | ** ** | **Yield**                    | ** ** | **Amount** | ** ** | **Yield**  | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** |
| U.S. Government  sponsored agencies |       | —             |       | —                    |       | $                          | 2,035,900  |                         | 5.23       | %          | $          | 3,958,774  |       | 5.36       | %          | $ | 893,568 |   | 5.44 | % | $ | 6,888,242 |   | 5.33 | % |
| Mortgage-backed  agencies           |       | —             |       | —                    |       | —                     |       | —                       |       | 1,493,268  |       | 5.44       |       | 6,451,922  |       | 5.45 |   | 7,945,190 |   | 5.45 |   |
| Total                               |       | —             |       | —                    |       | $                          | 2,035,900  |                         | 5.23       | %          | $          | 5,452,042  |       | 5.38       | %          | $ | 7,345,490 |   | 5.45 | % | $ | 14,833,432 |   | 5.40 | % |
|                                     |            |                    |            |                           |            |                            |            |                              |            |            |            |            |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The amortized costs andthe fair value of our investment securities at December 31, 2007 and 2006are shown in the following table.

 
| ** **                          | ** ** | **2007**            | ** **     | **2006**        | ** ** |
|-------------------------------------|------------|---------------------|----------------|-----------------|------------|
| ** **                          | ** ** | **Amortized  Cost** | ** **     | **Fair  Value** | ** ** | **Amortized  Cost** | ** ** | **Fair  Value** | ** ** |
| **Available  for Sale**             | ** ** | ** **          | ** **     | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** |
| U.S. Government  sponsored agencies |       | $                   | 6,788,421      |            | $          | 6,888,242 |   | $ | 1,517,670 |   | $ | 1,517,673 |   |
| Mortgage-backed  agencies           |       | 7,913,338           |           | 7,945,190       |       | 2,697,081 |   | 2,696,833 |   |
|                                |       |                |           |            |       |   |   |   |   |
| Total                               | ** ** | **$**               | **14,701,759** | ** **      | **$**      | **14,833,432** | ** ** | **$** | **4,214,751** | ** ** | **$** | **4,214,506** | ** ** |

 

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.

 

Investment securitieswith market values of approximately $4,247,344 and $4,195,988 at December 31,2007 and 2006, respectively, were pledged to secure public deposits andsecurities sold under agreements to repurchase.

 

We had no sales ofinvestment securities in 2007 and 2006.

 

In 2007, we became amember of the Federal Home Loan Bank, and at December 31, 2007, we heldnon-marketable equity securities, which consisted of Federal Home Loan Bankstock of $112,900 and Silverton Bank of $155,344.  This investment iscarried at cost, which approximates fair market value.

 

28

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*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, 2007 were$55,288,904, or 78.4% of interest-earning and 70.5% of total assets, comparedto $4,995,781, or 23.9% of interest-earning and 20.7% of total assets at December 31,2006.

 

Loans secured by realestate mortgages comprised approximately 83.4% of loans outstanding at December 31,2007 and 87.3% at December 31, 2006. 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. We obtaina security interest in real estate whenever possible, in addition to any otheravailable collateral. This collateral is taken to increase the likelihood ofthe ultimate repayment of the loan. Generally, we limit the loan-to-value ratioon loans we make to 80%.

 

Commercial loans andlines of credit represented approximately 13.6% and 3.2% of our loan portfolioat December 31, 2007 and 2006, respectively.

 

Our construction anddevelopment, and land loan portfolio increased in 2007, due primarily to thesignificant amount of construction activity in 2007.  These loansrepresented approximately 14.8% and 8.9% at December 31, 2007 and 2006,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, 2007and 2006.

 
| ** **                             | ** ** | **2007**   | ** ** | **2006**                      | ** ** |
|----------------------------------------|------------|------------|------------|-------------------------------|------------|
| ** **                             | ** ** | **Amount** | ** ** | **Percentage  of Total** | ** ** | **Amount** | ** ** | **Percentage  of Total** | ** ** |
| Real Estate:                           |       |       |       |                          |       |   |   |   |   |
| Construction and  development and land |       | $          | 8,188,004  |                          | 14.81      | % | $ | 444,242 |   | 8.90 | % |
| Commercial                             |       | 22,048,484 |       | 39.88                         |       | 3,153,411 |   | 63.12 |   |
| Residential  mortgages                 |       | 3,803,706  |       | 6.88                          |       | 259,688 |   | 5.20 |   |
| Home equity  lines                     |       | 12,082,002 |       | 21.85                         |       | 504,415 |   | 10.10 |   |
| Total real  estate                     |       | 46,122,196 |       | 83.42                         |       | 4,361,756 |   | 87.32 |   |
|                                   |       |       |       |                          |       |   |   |   |   |
| Commercial                             |       | 7,505,415  |       | 13.58                         |       | 158,500 |   | 3.17 |   |
| Consumer                               |       | 1,661,293  |       | 3.00                          |       | 475,525 |   | 9.51 |   |
| Gross loans                            |       | 55,288,904 |       | 100                           | %          | 4,995,781 |   | 100 | % |
| Less allowance  for loan losses        |       | (552,600   | )          |                          |       | (50,000 | ) |   |   |
| Total loans, net                       |       | $          | 54,736,304 |                          |       |   | $ | 4,945,781 |   |   |   |

 

*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.

 

29

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The following tablesummarizes the loan maturity distribution by composition and interest ratetypes at December 31, 2007.

 
| ** **                          | ** ** | ** **                      | ** ** | **After one**                   | ** ** | ** **                 | ** ** | ** ** | ** ** |
|-------------------------------------|------------|---------------------------------|------------|--------------------------------------|------------|----------------------------|------------|------------|------------|
| ** **                          | ** ** | **One year  or less** | ** ** | **but within  five years** | ** ** | **After five  years** | ** ** | **Total**  | ** ** |
| Real estate-  mortgage              |       | $                               | 6,737,195  |                                 | $          | 17,522,911                 |       | $          | 13,674,086 |   | $ | 37,934,192 |   |
| Real estate-  construction          |       | 2,996,355                       |       | 4,888,098                            |       | 303,551                    |       | 8,188,004  |       |
| Total real  estate                  |       | 9,733,550                       |       | 22,411,009                           |       | 13,977,637                 |       | 46,122,196 |       |
|                                |       |                            |       |                                 |       |                       |       |       |       |
| Commercial                          |       | $                               | 3,677,960  |                                 | 3,734,174  |                       | 93,281     |       | 7,505,415  |   |
| Consumer- other                     |       | 237,852                         |       | 1,187,750                            |       | 235,691                    |       | 1,661,293  |       |
| Gross loans                         |       | $                               | 13,649,362 |                                 | $          | 27,332,933                 |       | $          | 14,306,609 |   | $ | 55,288,904 |   |
|                                |       |                            |       |                                 |       |                       |       |       |       |
| Loans maturing  after one year with |       |                            |       |                                 |       |                       |       |       |       |
| Fixed interest  rates               |       |                            |       |                                 |       |                       |       | $          | 21,010,817 |   |
| Floating  interest rates            |       |                            |       |                                 |       |                       |       | 20,628,725 |       |
|                                |       |                            |       |                                 |       |                       |       | $          | 41,639,542 |   |

 

*Provisionand Allowance for Loan Losses*

 

We have established anallowance for loan losses through a provision for loan losses charged toexpense on our consolidated statement of operations. The allowance for loanlosses was $552,600 and $50,000 as of December 31, 2007 and December 31,2006, respectively, and represented 1.0% of outstanding loans at December 31,2007 and December 31, 2006. The allowance for loan losses represents anamount which we believe will be adequate to absorb probable losses on existingloans that may become uncollectible. Our judgment as to the adequacy of theallowance for loan losses is based on a number of assumptions about futureevents, which we believe to be reasonable, but which may or may not prove to beaccurate. Our determination of the allowance for loan losses is based onevaluations of the collectibility of loans, including consideration of factorssuch as the balance of impaired loans, the quality, mix, and size of ouroverall 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 limited operating history, to date the provision forloan losses has been made primarily as a result of our assessment of generalloan loss risk compared to banks of similar size and maturity.

 

Due to our shortoperating history, the loans in our loan portfolio and our lendingrelationships are of very recent origin. In general, loans do not begin to showsigns of credit deterioration or default until they have been outstanding forsome period of time, a process known as seasoning. As a result, a portfolio ofolder loans will usually behave more predictably than a newer portfolio.Because our loan portfolio is new, the current level of delinquencies anddefaults may not be representative of the level that will prevail when theportfolio becomes more seasoned, which may be higher than current levels. Ifdelinquencies and defaults increase, we may be required to increase ourprovision for loan losses, which would adversely affect our results ofoperations and financial condition. Periodically, we will adjust the amount ofthe allowance based on changing circumstances. We will charge recognized lossesto the allowance and add subsequent recoveries back to the allowance for loanlosses. There can be no assurance that charge-offs of loans in future periodswill not exceed the allowance for loan losses as estimated at any point in timeor that provisions for loan losses will not be significant to a particularaccounting period.

 

Because of our short operatinghistory and the lack of seasoning of our loan portfolio, we do not allocate theallowance for loan losses to specific categories of loans. Instead, we evaluatethe adequacy of the allowance for loan losses on an overall portfolio basisutilizing our credit grading system which we apply to each loan. We haveretained an independent consultant to review the loan files on a test basis toassess the grading of samples of loans.

 

30

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There were no charge-offsin 2007 and 2006.  There were no nonaccrual or nonperforming loans at December 31,2007 or 2006, and no accruing loans which were contractually past due 90 daysor more as to principal or interest payments. 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 whenreceived.  At December 31, 2007, we were not aware of any potentialproblem loans, nor any loans considered impaired.

 

The following table presentsa summary of changes in the allowance for loan losses for the past two years(dollar amounts are presented in thousands):

 
| ** **                                     | ** ** | **For the years ended December 31,** | ** ** |
|------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                     | ** ** | **2007**                                                      | ** ** | **2006** | ** ** |
|                                           |       |                                                          |       |   |   |
| Balance at the  beginning of period            |       | $                                                             | 50,000     |   | $ | -0- |   |
| Charge-offs:                                   |       |                                                          |       |   |   |
| Commercial,  financial and agricultural        |       | —                                                        |       | — |   |
| Real estate -  mortgage                        |       | —                                                        |       | — |   |
| Real estate -  construction                    |       | —                                                        |       | — |   |
| Consumer                                       |       | —                                                        |       | — |   |
| Total  Charged-off                             |       | $                                                             | -0-        |   | $ | -0- |   |
|                                           |       |                                                          |       |   |   |
| Recoveries:                                    |       |                                                          |       |   |   |
| Commercial,  financial and agricultural        |       | —                                                        |       | — |   |
| Real estate -  mortgage                        |       | —                                                        |       | — |   |
| Consumer                                       |       | —                                                        |       | — |   |
| Total Recoveries                               |       | $                                                             | -0-        |   | $ | -0- |   |
|                                           |       |                                                          |       |   |   |
| Net Charge-offs                                |       | $                                                             | -0-        |   | $ | -0- |   |
|                                           |       |                                                          |       |   |   |
| Provision for  Loan Loss                       |       | $                                                             | 502,600    |   | $ | 50,000 |   |
|                                           |       |                                                          |       |   |   |
| Balance at end  of period                      |       | $                                                             | 552,600    |   | $ | 50,000 |   |
|                                           |       |                                                          |       |   |   |
| Total loans at  end of period                  |       | $                                                             | 55,288,904 |   | $ | 4,995,781 |   |
|                                           |       |                                                          |       |   |   |
| Average loans  outstanding                     |       | $                                                             | 26,861,247 |   | $ | 3,261,784 |   |
|                                           |       |                                                          |       |   |   |
| As a percentage  of average loans:             |       |                                                          |       |   |   |
|                                           |       |                                                          |       |   |   |
| Net loans  charged-off                         |       | 0                                                             | %          | 0 | % |
| Provision for  loan losses                     |       | 1.87                                                          | %          | 1.53 | % |
|                                           |       |                                                          |       |   |   |
| Allowance for  loan losses as a percentage of: |       |                                                          |       |   |   |
| Year end loans                                 |       | 1.00                                                          | %          | 1.00 | % |

 

*Deposits*

 

Our primary source for our loans and investments is our deposits. Totaldeposits as of the years ended December 31, 2007 and 2006 were $60,279,810 and$8,008,566, respectively. The following table shows the balance outstanding andthe average rates paid on deposits during 2007 and 2006.

 
| ** **                            | ** ** | **2007**   | ** ** | **2006** | ** ** |
|---------------------------------------|------------|------------|------------|----------|------------|
| ** **                            | ** ** | **Amount** | ** ** | **Rate** | ** ** | **Amount** | ** ** | **Rate** | ** ** |
| Non-interest  bearing demand deposits |       | $          | 4,911,717  |     | —     | % | $ | 723,074 |   | — | % |
| Interest-bearing  checking            |       | 5,670,104  |       | 1.54     |       | 686,750 |   | 1.20 |   |
| Money market                          |       | 24,037,611 |       | 4.82     |       | 1,059,118 |   | 4.56 |   |
| Savings                               |       | 443,778    |       | 1.84     |       | 44,783 |   | 2.83 |   |
| Time deposits  less than $100,000     |       | 11,529,784 |       | 5.20     |       | 2,778,501 |   | 6.45 |   |
| Time deposits  $100,000 and over      |       | 13,686,816 |       | 5.29     |       | 2,716,340 |   | 5.63 |   |
| Total                                 |       | $          | 60,279,810 |     | 4.78       | % | $ | 8,008,566 |   | 4.13 | % |

 

31

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Core deposits, whichexclude time deposits of $100,000 or more and brokered certificates of deposit,provide a relatively stable funding source for our loan portfolio and otherearning assets. Our core deposits were $43,592,994 at December 31, 2007.Our loan-to-deposit ratio was 91.72% and 62.38% at December 31, 2007 and2006, respectively.  Due to the competitive interest rate environment inour market, we utilized brokered certificates of deposit as a funding source in2007 when we were able to procure these certificates at interest rates lessthan those in the local market.  Brokered certificates of depositpurchased outside our primary market totaled $3,000,000 at December 31,2007.  All of our time deposits are certificates of deposits.

 

The maturity distributionof our time deposits of $100,000 or more and brokered time deposits at December 31,2007 was as follows:

 
| Three months or  less           |   | $         | 5,558,287  |   |
|---------------------------------|--------|-----------|------------|--------|
| Over three  through six months  |   | 2,737,150 |       |
| Over six through  twelve months |   | 5,090,603 |       |
| Over twelve  months             |   | 300,776   |       |
| Total                           |   | $         | 13,686,816 |   |

 

*Borrowingsand lines of credit*

 

At December 31, 2007,the bank had short-term lines of credit with correspondent banks to purchase amaximum of $7,900,000 in unsecured federal funds on a one to fourteen day basisfor general corporate purposes. The interest rate on borrowings under theselines is the prevailing market rate for federal funds purchased. Theseaccommodation lines of credit are renewable annually and may be terminated atany time at the correspondent banks’ sole discretion.  The Bank utilizedthese lines of credit during the fourth quarter of 2007. The highest month-endamount outstanding was $3,658,000 at December 31, 2007, and the averageinterest rate paid on these borrowings during the fourth quarter was5.01%.  At December 31, 2007, $3,658,000 was outstanding at aninterest rate of 4.60%.  No amounts were outstanding at December 31,2006, or during the year then ended.

 

We are also a member ofthe Federal Home Loan Bank.  At December 31, 2007, we had no balanceoutstanding in Federal Home Loan Bank borrowings.

 

**CapitalResources**

 

Total shareholders’equity was $12,935,788 at December 31, 2007 a decrease of $3,121,433 from$16,057,221 at December 31, 2006. Capital surplus increased due to stockcompensation expense of $279,514 in 2007. Shareholders’ equity was reduced byour net loss of $3,488,013 for the year ended December 31, 2007.Unrealized gains on investment securities available for sale increasedshareholders’ equity by $87,066 during 2007.

 

The Federal Reserve andbank regulatory agencies require bank holding companies and financialinstitutions to maintain capital at adequate levels based on a percentage ofassets and off-balance sheet exposures, adjusted for risk weights ranging from0% to 100%.  The Federal Reserve guidelines contain an exemption from thecapital requirements for “small bank holding companies”, which in 2006 wereamended to cover most bank holding companies with less than $500 million intotal assets that do not have a material amount of debt or equity securitiesoutstanding registered with the SEC.  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, ourBank remains subject to these capital requirements.  Failure to meetminimum 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.  Undercapital adequacy guidelines and the regulatory framework for prompt correctiveaction, the Bank must meet specific capital guidelines that involvequantitative measures of the Bank’s assets, liabilities and certain off-balancesheet items as

 

32

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calculated underregulatory accounting practices.  The Bank’s capital amounts andclassifications are also subject to qualitative judgments by the regulatorsabout components, risk weightings, and other factors.  Regardless, ourBank is “well capitalized” under these minimum capital requirements as set perbank regulatory agencies.

 

Under the capitaladequacy guidelines, regulatory capital is classified into two tiers. Theseguidelines require an institution to maintain a certain level of Tier 1 andTier 2 capital to risk-weighted assets. Tier 1 capital consists of commonshareholders’ equity, excluding the unrealized gain or loss on securitiesavailable for sale, minus certain intangible assets. In determining the amountof risk-weighted assets, all assets, including certain off-balance sheetassets, are multiplied by a risk-weight factor of 0% to 100% based on the risksbelieved to be inherent in the type of asset. Tier 2 capital consists of Tier 1capital 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.

 

At the bank level, we aresubject to various regulatory capital requirements administered by the federalbanking agencies. To be considered “adequately capitalized” under these capitalguidelines, we must maintain a minimum total risk-based capital of 8%, with atleast 4% being Tier 1 capital. In addition, we must maintain a minimum Tier 1leverage ratio of at least 4%. To be considered “well-capitalized,” we mustmaintain total risk-based capital of at least 10%, Tier 1 capital of at least6%, and a leverage ratio of at least 5%.

 

The following table setsforth the holding company and the bank capital ratios at December 31, 2007and 2006. For all periods, the bank was considered “well capitalized”.

 
| ** **                 | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|
| ** **                 | ** ** | **Bank** | ** ** | **Bank** | ** ** |
|                       |       |     |       |     |       |
| Total risk-based  capital  |       | 15.74    | %          | 135.70   | %          |
| Tier 1  risk-based capital |       | 14.89    | %          | 131.25   | %          |
| Leverage capital           |       | 14.38    | %          | 65.79    | %          |

 

We believe that ourcapital is sufficient to fund the activities of the bank in its initial stagesof operation and that the rate of asset growth will not negatively impact thecapital base. We have no plans for significant capital expenditures in2008.  All outstanding commitments at December 31, 2006 andassociated with the construction of our headquarters building were paid in2007.

 

33

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**Returnon Equity and Assets**

 

The following table showsthe return on average assets (net income (loss) divided by average totalassets), return on average equity (net income (loss) divided by averageequity), and equity to assets ratio (average equity divided by average totalassets) for the year ended December 31, 2007 and 2006. Since ourinception, we have not paid cash dividends.

 
| ** **                | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|
| Return on  average assets |       | (7.22    | )%         | (14.59   | )%         |
|                      |       |     |       |     |       |
| Return on  average equity |       | (30.62   | )          | (24.94   | )%         |
|                      |       |     |       |     |       |
| Equity to assets  ratio   |       | 23.59    | %          | 58.49    | %          |

 

**Effectof Inflation and Changing Prices**

 

The effect of relativepurchasing power over time due to inflation has not been taken into account inour consolidated financial statements. Rather, our financial statements havebeen prepared on an historical cost basis in accordance with accountingprinciples generally accepted in the United States of America.

 

Unlike most industrial companies,our assets and liabilities are primarily monetary in nature. Therefore, theeffect of changes in interest rates will have a more significant impact on ourperformance than will the effect of changing prices and inflation in general.In addition, interest rates may generally increase as the rate of inflationincreases, although not necessarily in the same magnitude. We attempt to managethe relationships between interest-sensitive assets and liabilities in order toprotect against wide rate fluctuations, including those resulting frominflation.

 

**Off-BalanceSheet Risk**

 

Through the bank, we havemade contractual commitments to extend credit in the ordinary course of ourbusiness activities. These commitments are legally binding agreements to lendmoney to our clients at predetermined interest rates for a specified period oftime. We evaluate each client’s creditworthiness on a case-by-case basis. Theamount of collateral obtained, if deemed necessary by us upon extension ofcredit, is based on our credit evaluation of the borrower. Collateral variesbut may include accounts receivable, inventory, property, plant and equipment,commercial and residential real estate. We manage the credit risk on thesecommitments by subjecting them to normal underwriting and risk managementprocesses.  At December 31, 2007, we had issued commitments to extendcredit of approximately $20,034,340 through various types of lendingarrangements.  There were no standby letters of credit included in thecommitments.  Fixed rate commitments were $11,359,575 and variable ratecommitments were $8,674,765.  At December 31, 2006, commitments toextend credit amounted to $1,442,198.

 

Commitments generallyhave fixed expiration dates or other termination clauses and may require the paymentof a fee. A significant portion of the unfunded commitments relate to consumerequity lines of credit and commercial lines of credit. Based on historicalexperience, we anticipate that a portion of these lines of credit will not befunded.

 

Except as disclosed inthis document, we are not involved in off-balance sheet contractualrelationships, unconsolidated related entities that have off-balance sheetarrangements or transactions that could result in liquidity needs or othercommitments that significantly impact earnings.

 

34

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**Liquidity**

 

Liquidity represents theability of a company to convert assets into cash or cash equivalents withoutsignificant loss, and the ability to raise additional funds by increasingliabilities. Liquidity management involves monitoring our sources and uses offunds in order to meet our day-to-day cash flow requirements while maximizingprofits. Liquidity management is made more complicated because differentbalance sheet components are subject to varying degrees of management control.For example, the timing of maturities of our investment portfolio is fairlypredictable and subject to a high degree of control at the time investmentdecisions are made. However, net deposit inflows and outflows are far lesspredictable and are not subject to the same degree of control.

 

At December 31,2007, our liquid assets, consisting of cash and due from banks and federalfunds sold, amounted to $4,122,721, or approximately 5.26% of total assets. Ourinvestment securities available for sale at December 31, 2007 amounted to$14,833,432 or approximately 18.91% of total assets. Unpledged investmentsecurities traditionally provide a secondary source of liquidity since they canbe converted into cash in a timely manner. At December 31, 2007,$4,247,344 of our investment securities were pledged to secure public entitydeposits and as collateral for securities sold under agreement to repurchase.

 

Our ability to maintainand expand our deposit base and borrowing capabilities serves as our primarysource of liquidity. We plan to meet our future cash needs through theliquidation of temporary investments and the generation of deposits. Inaddition, we will receive cash upon the maturities and sales of loans andmaturities, calls and prepayments on investment securities. We maintain federalfunds purchased lines of credit with correspondent banks totaling $7,900,000.Availability on these lines of credit was $4,242,000 at December 31, 2007.We are a member of the Federal Home Loan Bank (“FHLB”), from which applicationsfor borrowings can be made.  The FHLB requires that investment securitiesor qualifying mortgage loans be pledged to secure advances from them. We arealso required to purchase FHLB stock in a percentage of each advance.  Wehave not made application for borrowings from the FHLB at December 31,2007. We believe that our existing stable base of core deposits along withcontinued growth in this deposit base will enable us to successfully meet ourlong term liquidity needs.

 

**MarketRisk**

 

Market risk is the riskof loss from adverse changes in market prices and rates, which principallyarise from interest rate risk inherent in our lending, investing, depositgathering, and borrowing activities. Other types of market risks, such asforeign currency exchange rate risk and commodity price risk, do not generallyarise in the normal course of our business.

 

We actively monitor andmanage our interest rate risk exposure principally by measuring our interestsensitivity “gap,” which is the positive or negative dollar difference betweenassets and liabilities that are subject to interest rate repricing within agiven period of time. Interest rate sensitivity can be managed by repricingassets or liabilities, selling securities available for sale, replacing anasset or liability at maturity, or adjusting the interest rate during the lifeof an asset or liability. Managing the amount of assets and liabilitiesrepricing in this same time interval helps to hedge the risk and minimize theimpact on net interest income of rising or falling interest rates. We generallywould benefit from increasing market rates of interest when we have anasset-sensitive gap position and generally would benefit from decreasing marketrates of interest when we are liability-sensitive.  The analysis presentsonly a static view of the timing of maturities and repricing opportunities,without taking into consideration that changes in interest rates do not affectall assets and liabilities equally. For example, rates paid on a substantialportion of core deposits may change contractually within a relatively shorttime frame, but those rates are viewed by us as significantly lessinterest-sensitive than market-based rates such as those paid on noncoredeposits. Net interest income may be affected by other significant factors in agiven interest rate environment, including changes in the volume and mix ofinterest-earning assets and interest-bearing liabilities.

 

35

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**InterestRate 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.

 

The following table setsforth information regarding our rate sensitivity, as of December 31, 2007at 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** | ** ** | ** **          | ** ** | ** ** | ** ** |
|-----------------------------------------------------------|------------|-----------------------|------------|------------------------|------------|-----------------------------|------------|---------------------|------------|------------|------------|
| ** **                                                | ** ** | **Within three** | ** ** | **But within**    | ** ** | **within five**        | ** ** | **After five** | ** ** | ** ** | ** ** |
| **December 31, 2007**                           | ** ** | **months**            | ** ** | **twelve months** | ** ** | **years**                   | ** ** | **years**           | ** ** | **Total**  | ** ** |
|                                                      |       |                  |       |                   |       |                        |       |                |       |       |       |
| Interest-earning  assets:(in thousands)                   |       |                  |       |                   |       |                        |       |                |       |       |       |
| Federal funds  sold                                       |       | $                     | 110        |                   | $          | —                      |       | $                   | —     |       | $          | — |   | $ | 110 |   |
| Investment  securities                                    |       | 1,030                 |       | 1,542                  |       | 7,714                       |       | 4,816               |       | 15,102     |       |
| Loans                                                     |       | 33,835                |       | 3,915                  |       | 16,845                      |       | 694                 |       | 55,289     |       |
| Total  interest-earning assets                            |       | $                     | 34,975     |                   | $          | 5,457                       |       | $                   | 24,559     |       | $          | 5,510 |   | $ | 70,501 |   |
|                                                      |       |                  |       |                   |       |                        |       |                |       |       |       |
| Interest-bearing  liabilities:(in thousands)              |       |                  |       |                   |       |                        |       |                |       |       |       |
| Interest-bearing  checking                                |       | $                     | 5,670      |                   | $          | —                      |       | $                   | —     |       | $          | — |   | $ | 5,670 |   |
| Money market and  savings                                 |       | 24,481                |       | —                 |       | —                      |       | —              |       | 24,481     |       |
| Time deposits                                             |       | 8,357                 |       | 14,942                 |       | 1,918                       |       | —              |       | 25,217     |       |
| Federal funds  purchased                                  |       | 3,658                 |       | —                 |       | —                      |       | —              |       | 3,658      |       |
| Repurchase  agreement                                     |       | 1,395                 |       | —                 |       | —                      |       | —              |       | 1,395      |       |
| Total  interest-bearing Liabilities                       |       | $                     | 43,561     |                   | $          | 14,942                      |       | $                   | 1,918      |       | $          | — |   | $ | 60,421 |   |
|                                                      |       |                  |       |                   |       |                        |       |                |       |       |       |
| Period gap                                                |       | $                     | (8,586     | )                      | $          | (9,485                      | )          | $                   | 22,641     |       | $          | 5,510 |   | $ | 10,080 |   |
| Cumulative gap                                            |       | $                     | (8,586     | )                      | $          | (18,071                     | )          | $                   | 4,570      |       | $          | 10,080 |   | $ | 10,080 |   |
| Ratio of  cumulative gap to total interest-earning assets |       | (12.18                | )%         | (25.63                 | )%         | 6.48                        | %          | 14.30               | %          | 14.30      | %          |

 

36

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**Item7.  Financial Statements.**

 

**CONGAREEBANCSHARES, INC. AND SUBSIDIARY**

 

**Tableof Contents**

 
| ** **                                                                                       | ** ** | **Page No.** |
|--------------------------------------------------------------------------------------------------|------------|-------------------|
| Report of Independent  Registered Public Accounting Firm                                         |       | 38                |
| Consolidated Balance Sheets                                                                      |       | 39                |
| Consolidated Statements of  Operations                                                           |       | 40                |
| Consolidated Statements of  Changes in Stockholders’ Equity and Comprehensive Income (Loss) |       | 41                |
| Consolidated Statements of  Cash Flows                                                           |       | 42                |
| Notes to  Consolidated Financial Statements                                                      |       | 43-59             |

 

37

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**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

The Board of DirectorsCongaree Bancshares, Inc. and SubsidiaryCayce, South Carolina

 

We have audited theaccompanying consolidated balance sheets of Congaree Bancshares, Inc. andSubsidiary as of December 31, 2007 and 2006, and the related consolidatedstatements of operations, changes in shareholders’ equity and comprehensiveincome (loss), and cash flows for the years then ended.  These financialstatements are the responsibility of the Company’s management.  Ourresponsibility is to express an opinion on these consolidated financialstatements based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standards require that we plan and performthe audit to obtain reasonable assurance about whether the financial statementsare free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements.  An audit also includes assessing the accounting principlesused and significant estimates made by management, as well as evaluating theoverall financial statement presentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Congaree Bancshares, Inc. andSubsidiary, as of December 31, 2007 and 2006, 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.

 

As discussed in Note 1 tothe financial statements, the 2007 financial statements have been restated toadd a valuation allowance for income taxes.

 

We were not engaged toexamine management’s assertion about the effectiveness of Congaree Bancshares, Inc.and its Subsidiary’s internal control over financial reporting as of December 31,2007 included in the accompanying Management’s Report on Internal Control OverFinancial Reporting and, accordingly, we do not express an opinion thereon.

 
| /s/ Elliott Davis, LLC    |
|---------------------------|
| Columbia, South  Carolina |
| March 26, 2009       |

 

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**CONGAREEBANCSHARES, INC. AND SUBSIDIARY**

**Consolidated Balance Sheets**

 
| ** **                                                                                                                                             | ** ** | **December 31,** | ** **     |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|----------------|
| ** **                                                                                                                                             | ** ** | **2007**              | ** **     | **2006** | ** ** |
| **Assets:**                                                                                                                                            |       |                  |           |   |   |
| Cash and cash  equivalents:                                                                                                                            |       |                  |           |   |   |
| Cash and due  from banks                                                                                                                               |       | $                     | 4,012,721      |   | $ | 448,239 |   |
| Federal funds  sold                                                                                                                                    |       | 110,000               |           | 11,727,000 |   |
|                                                                                                                                                   |       |                  |           |   |   |
| Total cash and  cash equivalents                                                                                                                       |       | 4,122,721             |           | 12,175,239 |   |
|                                                                                                                                                   |       |                  |           |   |   |
| Securities  available for sale                                                                                                                         |       | 14,833,432            |           | 4,214,506 |   |
| Nonmarketable  equity securities                                                                                                                       |       | 268,244               |           | — |   |
| Loans receivable                                                                                                                                       |       | 55,288,904            |           | 4,995,781 |   |
| Less allowance  for loan losses                                                                                                                        |       | 552,600               |           | 50,000 |   |
|                                                                                                                                                   |       |                  |           |   |   |
| Loans, net                                                                                                                                             |       | 54,736,304            |           | 4,945,781 |   |
|                                                                                                                                                   |       |                  |           |   |   |
| Premises,  furniture and equipment, net                                                                                                                |       | 3,960,573             |           | 2,150,983 |   |
| Accrued interest  receivable                                                                                                                           |       | 338,183               |           | 78,878 |   |
| Deferred tax  asset                                                                                                                                    |       | —                |           | 414,346 |   |
| Other assets                                                                                                                                           |       | 184,220               |           | 98,388 |   |
|                                                                                                                                                   |       |                  |           |   |   |
| Total assets                                                                                                                                           | ** ** | **$**                 | **78,443,677** | ** ** | **$** | **24,078,121** | ** ** |
| ** **                                                                                                                                             | ** ** | ** **            | ** **     | ** ** | ** ** |
| **Liabilities:**                                                                                                                                       |       |                  |           |   |   |
| Deposits:                                                                                                                                              |       |                  |           |   |   |
| Noninterest-bearing  transaction accounts                                                                                                              |       | $                     | 4,911,717      |   | $ | 723,074 |   |
| Interest-bearing  transaction accounts                                                                                                                 |       | 5,670,104             |           | 686,750 |   |
| Savings and  money market                                                                                                                              |       | 24,481,389            |           | 1,103,901 |   |
| Time deposits  $100,000 and over                                                                                                                       |       | 13,686,816            |           | 2,716,340 |   |
| Other time  deposits                                                                                                                                   |       | 11,529,784            |           | 2,778,501 |   |
|                                                                                                                                                   |       |                  |           |   |   |
| Total deposits                                                                                                                                         |       | 60,279,810            |           | 8,008,566 |   |
|                                                                                                                                                   |       |                  |           |   |   |
| Federal funds  purchased                                                                                                                               |       | 3,658,000             |           | — |   |
| Securities sold  under agreements to repurchase                                                                                                        |       | 1,395,326             |           | — |   |
| Accrued interest  payable                                                                                                                              |       | 65,019                |           | 12,334 |   |
| Other  liabilities                                                                                                                                     |       | 109,734               |           | — |   |
|                                                                                                                                                   |       |                  |           |   |   |
| Total  liabilities                                                                                                                                     |       | 65,507,889            |           | 8,020,900 |   |
|                                                                                                                                                   |       |                  |           |   |   |
| 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,  $.01 par value, 10,000,000 shares authorized; 1,764,439 shares issued and  outstanding at December 31, 2007 and 2006, respectively |       | 17,644                |           | 17,644 |   |
| Capital surplus                                                                                                                                        |       | 17,141,232            |           | 16,861,718 |   |
| Retained deficit                                                                                                                                       |       | (4,309,992            | )              | (821,979 | ) |
| Accumulated  other comprehensive income (loss)                                                                                                         |       | 86,904                |           | (162 | ) |
|                                                                                                                                                   |       |                  |           |   |   |
| Total  shareholders’ equity                                                                                                                       |       | 12,935,788            |           | 16,057,221 |   |
|                                                                                                                                                   |       |                  |           |   |   |
| Total  liabilities and shareholders’ equity                                                                                                       | ** ** | **$**                 | **78,443,677** | ** ** | **$** | **24,078,121** | ** ** |

 

 The accompanyingnotes are an integral part of the consolidated financial statements.

 

39

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**CONGAREEBANCSHARES, INC. AND SUBSIDIARY**

**Consolidated Statements of Operations**

**Forthe years ended December 31, 2007 and 2006**

 
| ** **                                               | ** ** | **2007**      | ** **     | **2006**    | ** ** |
|----------------------------------------------------------|------------|---------------|----------------|-------------|------------|
| **Interest  income:**                                    |       |          |           |        |       |
| Loans, including  fees                                   |       | $             | 2,153,450      |        | $          | 59,401 |   |
| Securities  available for sale, taxable                  |       | 565,520       |           | 37,884      |       |
| Federal funds  sold                                      |       | 440,931       |           | 143,779     |       |
|                                                     |       |          |           |        |       |
| Total                                                    |       | 3,159,901     |           | 241,064     |       |
|                                                     |       |          |           |        |       |
| **Interest  expense:**                                   |       |          |           |        |       |
| Time deposits  $100,000 and over                         |       | 337,699       |           | 13,813      |       |
| Other deposits                                           |       | 1,162,623     |           | 18,980      |       |
| Other borrowings                                         |       | 66,348        |           | 62,183      |       |
|                                                     |       |          |           |        |       |
| Total                                                    |       | 1,566,670     |           | 94,976      |       |
|                                                     |       |          |           |        |       |
| **Net  interest income**                                 |       | 1,593,231     |           | 146,088     |       |
|                                                     |       |          |           |        |       |
| Provision for  loan losses                               |       | 502,600       |           | 50,000      |       |
|                                                     |       |          |           |        |       |
| **Net  interest income after provision for loan losses** |       | 1,090,631     |           | 96,088      |       |
|                                                     |       |          |           |        |       |
| **Noninterest  income:**                                 |       |          |           |        |       |
| Service charges  on deposit accounts                     |       | 23,087        |           | 74          |       |
| Residential  mortgage origination fees                   |       | 53,580        |           | 2,225       |       |
| Other                                                    |       | 25,103        |           | 8,969       |       |
|                                                     |       |          |           |        |       |
| Total  noninterest income                                |       | 101,770       |           | 11,268      |       |
|                                                     |       |          |           |        |       |
| **Noninterest  expenses:**                               |       |          |           |        |       |
| Salaries and  employee benefits                          |       | 2,286,714     |           | 593,216     |       |
| Net occupancy                                            |       | 254,131       |           | 50,381      |       |
| Furniture and  equipment                                 |       | 359,877       |           | 104,770     |       |
| Other operating                                          |       | 1,365,430     |           | 446,012     |       |
|                                                     |       |          |           |        |       |
| Total noninterest  expense                               |       | 4,266,152     |           | 1,194,379   |       |
|                                                     |       |          |           |        |       |
| **Loss  before income taxes**                            |       | (3,073,751    | )              | (1,087,023  | )          |
|                                                     |       |          |           |        |       |
| Income tax  expense (benefit)                            |       | 414,262       |           | (414,262    | )          |
|                                                     |       |          |           |        |       |
| **Net  loss**                                            | ** ** | **$**         | **(3,488,013** | **)**       | **$**      | **(672,761** | **)** |
|                                                     |       |          |           |        |       |
| **Loss  per share**                                      |       |          |           |        |       |
| Basic loss per  share                                    | ** ** | **$**         | **(1.98**      | **)**       | **$**      | **(1.50** | **)** |
|                                                     |       |          |           |        |       |
| Average shares  outstanding                              | ** ** | **1,764,439** | ** **     | **449,577** | ** ** |

 

The accompanyingnotes are an integral part of the consolidated financial statements.

 

40

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**CONGAREEBANCSHARES, INC. AND SUBSIDIARY**

**Consolidated Statements of Changes inShareholders’ Equity and Comprehensive Income (Loss)**

**Forthe years ended December 31, 2007 and 2006**

 
| ** **                                         | ** ** | ** **            | ** ** | ** **  | ** ** | ** **   | ** ** | ** **     | ** ** | **Accumulated**   | ** **     | ** ** | ** ** |
|----------------------------------------------------|------------|-----------------------|------------|-------------|------------|--------------|------------|----------------|------------|-------------------|----------------|------------|------------|
| ** **                                         | ** ** | ** **            | ** ** | ** **  | ** ** | ** **   | ** ** | ** **     | ** ** | **other**         | ** **     | ** ** | ** ** |
| ** **                                         | ** ** | ** **            | ** ** | ** **  | ** ** | ** **   | ** ** | ** **     | ** ** | **comprehensive** | ** **     | ** ** | ** ** |
| ** **                                         | ** ** | **Common Stock** | ** ** | **Capital** | ** ** | **Retained** | ** ** | **income**     | ** ** | ** **        | ** **     |
| ** **                                         | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **surplus**  | ** ** | **deficit**    | ** ** | **(loss)**        | ** **     | **Total**  | ** ** |
|                                               |       |                  |       |        |       |         |       |           |       |              |           |       |       |
| **Balance,  December 31, 2005**               |       | 10                    |       | $           | 1          |         | $          | 99             |       | $                 | (149,218       | )          | $          | — |   | $ | (149,118 | ) |
|                                               |       |                  |       |        |       |         |       |           |       |              |           |       |       |
| Proceeds from  sale of stock                       |       | 1,764,429             |       | 17,643      |       | 17,626,647   |       |           |       |              |           | 17,644,290 |       |
|                                               |       |                  |       |        |       |         |       |           |       |              |           |       |       |
| Costs of stock  issuance                           |       |                  |       |        |       | (790,252     | )          |           |       |              |           | (790,252   | )          |
|                                               |       |                  |       |        |       |         |       |           |       |              |           |       |       |
| Net loss                                           |       |                  |       |        |       |         |       | (672,761       | )          |              |           | (672,761   |       |
|                                               |       |                  |       |        |       |         |       |           |       |              |           |       |       |
| Other  comprehensive loss, net of taxes of $83     |       |                  |       |        |       |         |       |           |       | (162              | )              | (162       | )          |
|                                               |       |                  |       |        |       |         |       |           |       |              |           |       |       |
| Comprehensive  loss                                |       |                  |       |        |       |         |       |           |       |              |           | (672,923   | )          |
|                                               |       |                  |       |        |       |         |       |           |       |              |           |       |       |
| Stock and  warrant compensation expense            |       |                  |       |        |       | 25,224       |       |           |       |              |           | 25,224     |       |
|                                               |       |                  |       |        |       |         |       |           |       |              |           |       |       |
| **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** |   |

 

The accompanyingnotes are an integral part of the consolidated financial statements.

 

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**CONGAREEBANCSHARES, INC. AND SUBSIDIARY**

**Consolidated Statements of Cash Flows**

**Forthe years ended December 31, 2007 and 2006**

 
| ** **                                                                   | ** ** | **2007**    | ** **    | **2006**    | ** ** |
|------------------------------------------------------------------------------|------------|-------------|---------------|-------------|------------|
| **Cash  flows from operating activities:**                                   |       |        |          |        |       |
| Net loss                                                                     |       | $           | (3,488,013    | )           | $          | (672,761 | ) |
| Adjustments to  reconcile net loss to net cash used by operating activities: |       |        |          |        |       |
| Provision for  loan losses                                                   |       | 502,600     |          | 50,000      |       |
| Depreciation and  amortization expense                                       |       | 180,726     |          | 18,387      |       |
| Discount  accretion and premium amortization                                 |       | (53,655     | )             | (37,884     | )          |
| Deferred income  taxes                                                       |       | 414,262     |          | (414,262    | )          |
| Stock and  warrant compensation expense                                      |       | 279,514     |          | 25,224      |       |
| Increase in  accrued interest receivable                                     |       | (259,305    | )             | (78,878     | )          |
| Increase in  accrued interest payable                                        |       | 52,685      |          | 12,334      |       |
| Decrease  (increase) in other assets                                         |       | (142,003    | )             | (21,119     | )          |
| Increase  (decrease) in other liabilities                                    |       | 109,734     |          | (52,031     | )          |
|                                                                         |       |        |          |        |       |
| Net cash used by  operating activities                                       |       | (2,403,455  | )             | (1,170,990  | )          |
|                                                                         |       |        |          |        |       |
| **Cash  flows from investing activities:**                                   |       |        |          |        |       |
| Purchase of  nonmarketable equity securities                                 |       | (268,244    | )             | —      |       |
| Proceeds from  maturities/calls of securities available-for-sale             |       | 4,205,535   |          | —      |       |
| Purchases of  securities available-for-sale                                  |       | (14,638,971 | )             | (4,176,784  | )          |
| Net increase in  loans receivable                                            |       | (50,293,123 | )             | (4,995,781  | )          |
| Purchase of  premises, furniture and equipment                               |       | (1,978,830  | )             | (1,799,646  | )          |
|                                                                         |       |        |          |        |       |
| Net cash used by  investing activities                                       |       | (62,973,633 | )             | (10,972,211 | )          |
|                                                                         |       |        |          |        |       |
| **Cash  flows from financing activities:**                                   |       |        |          |        |       |
| Increase in  noninterest-bearing deposits                                    |       | 4,188,643   |          | 723,074     |       |
| Increase in  interest bearing deposits                                       |       | 48,082,601  |          | 7,285,492   |       |
| Increase in  federal funds purchased                                         |       | 3,658,000   |          | —      |       |
| Increase in  securities sold under agreements to repurchase                  |       | 1,395,326   |          | —      |       |
| Payments on note  payable                                                    |       | —      |          | (565,000    | )          |
| Issuance of  common stock, net                                               |       | —      |          | 16,854,038  |       |
|                                                                         |       |        |          |        |       |
| Net cash  provided by financing activities                                   |       | 57,324,570  |          | 24,297,604  |       |
|                                                                         |       |        |          |        |       |
| **Net  increase (decrease) in cash and cash equivalents**                    |       | (8,052,518  | )             | 12,154,403  |       |
|                                                                         |       |        |          |        |       |
| **Cash  and cash equivalents, beginning of period**                          |       | 12,175,239  |          | 20,836      |       |
|                                                                         |       |        |          |        |       |
| **Cash  and cash equivalents, end of period**                                | ** ** | **$**       | **4,122,721** | ** **  | **$**      | **12,175,239** | ** ** |

 

The accompanyingnotes are an integral part of the consolidated financial statements.

 

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**CONGAREEBANCSHARES, INC. AND SUBSIDIARY**

 

**NOTE1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

**Organization**- Congaree Bancshares, Inc. and Subsidiary (the Company) was incorporatedto serve as a bank holding company for its subsidiary, Congaree State Bank (theBank).  Congaree State Bank commenced business on October 16,2006.  The principal business activity of the Bank is to provide bankingservices to domestic markets, principally in West Columbia and Cayce, SouthCarolina.  The Bank is a state-chartered commercial bank, and its depositsare insured by the Federal Deposit Insurance Corporation.  Theconsolidated financial statements include the accounts of the parent companyand its wholly-owned subsidiary after elimination of all significant intercompanybalances and transactions.

 

**Restatement**- The Company has restated itspreviously filed financial statements to add a valuation allowance inaccordance with the rules of SFAS 109, Deferred Income Taxes.  The Company believes it is more likely thannot that it will not be able to realize all of the tax benefits.  The Company has incurred operating lossessince inception.  The Company received aComment Letter from the Securities and Exchange Commission in January 2009,and based on their views and the Company’s re-evaluation, determined that avaluation allowance on deferred taxes was appropriate at December 31,2007.  These financial statements reflectthis revision.

 

**Management’sEstimates** - The preparation of consolidated financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

 

Material estimates thatare particularly susceptible to significant change relate to the determinationof the allowance for losses on loans, including valuation allowances forimpaired loans, and the valuation of real estate acquired in connection withforeclosures or in satisfaction of loans.  In connection with thedetermination of the allowances for losses on loans and foreclosed real estate,management obtains independent appraisals for significant properties. Management must also make estimates in determining the estimated useful livesand methods for depreciating premises and equipment.

 

While management usesavailable information to recognize losses on loans and foreclosed real estate,future additions to the allowances may be necessary based on changes in localeconomic conditions.  In addition, regulatory agencies, as an integralpart of their examination process, periodically review the Company’s allowancesfor losses on loans and foreclosed real estate.  Such agencies may requirethe Company to recognize additions to the allowances based on their judgmentsabout information available to them at the time of their examination. Because of these factors, it is reasonably possible that the allowances forlosses on loans and foreclosed real estate may change materially in the nearterm.

 

**Concentrationsof Credit Risk** - Financial instruments, which potentiallysubject the Company to concentrations of credit risk, consist principally ofloans receivable, investment securities, federal funds sold and amounts duefrom banks.

 

The Company makes loansto individuals and small businesses for various personal and commercialpurposes primarily in the Lexington County region of South Carolina.  TheCompany’s loan portfolio is not concentrated in loans to any single borrower ora relatively small number of borrowers.  Additionally, Management is notaware of any concentrations of loans to classes of borrowers or industries thatwould be similarly affected by economic conditions.

 

In addition to monitoringpotential concentrations of loans to particular borrowers or groups ofborrowers, industries and geographic regions, Management monitors exposure tocredit risk from concentrations of lending products and practices such as loansthat subject borrowers to substantial payment increases (e.g. principaldeferral periods, loans with initial interest-only periods, etc.), and loanswith high loan-to-value ratios.  Management has determined that there isno concentration of credit risk associated with its lending policies orpractices.  Additionally, there are industry practices that could subjectthe Company to increased credit risk should economic conditions change over thecourse of a loan’s life. For example, the Company makes variable rate loans andfixed rate principal-amortizing loans with maturities prior to the loan beingfully paid (i.e. balloon payment loans).  These loans are underwritten andmonitored to manage the associated risks.  Therefore, management believesthat these particular practices do not subject the Company to unusual creditrisk.

 

The Company’s investmentportfolio consists principally of obligations of the United States, itsagencies or its corporations.  In the opinion of Management, there is noconcentration of credit risk in its investment portfolio.  The Companyplaces its deposits and correspondent accounts with and sells its federal fundsto high quality institutions. Management believes credit risk associated withcorrespondent accounts is not significant.

 

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**CONGAREEBANCSHARES, INC. AND SUBSIDIARY**

 

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

 

**SecuritiesAvailable-for-Sale**- Securities available-for-sale arecarried at amortized cost and adjusted to estimated market value by recognizingthe aggregate unrealized gains or losses in a valuation account. Aggregate market valuation adjustments are recorded in shareholders’ equity netof deferred income taxes.  Reductions in market value considered bymanagement to be other than temporary are reported as a realized loss and areduction in the cost basis of the security. The adjusted cost basis ofinvestments available-for-sale is determined by specific identification and isused in computing the gain or loss upon sale.

 

**NonmarketableEquity Securities** - Nonmarketable equity securitiesinclude the cost of the Company’s investment in the stock of the Federal HomeLoan Bank and Silverton Bank.  These stocks have no quoted market valueand no ready market exists.  The Bank’s investment in nonmarketable equitysecurities was $268,244 as of December 31, 2007.  The Company did notinvest in nonmarketable equity securities as of December 31, 2006.

 

**LoansReceivable** - Loans are stated at their unpaid principalbalance.  Interest income is computed using the simple interest method andis recorded in the period earned.

 

When serious doubt existsas to the collectibility of a loan or when a loan becomes contractually 90 dayspast due as to principal or interest, interest income is generally discontinuedunless the estimated net realizable value of collateral exceeds the principalbalance and accrued interest.  When interest accruals are discontinued,income earned but not collected is reversed.

 

Loan origination andcommitment fees and certain direct loan origination costs (principally salariesand employee benefits) are deferred and amortized to income over thecontractual life of the related loans or commitments, adjusted for prepayments,using the straight-line method.

 

The Company identifiesimpaired loans through its normal internal loan review process.  Loans onthe Company’s problem loan watch list are considered potentially impairedloans.  These loans are evaluated in determining whether all outstandingprincipal and interest are expected to be collected.  Loans are notconsidered impaired if a minimal payment delay occurs and all amounts due,including accrued interest at the contractual interest rate for the period ofdelay, are expected to be collected.  At December 31, 2007,management has determined that no impairment of loans existed.

 

**Allowancefor Loan Losses** - The provision for loan losses chargedto operating expenses reflects the amount deemed appropriate by management toestablish an adequate reserve to meet the probable loan losses incurred in thecurrent portfolio.  Management’s judgment is based on periodic and regularevaluation of individual loans, the overall risk characteristics of the variousportfolio segments, and prevailing economic conditions.  Loans that aredetermined to be uncollectible are charged against the allowance. Provisions for loan losses and recoveries on loans previously charged off areadded to the allowance.

 

While management uses thebest information available to make evaluations, future adjustments may benecessary if economic conditions differ substantially from the assumptions usedin making the evaluation.  The allowance for loan losses is subject toperiodic evaluation by various regulatory authorities and may be subject toadjustment upon examination.

 

**Premises,Furniture and Equipment** - Premises, furniture andequipment are stated at cost, less accumulated depreciation.  Theprovision for depreciation is computed by the straight-line method, based onthe estimated useful lives for buildings and improvements of 40 years,furniture and equipment of 5 to 10 years and software of 5 years.  Thecost of assets sold or otherwise disposed of and the related allowance fordepreciation are eliminated from the accounts and the resulting gains or lossesare reflected in the income statement when incurred.  Maintenance andrepairs are charged to current expense. The costs of major renewals andimprovements are capitalized.

 

44

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**CONGAREEBANCSHARES, INC. AND SUBSIDIARY**

 

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

 

**IncomeTaxes** - Income taxes are the sum of amounts currentlypayable to taxing authorities and the net changes in income taxes payable orrefundable in future years.  Income taxes deferred to future years aredetermined utilizing a liability approach.  This method gives considerationto the future tax consequences associated with differences between financialaccounting and tax bases of certain assets and liabilities which areprincipally the allowance for loan losses, depreciable premises and equipment,and the net operating loss carryforward.

 

In 2006, the FASB issuedInterpretation No. 48 (FIN 48), “Accounting for Uncertainty in IncomeTaxes - an Interpretation of SFAS No. 109.”  FIN 48 clarifies theaccounting for uncertainty in income taxes recognized in an enterprise’s financialstatements in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 also prescribes a recognition threshold and measurement of a taxposition taken or expected to be taken in an enterprise’s tax return.  FIN48 is effective for fiscal years beginning after December 15, 2006. Accordingly, the Company adopted FIN 48 effective January 1, 2007. The adoption of FIN 48 did not have any impact on the Company’s consolidatedfinancial position.

 

**AdvertisingExpense** - Advertising and public relations costs aregenerally expensed as incurred.  External costs incurred in producingmedia advertising are expensed the first time the advertising takesplace.  External costs relating to direct mailing costs are expended inthe period in which the direct mailings are sent.

 

**Pre-openingexpenses** - The activities associated with organizing theBank were conducted in the name of the Company during the developmental stageperiod (November 2, 2005 to October 15, 2006).

 

On October 15, 2006,the close of the development stage period, the Company’s financial position wasas follows:

 
| Cash and cash  equivalents                                                |       | $           | 15,464,798   |   |
|---------------------------------------------------------------------------|------------|-------------|--------------|--------|
| Premises and  equipment                                                   |       | 466,427     |         |
| Other assets                                                              |       | 14,710      |         |
| Notes payable                                                             |       | (1,300,000  | )            |
| Other  liabilities                                                        |       | (146,330    | )            |
| Common stock  subscription proceeds, net of $118,239 expenses of offering |       | (15,347,509 | )            |
|                                                                      |       |        |         |
| Net pre-opening  expenses                                                 | ** ** | **$**       | **(847,904** | **)**  |

 

**Loss PerShare** - Basic loss per share represents income availableto shareholders divided by the weighted-average number of common shares outstandingduring the period.  Dilutive loss per share reflects additional commonshares that would have been outstanding if dilutive potential common shares hadbeen issued. The only potential common share equivalents are those related tostock options and warrants.  Stock options and warrants which areanti-dilutive are excluded from the calculation of diluted net income pershare.

 

**Stock-BasedCompensation** - The Company accounts for stock options andwarrants under the fair value recognition provisions of Financial AccountingStandards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 123(R),“Share-Based Payment.”  Compensation expense is recognized as salaries andbenefits in the consolidated statement of operations.

 

45

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**CONGAREEBANCSHARES, INC. AND SUBSIDIARY**

 

**NOTE 1 -SUMMARY OF 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 and liabilities, such as unrealized gainsand losses on available-for-sale securities, are reported as a separatecomponent of the equity section of the balance sheet, such items, along withnet income, are components of comprehensive income.

 

The components of othercomprehensive income and related tax effects are as follows for the years endedDecember 31, 2007 and 2006:

 
| ** **                                                     | ** ** | **2007** | ** ** | **2006**   | ** ** |
|----------------------------------------------------------------|------------|----------|------------|------------|------------|
|                                                           |       |     |       |       |       |
| Unrealized gains  (losses) on securities available-for-sale    |       | $        | 131,918    |       | (245       | ) |
| Reclassification  adjustment for losses realized in net income |       | —   |       | —     |       |
|                                                           |       |     |       |       |       |
| Net unrealized  losses on securities                           |       | 131,918  |       | (245       | )          |
|                                                           |       |     |       |       |       |
| Tax effect                                                     |       | (44,852  | )          | 83         |       |
|                                                           |       |     |       |       |       |
| Net-of-tax  amount                                             | ** ** | **$**    | **87,066** | ** ** | **$**      | **(162** | **)** |
|                                                                |            |          |            |            |            |  |  |

 

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

 

Interest paid on depositsand other borrowings totaled $1,513,985 and $22,537 for the years ended December 31,2007 and 2006, respectively.

 

There were no income taxpayments during the years ended December 31, 2007 and 2006.

 

**Off-Balance-SheetFinancial Instruments** - In the ordinary course ofbusiness, the Company enters into off-balance-sheet financial instrumentsconsisting of commitments to extend credit and letters of credit.  Thesefinancial instruments are recorded in the financial statements when they becomepayable by the customer.

 

**RecentAccounting Pronouncements** - The following is a summary ofrecent authoritative pronouncements that may affect accounting, reporting, anddisclosure of financial information by the Company:

 

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS157 defines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles, and expands disclosures about fairvalue measurements.  This standard eliminates inconsistencies found invarious prior pronouncements but does not require any new fair valuemeasurements.  SFAS 157 is effective for the Company on January 1,2008 and will not impact the Company’s accounting measurements but it isexpected to result in additional disclosures.

 

In September 2006,The FASB ratified the consensuses reached by the FASB’s Emerging Issues TaskForce (“EITF”) relating to EITF 06-4, “Accounting for the Deferred Compensationand Postretirement Benefit Aspects of Endorsement Split-Dollar Life InsuranceArrangements” (“EITF 06-4”).  Entities purchase life insurance for variousreasons including protection against loss of key employees and to fundpostretirement benefits.  The two most common types of life insurancearrangements are endorsement split dollar life and collateral assignment splitdollar life.  EITF 06-4 covers the former and EITF 06-10 (discussed below)covers the latter.  EITF 06-4 states that entities with endorsementsplit-dollar life insurance arrangements that provide a benefit to an employeethat extends to postretirement periods should recognize a liability for futurebenefits in accordance with SFAS No. 106, “Employers’ Accounting forPostretirement Benefits Other Than Pensions,” (if, in substance, apostretirement benefit plan exists) or Accounting Principles Board (“APB”)Opinion No. 12, “Omnibus Opinion - 1967” (if the arrangement is, insubstance, an individual deferred compensation contract).* * Entities should recognize the effects of applying this Issue througheither (a) a change in accounting principle through a cumulative-effectadjustment to retained earnings or to other components of equity or net assetsin the statement of financial position as of the beginning of the year ofadoption or (b) a change in accounting principle through retrospectiveapplication to all prior periods.  EITF 06-4 is effective for the Companyon January 1, 2008.  The Company does not believe the adoption ofEITF 06-4 will have a material impact on its financial position, results ofoperations or cash flows.

 

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**CONGAREEBANCSHARES, INC. AND SUBSIDIARY**

 

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

 

**RecentlyIssued Accounting Standards** (*continued)* - In September 2006, the FASB ratified theconsensus reached on EITF 06-5, “Accounting for Purchases of Life Insurance -Determining the Amount That Could Be Realized in Accordance with FASB TechnicalBulletin No. 85-4, Accounting for Purchases of Life Insurance” (“EITF 06-5”). EITF 06-5 states that a policyholder should consider any additional amountsincluded in the contractual terms of the insurance policy other than the cashsurrender value in determining the amount that could be realized under theinsurance contract.  EITF 06-5 also states that a policyholder shoulddetermine the amount that could be realized under the life insurance contractassuming the surrender of an individual-life by individual-life policy (orcertificate by certificate in a group policy).  EITF 06-5 is effective forthe Company on January 1, 2008.  The Company does not believe theadoption of EITF 06-5 will have a material impact on its financial position,results of operations or cash flows.

 

In March 2007, theFASB ratified the consensus reached on EITF 06-10, “Accounting for CollateralAssignment Split-Dollar Life Insurance Arrangements” (“EITF 06-10”).  Thepostretirement aspect of this EITF is substantially similar to EITF 06-4discussed above and requires that an employer recognize a liability for thepostretirement benefit related to a collateral assignment split-dollar lifeinsurance arrangement in accordance with either FASB Statement No. 106 orAPB Opinion No. 12, as appropriate, if the employer has agreed to maintaina life insurance policy during the employee’s retirement or provide theemployee with a death benefit based on the substantive agreement with theemployee.  In addition, a consensus was reached that an employer shouldrecognize and measure an asset based on the nature and substance of thecollateral assignment split-dollar life insurance arrangement.  EITF 06-10is effective for the Company on January 1, 2008.  The Company doesnot believe the adoption of EITF 06-10 will have a material impact on itsfinancial position, results of operations or cash flows.

 

In February 2007,the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assetsand Financial Liabilities - Including an amendment of FASB Statement No. 115”(“SFAS 159”).  This statement permits, but does not require, entities tomeasure many financial instruments at fair value.  The objective is toprovide entities with an opportunity to mitigate volatility in reportedearnings caused by measuring related assets and liabilities differently withouthaving to apply complex hedge accounting provisions.  Entities electingthis option will apply it when the entity first recognizes an eligible instrumentand will report unrealized gains and losses on such instruments in currentearnings.  This statement 1) applies to all entities, 2) specifies certainelection dates, 3) can be applied on an instrument-by-instrument basis withsome exceptions, 4) is irrevocable and 5) applies only to entireinstruments.  One exception is demand deposit liabilities which areexplicitly excluded as qualifying for fair value.  With respect to SFAS115, available-for-sale and held-to-maturity securities at the effective dateare eligible for the fair value option at that date.  If the fair valueoption is elected for those securities at the effective date, cumulativeunrealized gains and losses at that date shall be included in thecumulative-effect adjustment and thereafter, such securities will be accountedfor as trading securities.  SFAS 159 is effective for the Company on January 1,2008.  The Company is currently analyzing the fair value option that ispermitted, but not required, under SFAS 159.

 

In November 2007,the Securities and Exchange Commission (“SEC”) issued Staff Accounting BulletinNo. 109, “Written Loan Commitments Recorded at Fair Value Through Earnings”(“SAB 109”).  SAB 109 expresses the current view of the SEC staff that theexpected net future cash flows related to the associated servicing of the loanshould be included in the measurement of all written loan commitments that areaccounted for at fair value through earnings.   SEC registrants areexpected to apply this guidance on a prospective basis to derivative loancommitments issued or modified in the first quarter of 2008 and thereafter. TheCompany is currently analyzing the impact of this guidance, which relates tothe Company’s mortgage loans held for sale.

 

In December 2007,the FASB issued 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 bythe Company taking place on or after January 1, 2009.  Early adoptionis prohibited.  Accordingly, a calendar year-end company is required torecord and disclose business combinations following existing accountingguidance until January 1, 2009.  The Company will assess the impactof SFAS 141(R) if and when a future acquisition occurs.

 

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**CONGAREEBANCSHARES, INC. AND SUBSIDIARY**

 

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

 

**RecentlyIssued Accounting Standards** (*continued)* - In December 2007, the FASB issued SFAS No. 160,“Noncontrolling Interests in Consolidated Financial Statements - an amendmentof ARB No. 51” (“SFAS 160”).  SFAS 160 establishes new accounting andreporting standards for the noncontrolling interest in a subsidiary and for thedeconsolidation of a subsidiary.  Before this statement, limited guidanceexisted for reporting noncontrolling interests (minority interest).  As aresult, diversity in practice exists. In some cases minority interest isreported as a liability and in others it is reported in the mezzanine sectionbetween liabilities and equity.  Specifically, SFAS 160 requires therecognition of a noncontrolling interest (minority interest) as equity in theconsolidated financials statements and separate from the parent’s equity. The amount of net income attributable to the noncontrolling interest will beincluded in consolidated net income on the face of the income statement. SFAS 160 clarifies that changes in a parent’s ownership interest in asubsidiary that do not result in deconsolidation are equity transactions if theparent 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 usingthe fair value of the noncontrolling equity investment on the deconsolidationdate.  SFAS 160 also includes expanded disclosure requirements regardingthe interests of the parent and its noncontrolling interests. SFAS 160 iseffective for the Company on January 1, 2009.  Earlier adoption isprohibited. The Company is currently evaluating the impact, if any, theadoption of SFAS 160 will have on its consolidated financial statements.

 

Other accountingstandards that have been issued or proposed by the FASB or otherstandards-setting bodies are not expected to have a material impact on theCompany’s financial position, results of operations or cash flows.

 

**Risksand Uncertainties** - In the normal course of its business,the Company encounters two significant types of risks: economic andregulatory.  There are three main components of economic risk: interest rate risk, credit risk and market risk.  The Company is subjectto interest rate risk to the degree that its interest-bearing liabilitiesmature or reprice at different speeds, or on different basis, than its interest-earningassets.  Credit risk is the risk of default on the Company’s loanportfolio that results from borrower’s inability or unwillingness to makecontractually required payments.  Market risk reflects changes in thevalue of collateral underlying loans receivable and the valuation of realestate held by the Company.

 

The Company is subject tothe regulations of various governmental agencies.  These regulations canand do change significantly from period to period.  The Company alsoundergoes periodic examinations by the regulatory agencies, which may subjectit to further changes with respect to asset valuations, amounts of requiredloss allowances and operating restrictions from the regulators’ judgments basedon information available to them at the time of their examination.

 

**Reclassifications**- Certain captions and amounts in the 2006 consolidated financial statementswere reclassified to conform with the 2007 presentation.

 

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

 

The Company is requiredto maintain cash balances with its correspondent banks to cover all cash lettertransactions.  At December 31, 2007 and 2006, the requirement was metby the cash balance in the vault.

 

48

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**CONGAREEBANCSHARES, INC. AND SUBSIDIARY**

 

**NOTE 3 -INVESTMENT SECURITIES**

 

 The amortized costand estimated fair values of securities available for sale were:

 
| ** **                        | ** ** | ** ** | ** **     | **Gross Unrealized** | ** ** | **Estimated** | ** ** |
|-----------------------------------|------------|------------|----------------|---------------------------|------------|---------------|------------|
| ** **                        | ** ** | **Costs**  | ** **     | **Gains**                 | ** ** | **Losses**    | ** ** | **Fair Value** | ** ** |
| **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** | ** ** |
| **December 31,  2006**       |       |       |           |                      |       |          |       |   |   |
| Government  sponsored enterprises |       | $          | 1,517,670      |                      | $          | 1,134         |       | $ | 1,131 |   | $ | 1,517,673 |   |
| U.S. government  agencies         |       | 2,697,081  |           | 4,804                     |       | 5,052         |       | 2,696,833 |   |
|                              |       |       |           |                      |       |          |       |   |   |
| ** **                        | ** ** | **$**      | **4,214,751**  | ** **                | **$**      | **5,938**     | ** ** | **$** | **6,183** | ** ** | **$** | **4,214,506** | ** ** |

 

The amortized costs andfair values of investment securities at December 31, 2007, by contractualmaturity, are shown in the following chart.  Expected maturities maydiffer from contractual maturities because borrowers may have the right to callor prepay obligations with or without call or prepayment penalties.

 
| ** **                        | ** ** | **Amortized** | ** **     | ** **          | ** ** |
|-----------------------------------|------------|---------------|----------------|---------------------|------------|
| ** **                        | ** ** | **Cost**      | ** **     | **Fair Value** | ** ** |
|                              |       |          |           |                |       |
| Due within one  year              |       | $             | —         |                | $          | — |   |
| Due after one  through five years |       | 2,000,000     |           | 2,035,900           |       |
| Due after five  through ten years |       | 5,371,707     |           | 5,452,042           |       |
| Due after ten  years              |       | 7,330,052     |           | 7,345,490           |       |
|                              |       |          |           |                |       |
| Total securities                  | ** ** | **$**         | **14,701,759** | ** **          | **$**      | **14,833,432** | ** ** |

 

The following table showsgross unrealized losses and fair value, aggregated by investment category, andlength of time that individual securities have been in a continuous realizedloss 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** | **)** |

 

The following table showsgross unrealized losses and fair value, aggregated by investment category, andlength of time that individual securities have been in a continuous realizedloss position, at December 31, 2006.

 
| ** **                        | ** ** | **Less than 12 months** | ** **    | **12 months or more** | ** ** | **Total** | ** ** |
|-----------------------------------|------------|----------------------------------------|---------------|--------------------------------------|------------|-----------|------------|
| ** **                        | ** ** | **Fair**                               | ** **    | **Unrealized**                       | ** ** | **Fair**  | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** |
| ** **                        | ** ** | **Value**                              | ** **    | **Losses**                           | ** ** | **Value** | ** ** | **Losses** | ** ** | **Value** | ** ** | **Losses** | ** ** |
| Government sponsored  enterprises |       | $                                      | 1,495,634     |                                 | $          | 1,131     |       | $ | — |   | $ | — |   | $ | 1,495,634 |   | $ | 1,131 |   |
| U.S. government  agencies         |       | 557,218                                |          | 5,052                                |       | —    |       | — |   | 557,218 |   | 5,052 |   |
|                              |       |                                   |          |                                 |       |      |       |   |   |   |   |   |   |
| ** **                        | ** ** | **$**                                  | **2,052,852** | ** **                           | **$**      | **6,183** | ** ** | **$** | **—** | ** ** | **$** | **—** | ** ** | **$** | **2,052,852** | ** ** | **$** | **6,183** |   |

 

Securities classified asavailable-for-sale are recorded at fair market value.  There were nosecurities in a continuous loss position for more than twelve months at December 31,2007 or 2006.

 

49

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**CONGAREEBANCSHARES, INC. AND SUBSIDIARY**

 

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

 

Management evaluatessecurities for other-than-temporary impairment at least on a quarterly basis,and more frequently when economic or market concerns warrant suchevaluation.  Consideration is given to (1) the length of time and theextent to which the fair value has been less than cost, (2) the financialcondition and near-term prospects of the issuer, and (3) the intent andability of the Corporation to retain its investment in the issuer for a periodof time sufficient to allow for any anticipated recovery in fair value.

 

In analyzing an issuer’sfinancial condition, management considers whether the securities are issued bythe federal government or its agencies whether downgrades by bond rating agencieshave occurred, and industry analysts’ reports. As management has the ability tohold debt securities until maturity, or for the foreseeable future ifclassified as available for sale, no declines are deemed to be other thantemporary.

 

At December 31,2007, securities with an amortized cost of $4,247,344 and an estimated fairvalue of $4,195,988 were pledged to secure public deposits and securities soldunder agreements to repurchase.

 

**NOTE 4 -LOANS RECEIVABLE**

 

Major classifications ofloans receivable at December 31 are summarized as follows:

 
| ** **                  | ** ** | **2007**  | ** **     | **2006**   | ** ** |
|-----------------------------|------------|-----------|----------------|------------|------------|
| Real estate -  mortgage     |       | $         | 37,934,192     |       | 3,917,514  |   |
| Real estate -  construction |       | 8,188,004 |           | 444,242    |       |
| Commercial and  industrial  |       | 7,505,415 |           | 158,500    |       |
| Consumer and  other         |       | 1,661,293 |           | 475,525    |       |
|                        |       |      |           |       |       |
| Total gross  loans          | ** ** | **$**     | **55,288,904** | ** ** | **$**      | **4,995,781** | ** ** |
|                             |            |           |                |            |            |  |  |

 

Transactions in theallowance for loan losses during 2007 and 2006 are summarized below:

 
| ** **                       | ** ** | **2007** | ** **  | **2006**   | ** ** |
|----------------------------------|------------|----------|-------------|------------|------------|
| Balance,  beginning of year      |       | $        | 50,000      |       | $          | — |   |
| Provision  charged to operations |       | 502,600  |        | 50,000     |       |
|                             |       |     |        |       |       |
| Balance, end of  year            | ** ** | **$**    | **552,600** | ** ** | **$**      | **50,000** | ** ** |

 

At December 31, 2007and 2006, the Bank had no loans in nonaccrual status.  There were no loanspast due ninety days or more and still accruing interest at December 31,2007 or 2006.

 

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

 

Premises, furniture andequipment consisted of the following:

 
| ** **                              | ** ** | **December 31,** | ** **    |
|-----------------------------------------|------------|-----------------------|---------------|
| ** **                              | ** ** | **2007**              | ** **    | **2006** | ** ** |
| Land                                    | ** ** | $                     | **1,090,000** | ** ** | $ | **380,134** | ** ** |
| Construction in  progress               |       | 430,097               |          | — |   |
| Building and  improvements              |       | 1,633,383             |          | 1,420,799 |   |
| Furniture and  equipment                |       | 850,435               |          | 245,772 |   |
| Automobiles                             |       | 138,982               |          | 120,909 |   |
|                                    |       |                  |          |   |   |
| Total                                   |       | 4,142,897             |          | 2,167,614 |   |
|                                    |       |                  |          |   |   |
| Less,  accumulated depreciation         |       | 182,324               |          | 16,631 |   |
|                                    |       |                  |          |   |   |
| Premises,  furniture and equipment, net | ** ** | **$**                 | 3,960,573     | ** ** | **$** | 2,150,983 | ** ** |

 

Construction in progressrelates to certain leasehold improvements, signs and furniture and fixtures forthe West Columbia, South Carolina branch.  The branch opened in January 2008.

 

50

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**CONGAREEBANCSHARES, INC. AND SUBSIDIARY**

 

**NOTE 6 - DEPOSITS**

 

At December 31,2007, the scheduled maturities of certificates of deposit were as follows:

 
| **Maturing In:** | ** ** | **Amount** | ** **     |
|-----------------------|------------|------------|----------------|
| 2008                  |       | $          | 23,298,339     |   |
| 2009                  |       | 1,918,261  |           |
|                  |       |       |           |
| Total                 | ** ** | **$**      | **25,216,600** | ** ** |

 

**NOTE 7 -NOTES PAYABLE**

 

The Company hadestablished an $875,000 line of credit with a bank to fund operating expensesduring the development stage as of December 31, 2005.  The Companyincreased the line of credit to $1,300,000 on July 28, 2006. The line wasuncollateralized and had a limited guaranty by the thirteen organizers. The line bore a variable rate of interest at the prime rate (8.25 percent)minus 0.5 percent and matured on November 30, 2006.  Interest was dueon a monthly basis and the unpaid principal balance was due at maturity. As of December 31, 2006, the line was repaid with proceeds from the stockoffering.

 

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

 

The Bank entered intosales of securities under agreements to repurchase.  These obligations torepurchase securities sold are reflected as liabilities in the consolidatedbalance sheets.  The dollar amounts of securities underlying theagreements are book entry securities.  Government-sponsored enterprisesand mortgage-backed securities with a book value of $3,215,849 and a fair valueof $3,171,758 at December 31, 2007 are used as collateral for theagreements.  There were no securities sold under repurchase agreements at December 31,2006.

 

**NOTE 9 -STOCK COMPENSATION PLAN**

 

Under the terms ofemployment agreements with the Chief Executive Officer (CEO) and President,Chief Business Development Officer and Chief Financial Officer (CFO), stockoptions were granted to each as part of their compensation and benefitspackage.  Under these agreements, the CEO and President was granted 79,399stock options, the Chief Business Development Officer 61,755 options and theCFO 44,110 options.  These options vest over five years. The options havean exercise price of $10.00 per share and terminate ten years after the date ofgrant.

 

The Company alsoestablished the 2007 Stock Incentive Plan (the Plan) which provides for thegranting of options to employees of the Company.  The Company granted46,872 options during 2007.  These options vest over five years.  Theoptions have an exercise price of $10.00 per share and terminate ten yearsafter the grant date.

 

The Company recognized$153,389 of stock-based employee compensation expense during 2007 associatedwith its stock option grants.  The Company is recognizing the compensationexpense for stock option grants with graded vesting schedules on astraight-line basis over the requisite service period of the award as permittedby SFAS No. 123(R).  As of December 31, 2007, there was $623,798of unrecognized compensation cost related to stock option grants.  Thecost is expected to be recognized over a weighted average period of 2.35 years.

 

The weighted averagegrant-date fair value of each option granted during 2007 was $3.34.  Thefair value for each option is estimated on the date of grant using theBlack-Scholes Model.  The following weighted average assumptions were usedfor grants in 2007:

 
| Dividend yield           |   | 0.00         | %      |
|--------------------------|--------|--------------|--------|
| Expected  volatility     |   | 17.89        | %      |
| Risk-free  interest rate |   | 3.53% - 4.93 | %      |
| Expected term            |   | 7 years      |   |

 

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**CONGAREEBANCSHARES, INC. AND SUBSIDIARY**

 

**NOTE 9 -STOCK COMPENSATION PLAN** -*continued*

 

A summary of the activityunder the stock option plan for the year ended December 31, 2007 follows:

 
| ** **                            | ** ** | ** **  | ** ** | **Weighted** | ** ** |
|---------------------------------------|------------|-------------|------------|--------------|------------|
| ** **                            | ** ** | ** **  | ** ** | **Average**  | ** ** |
| ** **                            | ** ** | ** **  | ** ** | **Exercise** | ** ** |
| ** **                            | ** ** | **Shares**  | ** ** | **Price**    | ** ** |
| Outstanding,  beginning of the period |       | 185,264     |       | $            | 10.00      |   |
|                                  |       |        |       |         |       |
| Granted during  the period            |       | 46,872      |       | 10.00        |       |
|                                  |       |        |       |         |       |
| Exercised during  the period          |       | —      |       | —       |       |
|                                  |       |        |       |         |       |
| Forfeited during  the period          |       | (500        | )          | 10.00        |       |
|                                  |       |        |       |         |       |
| Outstanding, end  of the period       | ** ** | **231,636** | ** ** | **$**        | **10.00**  | ** ** |
| ** **                            | ** ** | ** **  | ** ** | ** **   | ** ** |
| Options  exercisable at year end      | ** ** | **37,053**  |       |         |       |

 

The weighted averagecontractual life of the options outstanding as of December 31, 2007 is8.91 years.  There was no aggregate intrinsic value of options outstandingor exercisable at December 31, 2007.

 

A summary of the statusof the Company’s nonvested shares as of December 31, 2007 is presentedbelow:

 
| ** **                           | ** ** | ** **  | ** ** | **Weighted**        | ** ** |
|--------------------------------------|------------|-------------|------------|---------------------|------------|
| ** **                           | ** ** | ** **  | ** ** | **Average**         | ** ** |
| ** **                           | ** ** | ** **  | ** ** | **Grant Date** | ** ** |
| ** **                           | ** ** | **Shares**  | ** ** | **Fair Value** | ** ** |
| Nonvested at  January 1, 2007   |       | 185,264     |       | $                   | 3.35       |   |
| Granted                              |       | 46,872      |       | 3.32                |       |
| Forfeited                            |       | (500        | )          | 3.31                |       |
| Vested                               |       | (37,053     | )          | 3.35                |       |
|                                 |       |        |       |                |       |
| Nonvested at  December 31, 2007 | ** ** | **194,583** |       | 3.34                |       |
|                                      |            |             |            |                     |            |  |

 

**NOTE 10- STOCK WARRANTS**

 

The organizers of theCompany received stock warrants giving them the right to purchase one share ofcommon stock for every share they purchased in the initial offering of theCompany’s common stock up to 10,000 shares at a price of $10 per share. The warrants vest over three years and expire on October 16, 2016. Warrants held by directors of the Company will expire 90 days after thedirector ceases to be a director or officer of the Bank (365 days if due todeath or disability).

 

Warrants issued in 2006totaled 130,000.  No warrants were exercised or canceled.  At December 31,2007, 43,333 of the warrants were exercisable.

 

In calculating theexpense for warrants, the fair value of warrants is estimated as of the grantdate using the Black-Scholes option pricing model with the followingweighted-average assumptions: dividend yield of 0 percent based on the Company’sexpectation of dividend payouts; expected volatility of 9.77 percent based onpeer group data; risk-free interest rate of 4.76 percent based on the grantdate and expected term of the options and expected life of 3 years based onfactors such as the vesting period and the option’s contractual term. Total compensation expense related to warrants was $126,125 and $25,224 for theyears ended December 31, 2007 and 2006, respectively.

 

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**CONGAREEBANCSHARES, INC. AND SUBSIDIARY**

 

**NOTE 11- INCOME TAXES**

 

The Company has restatedits previously filed financial statements to add a valuation allowance inaccordance with the rules of SFAS 109, Deferred Income Taxes.  The Company believes it is more likely thannot that it will not be able to realize all of the tax benefits.  The Company has incurred operating lossessince inception.  The Company received aComment Letter from the Securities and Exchange Commission in January 2009,and based on their views and the Company’s re-evaluation, determined that avaluation allowance on deferred taxes was appropriate at December 31,2007.  These financial statements reflectthis revision.

 

 Income tax expenseis summarized as follows:

 
| ** **                    | ** ** | **Years ended December 31,** | ** **  |
|-------------------------------|------------|---------------------------------------------|-------------|
| ** **                    | ** ** | **2007**                                    | ** **  | **2006** | ** ** |
| Current portion               |       |                                        |        |   |   |
| Federal                       |       | $                                           | —      |   | $ | — |   |
| State                         |       | (469                                        | )           | 469 |   |
|                          |       |                                        |        |   |   |
| Total current                 |       | (469                                        | )           | 469 |   |
|                          |       |                                        |        |   |   |
| Deferred income  taxes        |       | 414,731                                     |        | (414,731 | ) |
|                          |       |                                        |        |   |   |
| Income tax  (benefit) expense | ** ** | **$**                                       | **414,262** | ** ** | **$** | **(414,262** | **)** |

 

 The gross amountsof deferred tax assets and deferred tax liabilities are as follows:

 
| ** **                                        | ** ** | **Years ended December 31,** | ** **  |
|---------------------------------------------------|------------|---------------------------------------------|-------------|
| ** **                                        | ** ** | **2007**                                    | ** **  | **2006** | ** ** |
| Deferred tax  assets:                             |       |                                        |        |   |   |
| Allowance for  loan losses                        |       | $                                           | 119,873     |   | $ | 10,124 |   |
| Net operating  loss carryforward                  |       | 1,081,789                                   |        | 133,771 |   |
| Organization and  start-up costs                  |       | 271,794                                     |        | 283,006 |   |
| Unrealized loss  on securities available for sale |       | —                                      |        | 83 |   |
| Other                                             |       | 35,503                                      |        | 540 |   |
|                                              |       |                                        |        |   |   |
| Total deferred  tax assets                        |       | 1,508,959                                   |        | 427,524 |   |
| Valuation allowance                               |       | (1,396,970                                  | )           | — |   |
|                                              |       |                                        |        |   |   |
| Net deferred tax  assets                          |       | 111,989                                     |        | 427,524 |   |
|                                              |       |                                        |        |   |   |
| Deferred tax  liabilities:                        |       |                                        |        |   |   |
| Unrealized gain  on securities available for sale |       | 44,851                                      |        | — |   |
| Accumulated  depreciation                         |       | 24,695                                      |        | 498 |   |
| Prepaid expenses                                  |       | 38,611                                      |        | 12,212 |   |
| Organization  costs                               |       | 48,683                                      |        | — |   |
|                                              |       |                                        |        |   |   |
| Total deferred  tax liabilities                   |       | 156,840                                     |        | 12,710 |   |
|                                              |       |                                        |        |   |   |
| Net deferred tax  asset (liability)               | ** ** | **$**                                       | **(44,851** | **)** | **$** | **414,814** | ** ** |

 

 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.  Net deferred tax assets are recorded as a separate line on theCompany’s consolidated balance sheet.

 

 The Company has anet operating loss for income tax purposes of $3,157,618 as of December 31,2007.  This net operating loss expires in the year 2026.

 

 A reconciliation ofthe income tax provision and the amount computed by applying the federalstatutory rate of 34% to income before income taxes follows:

 
| ** **                               | ** ** | **2007**  | ** **  | **2006**   | ** ** |
|------------------------------------------|------------|-----------|-------------|------------|------------|
| Tax expense  (benefit) at statutory rate |       | $         | (1,045,075  | )          | $          | (361,012 | ) |
| Stock  compensation expense              |       | 95,035    |        | —     |       |
| Change in  valuation allowance           |       | 1,396,970 |        | —     |       |
| Other                                    |       | (32,668   | )           | (53,250    | )          |
|                                     |       |      |        |       |       |
| Income tax  benefit                      | ** ** | **$**     | **414,262** | ** ** | **$**      | **(414,262** | **)** |

 

 The Company hadanalyzed the tax positions taken or expected to be taken in an its tax returnsand concluded it has no liability related to uncertain tax positions in accordancewith FIN 48.

 

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**CONGAREEBANCSHARES, INC. AND SUBSIDIARY**

 

**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.  Relatedparty loans are made on substantially the same terms, including interest ratesand collateral, as those prevailing at the time for comparable transactionswith unrelated persons and do not involve more than the normal risk ofcollectibility.  The following table summarizes the Bank’s related partyloan activity for the year ended December 31, 2007:

 
| Balance,  January 1, 2007   |       | $         | —        |       |
|----------------------------------|------------|-----------|---------------|------------|
| Disbursements                    |       | 3,342,670 |          |
| Repayments                       |       | (312,594  | )             |
|                             |       |      |          |
| Balance,  December 31, 2007 | ** ** | **$**     | **3,030,076** | ** ** |

 

There were no relatedparty loans as of December 31, 2006.

 

Deposits by directors,including their affiliates and executive officers, at December 31, 2007and 2006 were approximately $5,124,428 and $460,627, respectively.

 

**NOTE 13- LEASES**

 

The Company has enteredinto an agreement to lease an office facility under a noncancellable operatinglease agreement expiring in 2023.  The Company may, at its option, extendthe lease of its office facility at 2023 Sunset Boulevard in West Columbia,South Carolina, for two additional five year periods.  The Company alsoentered into a lease agreement for an office located on Devine Street for a thirty-sixmonth period.  Minimum rental commitments as of December 31, 2007 areas follows:

 
| 2008                 |       | $         | 119,826       |       |
|----------------------|------------|-----------|---------------|------------|
| 2009                 |       | 131,208   |          |
| 2010                 |       | 127,687   |          |
| 2011                 |       | 111,250   |          |
| 2012                 |       | 113,478   |          |
| 2013 and  thereafter |       | 1,278,845 |          |
|                 |       |      |          |
| Total                | ** ** | **$**     | **1,882,294** | ** ** |

 

The leases have variousrenewal options and require increased rentals under cost of living escalationclauses.  Rental expenses charged to occupancy and equipment expense in2007 and 2006 were $55,938 and $6,000, respectively.

 

**NOTE 14- COMMITMENTS AND CONTINGENCIES**

 

The Company is subject toclaims and lawsuits which arise primarily in the ordinary course ofbusiness.  Management is not aware of any legal proceedings which wouldhave a material adverse effect on the financial position or operating resultsof the Company.

 

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**CONGAREEBANCSHARES, INC. AND SUBSIDIARY**

 

**NOTE 15- LOSS PER SHARE**

 

 Basic loss pershare is computed by dividing net income (loss) by the weighted-average numberof common shares outstanding.  Diluted loss per share is computed bydividing net income (loss) by the weighted-average number of common sharesoutstanding and dilutive common share equivalents using the treasury stockmethod.  There were no dilutive common share equivalents outstandingduring 2007 and 2006 due to the net loss; therefore, basic loss per share anddiluted earnings per share were the same.

 
| ** **                                   | ** ** | **2007** | ** **     | **2006**   | ** **  |
|----------------------------------------------|------------|----------|----------------|------------|-------------|
| **Net  loss per share - basic computation:** |       |     |           |       |        |
|                                         |       |     |           |       |        |
| Net loss to  common shareholders             | ** ** | **$**    | **(3,488,013** | **)**      | **$**       | **(672,761** | **)** |
|                                         |       |     |           |       |        |
| Average common  shares outstanding - basic   | ** ** | **$**    | **1,764,439**  | ** ** | **449,577** | ** ** |
|                                         |       |     |           |       |        |
| Basic loss per  share                        | ** ** | **$**    | **(1.98**      | **)**      | **$**       | **(1.50** | **)** |

 

**NOTE 16- REGULATORY MATTERS**

 

** **The Bank is subject to various regulatorycapital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory,and possibly additional discretionary actions by regulators that, ifundertaken, could have a direct adverse material effect on the Bank’s financialstatements.  Under capital adequacy guidelines and the regulatoryframework for prompt corrective action, the Bank must meet specific capitalguidelines that involve quantitative measures of the Bank’s assets,liabilities, and certain off-balance-sheet items as calculated under regulatoryaccounting practices.  The Bank’s capital amounts and classification arealso subject to qualitative judgments by the regulators about components, riskweightings, and other factors.

 

Quantitative measuresestablished by regulation to ensure capital adequacy require the Bank tomaintain minimum ratios of Tier 1 and total capital as a percentage of assetsand off-balance-sheet exposures, adjusted for risk weights ranging from 0% to100%.  Tier 1 capital consists of common shareholders’ equity, excludingthe unrealized gain or loss on securities available-for-sale, minus certainintangible assets.  Tier 2 capital consists of the allowance for loanlosses subject to certain limitations.  Total capital for purposes ofcomputing the capital ratios consists of the sum of Tier 1 and Tier 2capital.  The regulatory minimum requirements are 4% for Tier 1 and 8% fortotal risk-based capital.

 

The Bank is also requiredto maintain capital at a minimum level based on total assets, which is known asthe leverage ratio.  Only the strongest banks are allowed to maintaincapital at the minimum requirement of 3%.  All others are subject tomaintaining ratios 1% to 2% above the minimum.

 

As of December 31,2007, management believes it is categorized as well-capitalized under theregulatory framework for prompt corrective action.  There are noconditions or events that management believes have changed the Bank’s category.

 

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

 
| ** **                                | ** ** | **Actual** | ** ** | **For Capital  Adequacy Purposes** | ** ** | **To Be Well-  Capitalized Under  Prompt Corrective  Action Provisions** | ** ** |
|-------------------------------------------|------------|------------|------------|----------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|
| **(Dollars in thousands)**      | ** ** | **Amount** | ** ** | **Ratio**                                    | ** ** | **Amount**                                                                                        | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
|                                      |       |       |       |                                         |       |                                                                                              |       |   |   |   |   |   |   |
| **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 | % |
|                                      |       |       |       |                                         |       |                                                                                              |       |   |   |   |   |   |   |
| **December 31,  2006**               |       |       |       |                                         |       |                                                                                              |       |   |   |   |   |   |   |
| Total capital  (to risk-weighted assets)  |       | $          | 12,575     |                                         | 135.70     | %                                                                                                 | $          | 741 |   | 8.00 | % | $ | 927 |   | 10.00 | % |
| Tier 1 capital  (to risk-weighted assets) |       | 12,161     |       | 131.25                                       | %          | 371                                                                                               |       | 4.00 | % | 556 |   | 6.00 | % |
| Tier 1 capital  (to average assets)       |       | 12,161     |       | 65.79                                        | %          | 739                                                                                               |       | 4.00 | % | 924 |   | 5.00 | % |

 

55

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**CONGAREEBANCSHARES, INC. AND SUBSIDIARY**

 

**NOTE 17- UNUSED LINES OF CREDIT**

 

As of December 31,2007, the Company had unused lines of credit to purchase federal funds fromunrelated banks totaling $7,900,000.  These lines of credit are availableon a one to fourteen day basis for general corporate purposes.  As of December 31,2007, the Company had borrowed $3,658,000 on these lines.

 

**NOTE 18- RESTRICTIONS ON DIVIDENDS, LOANS, OR ADVANCES**

 

The ability of theCompany to pay cash dividends to stockholders is dependent upon receiving cashin the form of dividends from its banking subsidiary.  However, certainrestrictions exist regarding the ability of the subsidiary to transfer funds inthe form of cash dividends to the Company.  State chartered banks are authorizedto pay cash dividends up to 100% of net income in any calendar year withoutobtaining the prior approval of the State Board of Financial Institutions orthe Commissioner of Banking provided that the Bank received a composite ratingof one or two at the last examination conducted by the State or Federalregulatory authority.  Otherwise, the Bank must file an income and expensereport and obtain the specific approval of the State Board.

 

Under Federal ReserveBoard regulations, the amount of loans or advances from the banking subsidiaryto the parent company are also restricted.

 

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

 

The Company is a party tofinancial instruments with off-balance sheet risk in the normal course ofbusiness to meet the financing needs of its customers.  These financialinstruments include commitments to extend credit and standby letters ofcredit.  Those instruments involve, to varying degrees, elements ofcredit, interest rate, and liquidity risk.  The Company’s exposure tocredit loss in the event of nonperformance by the other party to the financialinstrument for commitments to extend credit and standby letters of credit isessentially the same as that involved in extending loan facilities tocustomers.  The Company uses the same credit policies in makingcommitments and conditional obligations as it does for on-balance sheetinstruments.

 

Commitments to extendcredit are agreements to lend to a customer as long as there is no violation ofany condition established in the contract.  Commitments generally havefixed expiration dates or other termination clauses and may require payment ofa fee.  Since many of the commitments are expected to expire without beingdrawn upon, the total commitment amounts do not necessarily represent futurecash requirements.  The amount of collateral obtained if deemed necessaryby the Company upon extension of credit is based on management’s creditevaluation of the borrower. Collateral held varies, but may include accountsreceivable, negotiable instruments, inventory, property, plant and equipment,and real estate.  Commitments to extend credit, including unused lines ofcredit, amounted to $20,034,340 and $1,442,198 at December 31, 2007 and2006, respectively.

 

Standby letters of creditrepresent an obligation of the Company to a third party contingent upon thefailure of the Company’s customer to perform under the terms of an underlyingcontract with the third party or obligates the Company to guarantee or stand assurety for the benefit of the third party.  The underlying contract mayentail either financial or nonfinancial obligations and may involve such thingsas the shipment of goods, performance of a contract, or repayment of anobligation.  Under the terms of a standby letter, generally drafts will bedrawn only when the underlying event fails to occur as intended.  TheCompany can seek recovery of the amounts paid from the borrower.  Themajority of these standby letters of credit are unsecured.  Commitments understandby letters of credit are usually for one year or less.  At December 31,2007 and 2006, 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 had no standby letters of creditoutstanding at December 31, 2007 and 2006.

 

The Company originatescertain fixed rate residential loans and commits these loans for sale. The commitments to originate fixed rate residential loans and the salescommitments are freestanding derivative instruments.  The fair value ofthese commitments was not significant at December 31, 2007 and 2006.

 

56

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**CONGAREEBANCSHARES, INC. AND SUBSIDIARY**

 

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

 

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 value estimates are made at a specificpoint in time based on relevant market information and information about thefinancial instruments.  Because no market value exists for a significantportion of the financial instruments, fair value estimates are based onjudgments 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:

 

***Cash and Due from Banks*** - The carrying amount is a reasonable estimate offair value.

 

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

 

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

 

***Loans Receivable*** - For certain categories of loans, such as variablerate loans which are repriced frequently and have no significant change incredit risk, fair values are based on the carrying amounts.  The fairvalue of other types of loans is estimated by discounting the future cash flowsusing the current rates at which similar loans would be made to borrowers withsimilar credit ratings and for the same remaining maturities.

 

***Deposits*** - The fair value of demand deposits, savings, andmoney market accounts is the amount payable on demand at the reportingdate.  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.

 

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

 

***Securities Sold Under Agreements to Repurchase*** - These repurchase agreements havevariable rates that reprice on a continuous basis.  Due to the minorchange in interest rates, management estimates the carrying value to be areasonable estimate of fair value.

 

***Notes Payable*** - The carrying amount is a reasonable estimate of fairvalue.

 

***Accrued Interest Receivable and Payable*** - The carrying value of theseinstruments is a reasonable estimate of fair value.

 

***Off-Balance-Sheet Financial 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.  These financialinstruments are recorded in the financial statements when they become payableby the customer.

 

57

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**CONGAREEBANCSHARES, INC. AND SUBSIDIARY**

 

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

 

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

 
| ** **                                                          | ** ** | **December 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                                          | ** ** | **Carrying  Amount**            | ** ** | **Estimated  Fair Value**  | ** ** | **Carrying  Amount** | ** ** | **Estimated  Fair Value** | ** ** |
| **Financial  Assets:**                                              |       |                            |       |                            |       |   |   |   |   |
| Cash and due  from banks                                            |       | $                               | 4,012,721  |                            | $          | 4,012,721 |   | $ | 448,239 |   | $ | 448,239 |   |
| Federal funds  sold                                                 |       | 110,000                         |       | 110,000                         |       | 11,727,000 |   | 11,727,000 |   |
| Securities available-for-sale                                       |       | 14,833,432                      |       | 14,833,432                      |       | 4,214,506 |   | 4,214,506 |   |
| Nonmarketable  equity securities                                    |       | 268,244                         |       | 268,244                         |       | — |   | — |   |
| Loans  receivable, net                                              |       | 54,736,304                      |       | 54,987,400                      |       | 4,945,781 |   | 5,006,000 |   |
| Accrued interest  receivable                                        |       | 338,183                         |       | 338,183                         |       | 78,878 |   | 78,878 |   |
|                                                                |       |                            |       |                            |       |   |   |   |   |
| **Financial  Liabilities:**                                         |       |                            |       |                            |       |   |   |   |   |
| Demand deposit,  interest-bearing transaction, and savings accounts |       | 35,063,210                      |       | 35,063,210                      |       | 2,513,725 |   | 2,513,725 |   |
| Certificates of  deposit and other time deposits                    |       | 25,216,600                      |       | 24,733,000                      |       | 5,494,841 |   | 5,379,000 |   |
| Federal funds  purchased                                            |       | 3,658,000                       |       | 3,658,000                       |       | — |   | — |   |
| Securities sold  under agreements to repurchase                     |       | 1,395,326                       |       | 1,395,326                       |       | — |   | — |   |
| Accrued interest  payable                                           |       | 65,019                          |       | 65,019                          |       | 12,334 |   | 12,334 |   |
|                                                                     |            |                                 |            |                                 |            |  |  |  |  |  |  |  |  |

 
| ** **                                    | ** ** | **Notional  Amount** | ** ** | **Estimated  Fair Value** | ** ** | **Notional  Amount** | ** ** | **Estimated  Fair Value** | ** ** |
|-----------------------------------------------|------------|----------------------|------------|--------------------------------|------------|----------------------|------------|--------------------------------|------------|
| **Off-Balance  Sheet Financial Instruments:** |       |                 |       |                           |       |                 |       |                           |       |
| Commitments to  extend credit                 |       | $                    | 20,034,340 |                           | $          | —               |       | $                              | 1,442,198  |   | $ | — |   |
|                                               |            |                      |            |                                |            |                      |            |                                |            |  |  |  |  |

 

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

 

Presented below are thecondensed financial statements for Congaree Bancshares, Inc. (ParentCompany Only).

 

**CondensedBalance Sheets**

 
| ** **                                       | ** ** | **December 31,** | ** **     |
|--------------------------------------------------|------------|-----------------------|----------------|
| ** **                                       | ** ** | **2007**              | ** **     | **2006** | ** ** |
| **Assets:**                                      |       |                  |           |   |   |
| Cash                                             |       | $                     | 531,154        |   | $ | 1,645,199 |   |
| Premise and  equipment                           |       | 2,710,101             |           | 1,837,167 |   |
| Due from  investors                              |       | 18,440                |           | — |   |
| Investment in  banking subsidiary                |       | 9,705,878             |           | 12,574,855 |   |
|                                             |       |                  |           |   |   |
| Total assets                                     | ** ** | **$**                 | **12,965,573** | ** ** | **$** | **16,057,221** | ** ** |
|                                             |       |                  |           |   |   |
| **Liabilities  and shareholders’ equity:**  |       |                  |           |   |   |
| Other  liabilities                               |       | $                     | 29,785         |   | $ | — |   |
|                                             |       |                  |           |   |   |
| Total liabilities                                |       | 29,785                |           | — |   |
|                                             |       |                  |           |   |   |
| Shareholders’  equity                       |       | 12,935,788            |           | 16,057,221 |   |
|                                             |       |                  |           |   |   |
| Total  liabilities and shareholders’ equity | ** ** | **$**                 | **12,965,573** | ** ** | **$** | **16,057,221** | ** ** |

 

58

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**CONGAREEBANCSHARES, INC. AND SUBSIDIARY**

 

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

 

**CondensedStatements of Operations**

 
| ** **                                                                                         | ** ** | **Years ended December 31,** | ** **     |
|----------------------------------------------------------------------------------------------------|------------|---------------------------------------------|----------------|
| ** **                                                                                         | ** ** | **2007**                                    | ** **     | **2006** | ** ** |
| **Income  (including reimbursement from Bank):**                                                   |       | $                                           | 5,950          |   | $ | 648,285 |   |
| **Expenses:**                                                                                      |       |                                        |           |   |   |
| Stock based compensation  expense                                                                  |       | (279,514                                    | )              | — |   |
| Other expenses                                                                                     |       | (258,406                                    | )              | (696,065 | ) |
| **Income  (loss) before income taxes and equity in undistributed earnings of banking  subsidiary** |       | (531,970                                    | )              | (47,780 | ) |
|                                                                                               |       |                                        |           |   |   |
| Income tax  benefit                                                                                |       | —                                      |           | — |   |
|                                                                                               |       |                                        |           |   |   |
| Equity in  undistributed losses of banking subsidiary                                              |       | (2,956,043                                  | )              | (624,981 | ) |
|                                                                                               |       |                                        |           |   |   |
| **Net  loss**                                                                                      | ** ** | **$**                                       | **(3,488,013** | **)** | **$** | **(672,761** | **)** |

 

**CondensedStatements of Cash Flows**

 
| ** **                                                                   | ** ** | **Years ended December 31,** | ** **  |
|------------------------------------------------------------------------------|------------|---------------------------------------------|-------------|
| ** **                                                                   | ** ** | **2007**                                    | ** **  | **2006** | ** ** |
| **Cash  flows from operating activities:**                                   | ** ** | ** **                                  | ** **  | ** ** | ** ** |
| Net loss                                                                     |       | $                                           | (3,488,013  | ) | $ | (672,761 | ) |
| Adjustments to  reconcile net loss to net cash used by operating activities: |       |                                        |        |   |   |
| Depreciation  expense                                                        |       | 40,923                                      |        | — |   |
| Equity in  undistributed net loss of banking subsidiary                      |       | 2,956,043                                   |        | 624,981 |   |
| Reimbursement  from Bank                                                     |       | —                                      |        | (625,142 | ) |
| Decrease  (increase) in other assets                                         |       | (18,440                                     | )           | 29,937 |   |
| Increase  (decrease) in other liabilities                                    |       | 29,788                                      |        | (52,031 | ) |
| Stock and  warrant compensation expense                                      |       | 279,514                                     |        | 25,224 |   |
|                                                                         |       |                                        |        |   |   |
| Net cash used by  operating activities                                       |       | (200,185                                    | )           | (669,792 | ) |
| ** **                                                                   | ** ** | ** **                                  | ** **  | ** ** | ** ** |
| **Cash  flows from investing activities:**                                   | ** ** | ** **                                  | ** **  | ** ** | ** ** |
| Purchase of bank  stock                                                      |       | —                                      |        | (12,574,856 | ) |
| Purchase of  premises and equipment                                          |       | (913,860                                    | )           | (1,420,027 | ) |
|                                                                         |       |                                        |        |   |   |
| Net cash used by  investing activities                                       |       | (913,860                                    | )           | (13,994,883 | ) |
|                                                                         |       |                                        |        |   |   |
| **Cash  flows from financing activities:**                                   | ** ** | ** **                                  | ** **  | ** ** | ** ** |
| Decrease in  borrowings                                                      |       | —                                      |        | (565,000 | ) |
| Issuance of  common stock, net                                               |       | —                                      |        | 16,854,038 |   |
|                                                                         |       |                                        |        |   |   |
| Net cash  provided by financing activities                                   |       | —                                      |        | 16,289,038 |   |
|                                                                         |       |                                        |        |   |   |
| **Net  increase (decrease) in cash and cash equivalents**                    |       | (1,114,045                                  | )           | 1,624,363 |   |
|                                                                         |       |                                        |        |   |   |
| **Cash  and cash equivalents, beginning of period**                          |       | 1,645,199                                   |        | 20,836 |   |
|                                                                         |       |                                        |        |   |   |
| **Cash  and cash equivalents, end of period**                                | ** ** | **$**                                       | **531,154** | ** ** | **$** | **1,645,199** | ** ** |

 

59

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**Item8.  Changes in and Disagreements with Accountants on Accounting andFinancial Disclosure.**

 

 None.

 

**Item8A.  Controls and Procedures.**

 

As of the end of theperiod covered by this report, we carried out an evaluation, under thesupervision and with the participation of our management, including our ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of ourdisclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Based upon that evaluation, our Chief Executive Officer and Chief FinancialOfficer have concluded that our current disclosure controls and procedures areeffective as of December 31, 2007.   There have been no significant changesin our internal controls over financial reporting during the fourth fiscalquarter ended December 31, 2007 that have materially affected, or arereasonably likely to materially affect, our internal controls over financialreporting.

 

The design of any systemof controls and procedures is based in part upon certain assumptions about thelikelihood 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’sAnnual Report on Internal Control Over Financial Reporting.**

 

Management of CongareeBancshares, Inc. and its subsidiary Congaree State Bank is responsible forestablishing and maintaining adequate internal control over financialreporting.  The Company’s internal control system was designed to providereasonable assurance to management and the Board of Directors regarding thepreparation and fair presentation of published financial statements.

 

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements.  Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 

The Company’s managementassessed the effectiveness of the Company’s internal control over financialreporting as of December 31, 2007.  Based on this assessmentmanagement believes that as of December 31, 2007, the Company’s internalcontrol over financial reporting was effective except as it relates toaccounting for income taxes.  The Companyrestated its financial statements because it now believes it is more likelythan not that it will not be able to realize all of its deferred tax assets ina reasonable period of time.

 

This annual report doesnot include an attestation report of the Company’s registered public accountingfirm regarding internal control over financial reporting.  Management’sreport was not subject to attestation by the Company’s registered publicaccounting firm pursuant to temporary rules of the Securities and ExchangeCommission that permit the Company to provide only management’s report of thisannual report.

 

**ITEM8B.  Other Information.**

 

Not applicable.

 

60

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**PART III**

 

**Item 9.  Directors, Executive Officers, Promoters and Control Persons;Compliance with Section 16(a) of the Exchange Act.**

 

Information required byItem 9 is hereby incorporated by reference from our proxy statement for our2008 annual meeting of shareholders to be held on May 14, 2008.

 

**Item10.  Executive Compensation.**

** **

Information required byItem 10 is hereby incorporated by reference from our proxy statement for our2008 annual meeting of shareholders to be held on May 14, 2008.

 

**Item11.  Security Ownership of Certain Beneficial Owners and Managementand Related Stockholder Matters.**

 

The followingtable sets forth equity compensation plan information at December 31,2007.

 
| ** **                                                     | ** ** | **Equity Compensation Plan Information**                                                                                                   | ** ** | **Number of securities  remaining available for**                                            | ** ** |
|----------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|
| **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)** | ** ** | **future issuance under  equity compensation  plans (c)  (excluding securities  reflected in column(a))** | ** ** |
|                                                           |       |                                                                                                                                                      |       |                                                                                                             |       |   |   |
| Equity  compensation plans approved by security holders (1)    |       | 231,636                                                                                                                                                   |       | $                                                                                                                | 10.00      |   | 85,963 |   |
|                                                           |       |                                                                                                                                                      |       |                                                                                                             |       |   |   |
| Equity  compensation plans not approved by security holders(2) |       | 130,000                                                                                                                                                   |       | $                                                                                                                | 10.00      |   | 130,000 |   |
| Total                                                          |       | 361,636                                                                                                                                                   |       | $                                                                                                                | 10.00      |   | 215,963 |   |

 

----

| (1)    | At our annual meeting  in 2007, we adopted the Congaree Bancshares, Inc. 2007 Stock Incentive  Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| (2)    | Each of our organizers  received, for no additional consideration, a warrant to purchase one share of  common stock for $10.00 per share for each share purchased during our initial  public offering up to a maximum of 10,000 warrants.  The warrants are  represented by separate warrant agreements.  The warrants vest will vest  over a three year period beginning October 16, 2007, and they will be  exercisable in whole or in part during the 10 year period ending  October 16, 2016.  If the South Carolina Board of Financial  Institutions or the FDIC issues a capital directive or other order requiring  the Bank to obtain additional capital, the warrants will be forfeited, if not  immediately exercised. |

 

61

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Additional informationrequired by Item 11 is hereby incorporated by reference from our proxystatement for our 2008 annual meeting of shareholders to be held on May 14,2008.

 

**Item12.  Certain Relationships and Related Transactions.**

 

Information required by Item 12 is herebyincorporated by reference from our proxy statement for our 2008 annual meetingof shareholders to be held on May 14, 2008.

 

**Item13.  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    |   | 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).                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                         |
| 10.1   |   | Employment Agreement  between Congaree Bancshares, Inc. and F. Harvin Ray, 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. 333-131931).*                                                          |
|   |   |                                                                                                                                                                                                                                                                                         |
| 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.*                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                         |
| 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.                                                                                                                                                                                                                                                           |

 

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

 

62

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**Item14.  Principal Accountant and Fees.**

 

Information required byItem 14 is hereby incorporated by reference from our proxy statement for our2008 annual meeting of shareholders to be held on May 14, 2008.

 

63

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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 30, 2009 |                           | By: | /s/ Charlie T. Lovering |
|       |                |                           | Charlie T. Lovering |
|       |                |                           | Chief Executive Officer  and Chief Financial Officer |

 

KNOW ALL MEN BY THESE PRESENTS,that each person whose signature appears below constitutes and appoints CharlieT. Lovering his true and lawful attorney-in-fact and agent, with full power ofsubstitution and resubstitution, for him and in his name, place and stead, inany and all capacities, to sign any and all amendments to this Annual Report onForm 10-KSB, and to file the same, with all exhibits thereto, and otherdocuments in connection therewith, with the Securities and Exchange Commission,granting unto attorney-in-fact and agent full power and authority to do andperform each and every act and thing requisite or necessary to be done in andabout the premises, as fully to all intents and purposes as he might or coulddo in person, hereby ratifying and confirming all that attorney-in-fact andagent, or his substitute or substitutes, may lawfully do or cause to be done byvirtue hereof.

 

In accordance with theExchange Act, this report has been signed below by the following persons onbehalf of the registrant in the capacities and on the dates indicated.

 
| **Signature**                 | ** ** | **Title**                        | ** ** | **Date**            |
|-------------------------------|------------|----------------------------------|------------|---------------------|
| ** **                    | ** ** | ** **                       | ** ** | ** **          |
| /s/ Thomas Hal Derrick        |       | Director                         |       | March 30, 2009 |
| Thomas Hal Derrick            |       |                             |       |                |
|                          |       |                             |       |                |
| /s/ Stephen P. Nivens         |       | Senior Vice  President, Director |       | March 30, 2009 |
| Stephen P. Nivens             |       |                             |       |                |
|                          |       |                             |       |                |
| /s/ David S. Murray, Jr. |       | Director                         |       | March 30, 2009 |
| David S.  Murray, Jr.    |       |                             |       |                |
|                          |       |                             |       |                |
| /s/ E. Daniel Scott           |       | Director                         |       | March 30, 2009 |
| E. Daniel Scott               |       |                             |       |                |
|                          |       |                             |       |                |
| /s/ Nitin C. Shah             |       | Director                         |       | March 30, 2009 |
| Nitin C. Shah                 |       |                             |       |                |
|                          |       |                             |       |                |
| /s/ J. Larry Stroud           |       | Director                         |       | March 30, 2009 |
| J. Larry Stroud               |       |                             |       |                |
|                          |       |                             |       |                |
| /s/ John D. Thompson          |       | Director                         |       | March 30, 2009 |
| John D. Thompson              |       |                             |       |                |

 

64

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| /s/ Charlie T. Lovering |   | Chief Executive  Officer Chief Financial Officer, Director |   | March 30, 2009 |
|-------------------------|--------|------------------------------------------------------------|--------|---------------------|
| Charlie T. Lovering     |   |                                                       |   |                |
|                    |   |                                                       |   |                |
| /s/ Harry Michael White |   | Director                                                   |   | March 30, 2009 |
| Harry Michael White     |   |                                                       |   |                |
|                    |   |                                                       |   |                |
| /s/ Samuel M. Corley    |   | Director                                                   |   | March 30, 2009 |
| Samuel M. Corley        |   |                                                       |   |                |
|                    |   |                                                       |   |                |
| /s/ J. Kevin Reeley     |   | Director                                                   |   | March 30, 2009 |
| J. Kevin Reeley         |   |                                                       |   |                |

 

65

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**EXHIBITINDEX**

 
| **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         |       | 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).                                                                                                                                   |
|        |       |                                                                                                                                                                                                                                                                                         |
| 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.*                                                                                                                                                                                                                                  |
|        |       |                                                                                                                                                                                                                                                                                         |
| 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.                                                                                                                                                                                                                                                           |

 

66

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