**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 

**(MarkOne)**

 
| **x** | **Annual Report Pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|-------|-------------------------------------------------------------------------------------------|

 

**For the fiscal year ended December 31, 2009**

 

**or**

 
| **o** | **Transition Report Pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|-------|-----------------------------------------------------------------------------------------------|

 

**For the transition period from            to            **

 

**Commission file number 000-52592**

 

**Congaree Bancshares, Inc.**

(Exact name of registrant 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’s Telephone Number)

 

Securitiesregistered pursuant to Section 12(b) of the Exchange Act: **None**

 

Securitiesregistered under Section 12(g) of the Exchange Act:

 

Title of eachclass:** CommonStock, $0.01 par value per share**

 

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act. Yes o No x

 

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section15(d) of the Exchange Act. Yes o No x

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  Yes x No o

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter)during the preceding 12 months (or for such shorter period that the registrantwas required to submit and post such files). Yes o No o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K. o

 

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

 

The aggregate market valueof the voting and nonvoting common equity held by non-affiliates of theregistrant (computed by reference to the price at which the stock was mostrecently sold) was $6,175,536 as of the last business day of the registrant’smost recently completed second fiscal quarter.

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company.  See the definitions of “large acceleratedfiler,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 ofthe Exchange Act.  (Check one):

 

| Large  accelerated filer o                     |   | Accelerated  filer o         |
|------------------------------------------------|--------|------------------------------|
|                                           |   |                         |
| Non-accelerated  filer o                       |   | Smaller  reporting company x |
| (Do not check if  a smaller reporting company) |   |                         |

 

Indicate the number ofshares outstanding of each of the registrant’s classes of common stock, as ofthe latest practicable date.

 
| **Class**                               | ** ** | **Outstanding at March 25, 2010** |
|-----------------------------------------|------------|-----------------------------------|
| Common Stock,  $.01 par value per share |       | 1,764,439 shares                  |

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

Proxy Statement for theAnnual Meeting of Shareholders to be held on June 16, 2010 Part III (Items10-14)

 

 

 

----

 

**Part I**

 

**Item1.  Business**

 

This Report containsstatements which constitute forward-looking statements within the meaning of Section27A of the Securities Act of 1933 and the Securities Exchange Act of 1934.  Forward-looking statements may relate to ourfinancial condition, results of operation, plans, objectives, or futureperformance.  These statements are basedon many assumptions and estimates and are not guarantees of futureperformance.  Our actual results maydiffer materially from those anticipated in any forward-looking statements, asthey will depend on many factors about which we are unsure, including manyfactors which are beyond our control. The words “may,” “would,” “could,” “will,” “expect,” “anticipate,” “believe,”“intend,” “plan,” and “estimate,” as well as similar expressions, are meant toidentify such forward-looking statements. Potential risks and uncertainties include, but are not limited to, thosedescribed below under “Risk Factors” and the following:

 

·                  reduced earnings due tohigher credit losses generally and specifically because losses in the sectorsof our loan portfolio secured by real estate are greater than expected due toeconomic factors, including declining real estate values, increasing interestrates, increasing unemployment, or changes in payment behavior or otherfactors;

·                  reduced earnings due tohigher credit losses because our loans are concentrated by loan type, industrysegment, borrower type, or location of the borrower or collateral;

·                  restrictions or conditionsimposed by our regulators on our operations may make it more difficult for usto achieve our goals;

·                  our efforts to raisecapital or otherwise increase our regulatory capital ratios;

·                  our ability to retain ourexisting customers, including our deposit relationships;

·                  significant increases incompetitive pressure in the banking and financial services industries;

·                  changes in the interestrate environment, which could reduce anticipated or actual margins;

·                  changes in politicalconditions or the legislative or regulatory environment;

·                  general economicconditions, either nationally or regionally and especially in our primaryservice area, becoming less favorable than expected, resulting in, among otherthings, a deterioration in credit quality;

·                  changes occurring inbusiness conditions and inflation;

·                  changes in technology;

·                  changes in monetary and taxpolicies;

·                  the level of allowance for loan loss;

·                  the rate of delinquencies and amounts ofcharge-offs;

·                  the rates of loan growth;

·                  the amount ofour loan portfolio collateralized by real estate, and the weakness in the realestate market;

·                  our reliance on available secondaryfunding sources such as FHLB advances, Federal Reserve Discount Windowborrowings, sales of securities and loans, and federal funds lines of creditfrom correspondent banks to meet our liquidity needs;

·                  our ability tomaintain effective internal control over financial reporting;

·                  adverse changes in asset quality andresulting credit risk-related losses and expenses;

·                  loss of consumer confidence and economicdisruptions resulting from terrorist activities or other military activity;

·                  changes in the securities markets; and

·                  other risks and uncertainties detailedfrom time to time in our filings with the Securities and Exchange Commission (“SEC”).

 

These risks are exacerbated by the recentdevelopments in national and international financial markets, and we are unableto predict what impact these uncertain market conditions will have on us.  During 2008 and 2009, the capital and creditmarkets experienced extended volatility and disruption.  There can be no assurance that theseunprecedented recent developments will not continue to materially and adverselyimpact our business, financial condition, and results of operations, as well asour ability to raise capital or other funding for liquidity and businesspurposes.

 

We have based our forward-looking statements on ourcurrent expectations about future events. Although we believe that the expectations reflected in ourforward-looking statements are reasonable, we cannot guarantee that 

 

1

----

 

theseexpectations will be achieved.  Weundertake no obligation to publicly update or otherwise revise any forward-lookingstatements whether as a result of new information, future events, or otherwise.

 

**General**

 

Congaree Bancshares, Inc.(the “Company”) is a South Carolina corporation organized in November 2005 tooperate as a bank holding company pursuant to the Federal Bank Holding CompanyAct of 1956 and the South Carolina Bank Holding Company Act, and to own andcontrol all of the capital stock of Congaree State Bank (the “Bank”).  The Bank opened for business on October 16,2006.  The Bank currently maintains amain office at 1201 Knox Abbott Drive, Cayce, South Carolina.  We opened a second office located at 2023Sunset Boulevard, West Columbia, South Carolina in 2008.

 

Our assets consistprimarily of our investment in the Bank and liquid investments. Our primary activitiesare conducted through the Bank.  As of December31, 2009, our consolidated total assets were $140,036,471, our consolidatedtotal loans were $106,143,726, our consolidated total deposits were$124,596,710, and our total shareholders’ equity was approximately $12,196,323.

 

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 netincome also is affected by our noninterest income derived principally fromservice charges and fees and income from the sale and/or servicing of financialassets such as loans and investments, as well as the level of noninterestexpenses such as salaries, employee benefits and occupancy costs.

 

Our operations aresignificantly affected by prevailing economic conditions, competition, and themonetary, fiscal, and regulatory policies of governmental agencies.  Lending activities are influenced by a numberof factors, including the general credit needs of individuals and small andmedium-sized businesses in our market areas, competition among lenders, thelevel of interest rates, and the availability of funds.  Deposit flows and costs of funds areinfluenced by prevailing market rates of interest, primarily the rates paid oncompeting investments, account maturities, and the levels of personal incomeand savings in our market areas.

 

**Marketing Focus**

 

Congaree State Bank is alocally-owned and operated bank organized to serve consumers and small- tomid-size businesses and professional concerns. A primary reason for operating the Bank lies in our belief that acommunity-based bank, with a personal focus, can better identify and servelocal relationship banking needs than can a branch or subsidiary of largeroutside banking organizations.  Webelieve 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 thatthis approach will be enthusiastically supported by the community.

 

**Banking Services**

 

The Bank is primarilyengaged in the business of accepting demand and time deposits and providingcommercial, consumer and mortgage loans to the general public.  Deposits in the Bank are insured by the FDICup to a maximum amount, which is currently $250,000 though December 31, 2013.  Other services which the Bank offers includeonline banking, commercial cash management, remote deposit capture, safedeposit boxes, bank official checks, traveler’s checks, and wire transfercapabilities.

 

**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 main office in West Columbia, SouthCarolina.  Our Sunset office is locatedin West Columbia on a major artery that connects Columbia with Lexington.  We opened the Sunset office in January,2008.  The site is located approximatelyone mile east of the Lexington Medical Center and provides excellent visibilityfor the Bank.

 

Our primary service areaconsists of Lexington and Richland Counties, South Carolina.  With its central location in the state andconvenient access to I-20, I-26, and I-77, this area is considered one of thefastest growing areas in South Carolina. Home to the state capital, the University of South Carolina, and avariety of service-based and light manufacturing companies, this area providesa growing and diverse economy.  LexingtonMedical Center, Lexington County’s largest employer, has approximately 3,800employees and continues to expand.  Theother top 

 

2

----

 

employers in LexingtonCounty include Michelin Tire Corporation, Allied-Signal Corporation, UnitedParcel Service, and NCR Corporation.  Theamenities and opportunities that our primary service area offers arewide-ranging from housing, education, healthcare, shopping, recreation, andculture.  We believe these factors makethe quality of life in the area attractive.

 

Ourprimary service area has also experienced solid population growth.  From 1990 to 2000 Lexington County’spopulation increased by 28.9% (an increase of 48,403 people), for a ranking of5th among the 46 counties in terms of population growth over the lastdecade.  Based on a 2008 estimate,Lexington County is home to almost 249,000 people, making up roughly 5.5% ofthe total state population.  Lexingtonhas shown to be a magnet for new residents as shown through its growth rate of15% since April of 2000.  LexingtonCounty has 15 municipalities within its borders.  Based on U.S. Census data, West Columbia isone of the largest cities in Lexington County with approximately 13,914residents in 2008, representing a growth rate of approximately 6.5% from 2000to 2008.  Together Lexington and RichlandCounties had a population of 612,519, as of 2008.  As of June 30, 2009, the Bank maintained a3.94% deposit market share in Lexington County.

 

Despitebeing in what we believe is one of the best markets in South Carolina, we facethe risk of being particularly sensitive to changes in the state and localeconomies.  South Carolina has not beenimmune to the economic challenges of the past two years.  Unemployment has been rising in our marketsand property values have declined. Continued higher levels of unemployment will continue to impact creditquality.  As a result, we are spendingsignificant time on credit solutions for our customers and managing anddisposing of real estate acquired in settlement of loans as effectively aspossible.  The weakening in the state andlocal economies has impacted our loan demand and, to a lesser extent, availabledeposits.

 

SeeItem 1A. Risk Factors for a discussion regarding the material risks anduncertainties that may impact our market.

 

**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 these loans with competitorswho are well established in our service area and have greater resources andlending limits.  As a result, we may haveto charge lower interest rates to attract borrowers.

 

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’s anticipated commercial loans will likely be made tosmall- to medium-sized businesses which may be less able to withstandcompetitive, economic, and financial conditions than larger borrowers.

 

*LoanApproval and Review.*  Certain credit risks are inherent in making loans.  These include prepayment risks, risksresulting from uncertainties in the future value of collateral, risks resultingfrom changes in economic and industry conditions, and risks inherent in dealingwith individual borrowers.  We attempt tomitigate repayment risks by adhering to internal credit policies andprocedures.  The Bank’sloan approval policies provide for various levels of officer lendingauthority.  When the amount of aggregateloans to a single borrower exceeds any individual officer’s lending authority,the loan request is considered and approved by an officer with a higher lendinglimit or the board of directors’ loan committee.  The Bank’s lending staff and creditadministration meets on a bi-monthly basis to help identify and discusspotential problem loans.  The Bank doesnot make any loans to any director of the Bank unless the loan is approved bythe board of directors of the Bank and is made on terms not more favorable tothe person than would be available to a person not affiliated with theBank.  The Bank currently adheres toFederal National Mortgage Association and Federal Home Loan MortgageCorporation guidelines in its mortgage loan review process, but may choose toalter this policy in the future.  TheBank sells residential mortgage loans that it originates in the secondarymarket.

 

*Allowancefor Loan Losses.*  We maintain an allowance for loan losses,which we establish through a provision for loan losses charged againstincome.  We charge loans against thisallowance when we believe that the collectibility of the principal isunlikely.  The allowance is an estimatedamount that we believe is adequate to absorb losses inherent in the loanportfolio based on evaluations of its collectibility.  As of December 31, 2009, our allowance forloan losses was approximately 1.38% of the average outstanding balance of ourloans, based on our consideration of several factors, including regulatoryguidelines, mix of our loan portfolio, and evaluations of local 

 

3

----

 

economic conditions aswell as peer data.  Over time, we willperiodically determine the amount of the allowance based on our considerationof several factors, including:

 

·                  an ongoing review of the quality, mix,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’sability to pay;

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

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

 

*LendingLimits.*  The Bank’s lending activities are subject toa variety of lending limits imposed by federal law.  In general, the Bank is subject to a legallimit on loans to a single borrower equal to 15% of the Bank’s capital andunimpaired surplus.  Different limits mayapply based on the type of loan or the nature of the borrower, including the borrower’srelationship to the Bank.  These limitswill increase or decrease as the Bank’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 witheach category of loans is the creditworthiness of the borrower.  Borrower creditworthiness is affected bygeneral economic conditions and the strength of the manufacturing, services,and retail market segments.  Generaleconomic factors affecting a borrower’s ability to repay include interest,inflation, and employment rates and the strength of local and national economy,as well as other factors affecting a borrower’s customers, suppliers, andemployees.

 

*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, 2009, loans secured byfirst or second mortgages on real estate made up approximately $92,180,742, or86.8% of our loan portfolio.  These loanswill generally fall into one of two categories: real estate — mortgage and realestate — construction.  These categoriesare discussed in more detail below, including their specific risks.  Interest rates for all categories may befixed or adjustable, and will more likely be fixed for shorter-term loans.  The Bank will generally charge an originationfee for each loan.

 

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

 

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

 

·                  *Real Estate - Mortgage*.  Loans securedby real estate mortgages are the principal component of our loanportfolio.  These loans generally fallinto one of two categories: residential real estate loans and commercial realestate loans.

 

·                  *Residential Real Estate Loans. *At December 31, 2009, our individualresidential real estate loans ranged in size from $3,400 to $709,200, with anaverage loan size of approximately $85,400. These loans generally have longer terms of up to 30 years.  We offer fixed and adjustable rate mortgages,and we intend to sell most, if not all, of the residential real estate loansthat we generate in the secondary market soon after we originate them.  We do not intend to retain servicing rightsfor these loans.  Inherent in residentialreal estate loans’ credit risk is the risk that the primary source ofrepayment, the residential borrower, will be insufficient to service thedebt.  If a real estate loan is indefault, we also run the risk that the value of a residential real estate loan’ssecured real estate will decrease, and thereby be insufficient to satisfy theloan.  To mitigate these risks, we willevaluate each borrower on an individual basis and attempt to determine itscredit profile.  By selling these loansin the secondary market, we can significantly reduce our 

 

4

----

 

exposure to creditrisk because the loans will be underwritten through a third party agent withoutany recourse against the Bank.  At December31, 2009, residential real estate loans (other than construction loans) totaled$43,800,218, or 41.3% of our loan portfolio.

 

·                  *Commercial Real Estate Loans*.  At December 31,2009, our individual commercial real estate loans ranged in size from $9,700 to$1,456,800, with an average loan size of approximately $253,400.  Commercial real estate loans generally haveterms of five years or less, although payments may be structured on a longeramortization basis.  Inherent incommercial real estate loans’ credit risk is the risk that the primary sourceof repayment, the operating commercial real estate company, will beinsufficient to service the debt.  If areal estate loan is in default, we also run the risk that the value of acommercial real estate loan’s secured real estate will decrease, and thereby beinsufficient to satisfy the loan.  Tomitigate these risks, we evaluate each borrower on an individual basis andattempt to determine its business risks and credit profile.  We attempt to reduce credit risk in thecommercial real estate portfolio by emphasizing loans on owner-occupied officeand retail buildings where the loan-to-value ratio is established byindependent appraisals.  We typicallyreview the personal financial statements of the principal owners and requiretheir personal guarantees.  These reviewsoften reveal secondary sources of payment and liquidity to support a loanrequest.  At December 31, 2009,commercial real estate loans (other than construction loans) totaled$31,926,392, or 30.1% of our loan portfolio.

 

·                  *Real Estate - Construction. *We offer adjustable and fixed rateresidential and commercial construction loans to builders and developers and toconsumers who wish to build their own home. The term of construction and development loans will generally be limitedto 18 months, although payments may be structured on a longer amortizationbasis.  Most loans will mature andrequire payment in full upon the sale of the property.  Construction and development loans generallycarry a higher degree of risk than long term financing of existing properties.  Repayment usually depends on the ultimatecompletion of the project within cost estimates and on the sale of theproperty.  Specific risks 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 sellingparticipations in larger loans to other institutions when possible.  At December 31, 2009, total constructionloans amounted to $16,454,132, or 15.5% of our loan portfolio.

 

*CommercialLoans*.  The Bank makes loans for commercial purposesin various lines of businesses.  We focusour efforts on commercial loans of less than $1,000,000.  Equipment loans will typically be made for aterm of five years or less at fixed or variable rates, with the loan fullyamortized over the term and secured by the financed equipment.  Working capital loans typically have termsnot exceeding one year and are usually secured by accounts receivable, inventory,or personal guarantees of the principals of the business.  For loans secured by accounts receivable orinventory, principal is typically repaid as the assets securing the loan areconverted into cash, and in other cases principal is typically due at maturity.  Trade letters of credit, standby letters ofcredit, and foreign exchange are handled through a correspondent bank as agentfor the Bank.  Commercial loans primarilyhave risk that the primary source of repayment, the borrowing business, will beinsufficient to service the debt.  Oftenthis occurs as the result of changes in local economic conditions or in theindustry in which the borrower operates which impact cash flow or collateralvalue.

 

We also offer smallbusiness loans utilizing government enhancements such as the Small BusinessAdministration’s 7(a) and SBA’s 504 programs. These loans are typically partially guaranteed by the government whichmay help to reduce the Bank’s risk. Government guarantees of SBA loans will not exceed 80% of the loanvalue, and will generally be less.  At December31, 2009, commercial loans amounted to $11,738,295, or 11.1% of our loanportfolio.

 

5

----

 

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

 

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, we analyze selective underwriting criteria foreach prospective borrower, which may include the borrower’s employment history,income history, credit bureau reports, or debt to income ratios.  If the consumer loan is secured by property,such as an automobile loan, we also attempt to offset the risk of rapiddepreciation of the collateral with a shorter loan amortization period.  Despite these efforts to mitigate our risks,consumer loans have a higher rate of default than real estate loans.  For this reason, we also attempt to reduceour loss exposure to these types of loans by limiting their sizes relative toother types of loans.

 

We also offer home equityloans.  Our underwriting criteria for andthe risks associated with home equity loans and lines of credit will generallybe the same as those for first mortgage loans. Home equity lines of credit typically have terms of 15 years or less,typically carry balances less than $125,000, and may extend up to 90% of theavailable equity of each property. At December 31, 2009, individual home equitylines of credit, which are secured by real estate, amounted to $27,425,120, or25.8% of our loan portfolio.  Consumerloans which are not secured by real estate amounted to $2,224,689 or 2.1% ofour loan portfolio.

 

*RelativeRisks of Loans*.  Each category of loan has a different levelof credit risk.  Real estate loans aregenerally safer than loans secured by other assets because the value of theunderlying security, real estate, is generally ascertainable and does notfluctuate as much as some other assets. Certain real estate loans are less risky than others.  Residential real estate loans are generallythe least risky type of real estate loan, followed by commercial real estateloans and construction and development loans. Commercial loans, which can be secured by real estate or other assets,or which can be unsecured, are generally more risky than real estate loans, butless risky than consumer loans.  Finally,consumer loans, which can also be secured by real estate or other assets, orwhich can also be unsecured, are generally considered to be the most risky ofthese categories of loans.  Any type ofloan which is unsecured is generally more risky than secured loans.  These levels of risk are general in nature,and many factors including the creditworthiness of the borrower or theparticular nature of the secured asset may cause any type of loan to be more orless risky than another.  Additionally,these levels of risk are limited to an analysis of credit risk, and they do nottake into account other risk factors associated with making loans such as theinterest 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 timecertificates are typically tailored to our primary service area at competitiverates.  In addition, we offer certainretirement account services, including IRAs. We solicit these accounts from individuals, businesses, and 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 traveler’s checks.  The Bank is associated****withthe Intercept Switch, Pulse, MasterCard,Cirrus and Plus ATM networks that may be used by the Bank’s customersthroughout the country.  We believe thatby being associated with a shared network of ATMs, we are better able to serveour customers and will be able to attract customers who are accustomed to theconvenience of using ATMs.  We also offera debit card and credit card services through a correspondent bank as an agentfor the Bank.  We anticipate that theBank eventually may offer other bank services including, lines of credit,24-hour telephone banking, and online banking. We do not expect the Bank to exercise trust powers during its initialyears of operation.

 

6

----

 

**Competition**

 

The Columbia/WestColumbia/Lexington market is highly competitive, with all of the largest banksin the state, as well as super regional banks, represented.  The competition among the various financialinstitutions is based upon a variety of factors, including interest ratesoffered on deposit accounts, interest rates charged on loans, credit andservice charges, the quality of services rendered, the convenience of bankingfacilities and, in the case of loans to large commercial borrowers, relativelending 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 largerbanks certain advantages in competing for business from largecorporations.  These advantages includehigher lending limits and the ability to offer services in other areas of SouthCarolina.  As a result, we do notgenerally attempt to compete for the banking relationships of largecorporations, but concentrate our efforts on small- to medium-sized businessesand individuals.  We believe we willcompete effectively in this market by offering quality and personal service.

 

**Employees**

 

As of December 31, 2009,we had 27 full-time employees and 4 part-time employees.

 

7

----

 

**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.  Theselaws generally are intended to protect depositors and not shareholders.  The following summary is qualified byreference to the statutory and regulatory provisions discussed.  Changes in applicable laws or regulations mayhave a material effect on our business and prospects.  Our operations may be affected by legislativechanges and the policies of various regulatory authorities.  We cannot predict the effect that fiscal ormonetary policies, economic control, or new federal or state legislation mayhave on our business and earnings 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 tobriefly summarize some material provisions.

 

**Recent Legislative and RegulatoryInitiatives to Address Financial and Economic Crisis**

 

EmergencyEconomic Stabilization Act

 

In response to thefinancial crisis affecting the banking system and financial markets, theEmergency Economic Stabilization Act (“EESA”) was signed into law on October 3,2008, which among other things: (1) temporarily increased FDIC insurancecoverage from $100,000 to $250,000 through December 31, 2009 (subsequentlyextended through December 31, 2013); and (2) established the Troubled AssetRelief Program (“TARP”).  As part ofTARP, the United States Department of the Treasury (“Treasury”) established theCapital Purchase Program (“CPP”) to provide up to $700 billion of funding toeligible financial institutions through the purchase of capital stock and otherfinancial instruments for the purpose of stabilizing and providing liquidity tothe U.S. financial markets.  Inconnection with EESA, there have been numerous actions by the FRB, Congress, andthe Treasury, the FDIC, the SEC and others to further the economic and bankingindustry stabilization efforts under EESA. It remains unclear at this time what further legislative and regulatorymeasures will be implemented under EESA affecting the Company.

 

On January 9, 2009, aspart of the TARP CPP, we entered into a Letter Agreement and SecuritiesPurchase Agreement (collectively, the “CPP Purchase Agreement”) with theTreasury Department, pursuant to which we sold (i) 3,285 shares of our FixedRate Cumulative Perpetual Preferred Stock, Series A (the “Series S PreferredStock”) and (ii) a warrant (the “CPP Warrant”) to purchase 164 shares of ourFixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Series BPreferred Stock”) for an aggregate purchase price of $3,285,000 million incash.  The CPP Warrant was immediatelyexercised.

 

The Series A PreferredStock qualified as Tier 1 capital and is entitled to cumulative dividends at arate of 5% per annum for the first five years, and 9% per annumthereafter.  The Series B Preferred Stockqualified as Tier 1 capital and is entitled to cumulative dividends at a rateof 9% per annum.  We must consult withthe Commission before we may redeem the Series A and Series B Preferred Stockbut, contrary to the original restrictions in the EESA, will not necessarily berequired to raise additional equity capital in order to redeem this stock.

 

TemporaryLiquidity Guarantee Program

 

On October 14, 2008, theFDIC announced the establishment of the Temporary Liquidity Guarantee Program (“TLGP”)to provide: (1) full deposit insurance on all non-interest bearing transactionaccount balances through December 31, 2009 (Transaction Account GuaranteeProgram); and (2) guarantees of certain newly issued senior unsecured debtissued by financial institutions and bank holding companies through June 30,2012 (Debt Guarantee Program).  The Bankelected to participate in the Transaction Account Guarantee Program, but notthe Debt Guarantee Program.

 

FinancialStability Plan

 

On February 10, 2009,Treasury announced the Financial Stability Plan (“FSP”) which, among otherthings, established a new Capital Assistance Program (“CAP”) through whicheligible banking institutions will have access to Treasury capital as a bridgeto private capital until market conditions normalize, and extended the DebtGuarantee Program of the TLGP to October 31, 2009, and the Transaction AccountGuarantee Program of the TLGP to June 30, 2010. As a complement to CAP, a new Public-Private Investment Fund on aninitial scale of up to $500

 

8

----

 

billion, which was laterrevised to be $30 billion, was announced to catalyze the removal of legacyassets from the balance sheets of financial institutions.  This fund will combine public and privatecapital with government financing to help free up capital to support newlending.  In addition, the existing TermAsset-Backed Securities Lending Facility (“TALF”) would be expanded (up to $1trillion) in order to reduce credit spreads and restart the securitized creditmarkets that in recent years supported a substantial portion of lending tohouseholds, students, small businesses, and others.  Furthermore, the FSP proposed a new frameworkof governance and oversight to help ensure that banks receiving funds are heldresponsible for appropriate use of those funds through stronger conditions onlending, dividends and executive compensation along with enhanced reporting tothe public.

 

American Recovery andReinvestment Act of 2009

 

On February 17,2009, the American Recovery and Reinvestment Act of 2009 (“ARRA”) was signedinto law.  ARRA is intended to providetax breaks for individuals and businesses, direct aid to distressed states andindividuals, and provide infrastructure spending.  In addition, ARRA imposes new executivecompensation and expenditure limits on all previous and future TARP CPPrecipients and expands the class of employees to whom the limits andrestrictions apply.  ARRA also providesthe opportunity for additional repayment flexibility for existing TARP CPPrecipients.  Among other things, ARRAprohibits the payment of bonuses, other incentive compensation and severance tocertain highly paid employees (except in the form of restricted stock subjectto specified limitations and conditions), and requires each TARP CPP recipientto comply with certain other executive compensation related requirements.  These provisions modify the executivecompensation provisions that were included in EESA, and in most instances applyretroactively for so long as any obligation arising from financial assistance providedto the recipient under TARP CPP remains outstanding.

 

In addition, ARRA directsthe Treasury to review previously-paid bonuses, retention awards and othercompensation paid to the senior executive officers and certain otherhighly-compensated employees of each TARP CPP recipient to determine whetherany such payments were excessive, inconsistent with the purposes of ARRA or theTARP, or otherwise contrary to the public interest.  If the Treasury determines that any suchpayments have been made by a TARP CPP recipient, the Treasury will seek tonegotiate with the TARP CPP recipient and the subject employee for appropriatereimbursements to the U.S. government (not the TARP CPP recipient) with respectto any such compensation or bonuses. ARRA also permits the Treasury, subject to consultation with theappropriate federal banking agency, to allow a TARP CPP recipient to repay anyassistance previously provided to such TARP CPP recipient under the TARP,without regard to whether the TARP CPP recipient has replaced such funds fromany source, and without regard to any waiting period.  Any TARP CPP recipient that repays its TARPassistance pursuant to this provision would no longer be subject to theexecutive compensation provisions under ARRA.

 

Homeowner Affordabilityand Stability Plan

 

On February 18,2009, the Treasury announced the Homeowner Affordability and Stability Plan(“HASP”), which proposes to provide refinancing for certain homeowners, tosupport low mortgage rates by strengthening confidence in Fannie Mae andFreddie Mac, and to establish a Homeowner Stability Initiative to reach at-riskhomeowners.  Among other things, theHomeowner Stability Initiative would offer monetary incentive to mortgageservicers and mortgage holders for certain modifications of at-risk loans, andwould establish an insurance fund designed to reduce foreclosures.

 

The Federal DepositInsurance Act

 

As amended by the FederalDeposit Insurance Reform Act of 2005 (the “FDI Reform Act”), it requires theFDIC to set a ratio of deposit insurance reserves to estimated insureddeposits, the designated reserve ratio (the “DRR”), for a particular yearwithin a range of 1.15% to 1.50%. Because the reserve ratio for the federal deposit insurance fund thatcovers both banks and savings associations (the “DIF”) ratio fell below 1.15%as of June 30, 2008 and was expected to remain below 1.15%, the FDI ReformAct required the FDIC to establish and implement a restoration plan that wouldrestore the reserve ratio to at least 1.15% within five years.  In October 2008, the FDIC adopted arestoration plan (the “Restoration Plan”). In February 2009, in light of the extraordinary challenges facingthe banking industry, the FDIC amended the Restoration Plan to allow sevenyears for the reserve ratio to return to 1.15%. In May 2009, the FDIC adopted a final rule imposing a fivebasis point special assessment based on each insured depository institution’sassets minus Tier 1 capital as of June 30, 2009.  The special assessment was collected onSeptember 30, 2009.  InOctober 2009, the FDIC passed a final rule extending the term of theRestoration Plan to eight years.  Thefinal rule also included a provision that implements a uniform three basispoint increase in assessment rates, effective January 1, 2011, to helpensure that the reserve ratio returns to at least 1.15% 

 

9

----

 

within the eight yearperiod called for by the Restoration Plan. In addition, on November 17, 2009, the FDIC implemented a finalrule requiring insured institutions to prepay their estimated quarterlyrisk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011and 2012.  Such prepaid assessments werepaid on December 30, 2009, along with each institution’s quarterlyrisk-based deposit insurance assessment for the third quarter of 2009.

 

Future Legislation andRegulatory Initiatives

 

Various other legislativeand regulatory initiatives, including proposals to overhaul the bankingregulatory system are from time to time introduced in Congress and statelegislatures, as well as regulatory agencies. Currently, the Congress is actively considering significant changes tothe manner of regulating financial institutions including combining one or moreof the FRB, FDIC, Comptroller of the Currency and the Office of ThriftSupervision and creating a new consumer protection agency for financialproducts.  The current legislation beingconsidered and other future legislation regarding financial institutions maychange banking statutes and the operating environment of the Company and theBank in substantial and unpredictable ways, and could increase or decrease thecost of doing business, limit or expand permissible activities or affect thecompetitive balance depending upon whether any of this potential legislationwill be enacted, and if enacted, the effect that it or any implementingregulations, would have on the financial condition or results of operations ofthe Company or the Bank.  The nature andextent of future legislative and regulatory changes affecting financialinstitutions is unpredictable at this time. The Company cannot determine the ultimate effect that such potentiallegislation, if enacted, would have upon its financial condition or operations.

 

**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“Bank Holding Company Act”).  As a result,we are primarily subject to the supervision, examination and reportingrequirements of the Board of Governors of the Federal Reserve (the “FederalReserve”) under the Bank Holding Company Act and its regulations promulgatedthereunder.  As a bank holding companylocated in South Carolina, the South Carolina Board of Financial Institutionsalso regulates and monitors all significant aspects of our operations.

 

***Permitted Activities.*** Under the Bank Holding Company Act, a bank holdingcompany is generally permitted to engage in, or acquire direct or indirectcontrol of more than 5% of the voting shares of any company engaged in, thefollowing activities:

 

·                  banking or managing or controlling banks;

 

·                  furnishing services to or performingservices for our subsidiaries; and

 

·                  any activity that the Federal Reservedetermines to be so closely related to banking as to be a proper incident tothe business of banking.

 

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 servicingloans and usual related activities;

 

·                  leasing personal or real property;

 

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

 

·                  trust company functions;

 

·                  financial and investment advisoryactivities;

 

·                  conducting discount securities brokerageactivities;

 

10

----

 

·                  underwriting and dealing in governmentobligations and money market instruments;

 

·                  providing specified management consultingand counseling activities;

 

·                  performing selected data processingservices and support services;

 

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

 

·                  performing selected insuranceunderwriting activities.

 

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

 

The Federal Reserve 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 to certain exceptions, the Bank Holding Company Act and the Changein Bank Control Act, together with regulations promulgated there under, requireFederal Reserve approval prior to any person or company acquiring “control” ofa bank holding company.  Control isconclusively presumed to exist if an individual or company acquires 25% or moreof any class of voting securities of a bank holding company.  Following the relaxing of these restrictionsby the Federal Reserve in September 2008, control will be rebuttablypresumed to exist if a person acquires more than 33% of the total equity of abank or bank holding company, of which it may own, control or have the power tovote not more than 15% of any class of voting securities.

 

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

 

***Capital Requirements.***  The FederalReserve Board imposes certain capital requirements on the bank holding companyunder the Bank Holding Company Act, including a minimum leverage ratio and aminimum ratio of “qualifying” capital to risk-weighted assets.  These requirements are essentially the sameas those that apply to the Bank and are described below under “Congaree StateBank - Capital Regulations.”  Subject toour capital requirements and certain other restrictions, we are able to borrowmoney to make a capital contribution to the Bank, and these loans may be repaidfrom dividends paid from the Bank to the Company.  Our ability to pay dividends depends on theBank’s ability to pay dividends to us, which is subject to regulatoryrestrictions as described below in “Congaree State Bank— Dividends.”  We are also able to raise capital forcontribution to the Bank by issuing securities without having to receiveregulatory approval, subject to compliance with federal and state securitieslaws.

 

11

----

 

***South Carolina State Regulation.*** As a South Carolina bank holding company under the South CarolinaBanking and Branching Efficiency Act, we are subject to limitations on sale ormerger and to regulation by the South Carolina Board of Financial Institutions,including a restriction on the ability to sell our Bank for at least five yearsfrom the date of its formation.  We arenot required to obtain the approval of the South Carolina Board of FinancialInstitutions prior to acquiring the capital stock of a national bank, but wemust notify them at least 15 days prior to doing so.  We must receive the Board’s approval prior toengaging in the acquisition of a South Carolina state chartered bank or anotherSouth Carolina bank holding company.

 

**CongareeState Bank**

 

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 FinancialInstitutions.  Deposits in the Bank areinsured by the FDIC up to a maximum amount, which is currently $250,000 foreach non-retirement depositor (though December 31, 2013) and $250,000 forcertain retirement-account depositors. The Bank is participating in the FDIC’s Temporary Liquidity GuaranteeProgram (discussed below in greater detail) which, in part, fully insuresnon-interest bearing transaction accounts.

 

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 lossreserves;

 

·                  loans;

 

·                  investments;

 

·                  borrowings;

 

·                  deposits;

 

·                  mergers;

 

·                  issuances of securities;

 

·                  payment of dividends;

 

·                  interest rates payable on deposits;

 

·                  interest rates or fees chargeable onloans;

 

·                  establishment of branches;

 

·                  corporate reorganizations;

 

·                  maintenance of books and records; and

 

·                  adequacy of staff training to carry onsafe 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 Carolina Board of FinancialInstitutions also requires the Bank to prepare quarterly reports on the Bank’sfinancial condition in compliance with its minimum standards and procedures.

 

All insured institutionsmust undergo regular on site examinations by their appropriate bankingagency.  The cost of examinations ofinsured depository institutions and any affiliates may be assessed by theappropriate agency against each institution or affiliate as it deems necessaryor appropriate.  Insured institutions arerequired to submit annual reports to the FDIC, their federal regulatory agency,and their state supervisor when applicable. The FDIC has developed a method for insured depository institutions toprovide supplemental disclosure of the estimated fair market value of assetsand liabilities, to the extent feasible and practicable, in any balance sheet,financial 

 

12

----

 

statement, report ofcondition or any other report of any insured depository institution.  The FDIC Improvement Act also requires thefederal banking regulatory agencies to prescribe, by regulation, standards forall insured depository institutions and depository institution holdingcompanies 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****fivecapital categories, each with specific regulatory consequences.  Under these regulations, the categories are:

 

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

 

·                                          Adequately Capitalized - The institutionmeets the required minimum level for each relevant capital measure.  No capital distribution may be made thatwould result in the institution becoming undercapitalized.  An adequately capitalized institution is one(i) having a total capital ratio of 8% or greater, (ii) having a tier1 capital ratio of 4% or greater and (iii) having a leverage capital ratioof 4% or greater or a leverage capital ratio of 3% or greater if theinstitution is rated composite 1 under the CAMELS (Capital, Assets, Management,Earnings, Liquidity and Sensitivity to market risk) rating system.

 

·                                          Undercapitalized - The institution failsto meet the required minimum level for any relevant capital measure.  An undercapitalized institution is one(i) having a total capital ratio of less than 8% or (ii) having atier 1 capital ratio of less than 4% or (iii) having a leverage capitalratio of less than 4%, or if the institution is rated a composite 1 under theCAMELS rating system, a leverage capital ratio of less than 3%.

 

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

 

·                                          Critically Undercapitalized - Theinstitution fails to meet a critical capital level set by the appropriatefederal banking agency.  A criticallyundercapitalized institution is one having a ratio of tangible equity to totalassets that is equal 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 FDICapproval.  Even if approved, raterestrictions apply governing the rate the bank may be permitted to pay on thebrokered deposits.  In addition, a bankthat is undercapitalized cannot offer an effective yield in excess of 75 basispoints over the “national rate” paid on deposits (including brokered deposits,if approval is granted for the bank to accept them) of comparable size andmaturity.  The “national rate” is definedas a simple average of rates paid by insured depository institutions andbranches for which data are available and is published weekly by the FDIC.  Institutions subject to the restrictions thatbelieve they are operating in an area where the rates paid on deposits arehigher than the “national rate” can use the local market to determine theprevailing rate if they seek and receive a determination 

 

13

----

 

from the FDIC that it isoperating in a high-rate area. Regardless of the determination, institutions must use the national rateto determine conformance for all deposits outside their market area.

 

Moreover, if the Bankbecomes less than adequately capitalized, it must adopt a capital restorationplan acceptable to the FDIC.  The Bankalso would become subject to increased regulatory oversight, and isincreasingly restricted in the scope of its permissible activities.  Each company having control over anundercapitalized institution also must provide a limited guarantee that theinstitution will comply with its capital restoration plan.  Except under limited circumstances consistentwith an accepted capital restoration plan, an undercapitalized institution maynot grow.  An undercapitalizedinstitution may not acquire another institution, establish additional branchoffices or engage in any new line of business unless determined by theappropriate Federal banking agency to be consistent with an accepted capitalrestoration plan, or unless the FDIC determines that the proposed action willfurther the purpose of prompt corrective action.  The appropriate federal banking agency maytake any action authorized for a significantly undercapitalized institution ifan undercapitalized institution fails to submit an acceptable capitalrestoration plan or fails in any material respect to implement a plan acceptedby the agency.  A critically undercapitalizedinstitution is subject to having a receiver or conservator appointed to manageits affairs and for loss of its charter to 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.  In addition, an institution cannot make acapital distribution, such as a dividend or other distribution that is insubstance a distribution of capital to the owners of the institution iffollowing such a distribution the institution would 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 31,2009, the Bank was deemed to be “well capitalized.”

 

***Standards for Safety and Soundness.    *** The Federal Deposit Insurance Act alsorequires the federal banking regulatory agencies to prescribe, by regulation orguideline, operational and managerial standards for all insured depositoryinstitutions relating to: (i) internal controls, information systems andinternal audit systems; (ii) loan documentation; (iii) creditunderwriting; (iv) interest rate risk exposure; and (v) assetgrowth.  The agencies also must prescribestandards for asset quality, earnings, and stock valuation, as well asstandards for compensation, fees and benefits. The federal banking agencies have adopted regulations and Interagency GuidelinesPrescribing Standards for Safety and Soundness to implement these requiredstandards.  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 the Bank fails to meet any standards prescribed bythe guidelines, the agency may require the Bank to submit to the agency anacceptable plan to achieve compliance with the standard, as required by theFDIC.  The final regulations establishdeadlines for the submission and review of such safety and soundness complianceplans.

 

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

 

Due to the large numberof recent bank failures, and the FDIC’s new Temporary Liquidity GuaranteeProgram, the FDIC adopted a revised risk-based deposit insurance assessmentschedule in February 2009, which raised deposit insurance premiums. The FDIC also implemented a five basis point special assessment of each insureddepository institution’s assets minus Tier 1 capital as of June 30, 2009,which special assessment amount was capped at 10 basis points times theinstitution’s assessment base for the second quarter of 2009.  In addition, the FDIC recently announced arule that requires financial institutions like us to prepay their estimatedquarterly risk-based assessments for the fourth quarter of 2009 and for all of2010 through and including 2012 to re-capitalize the Deposit InsuranceFund.  The FDIC may exercise itsdiscretion as supervisor and insurer to exempt an institution from theprepayment requirement if the FDIC determines that the prepayment wouldadversely affect the safety and soundness of the institution.  We requested exemption from the prepaymentrequirement and received such 

 

14

----

 

exemption from theFDIC.  During 2009, we paid $290,845 indeposit insurance, which included regular premiums and the specialassessment.  The rule also providesfor increasing the FDIC-assessment rates by three basis points effectiveJanuary 1, 2011.

 

FDIC insured institutionsare required to pay a Financing Corporation assessment, in order to fund theinterest on bonds issued to resolve thrift failures in the 1980s.  For the first quarter of 2009, the FinancingCorporation assessment equaled 1.14 basis points for domestic deposits.  These assessments, which may be revised basedupon the level of deposits, will continue until the bonds mature in the years2017 through 2019.

 

The FDIC may terminatethe deposit insurance of any insured depository institution, including theBank, if it determines after a hearing that the institution has engaged inunsafe or unsound practices, is in an unsafe or unsound condition to continueoperations or has violated any applicable law, regulation, rule, order or conditionimposed by the FDIC or the OCC.  It alsomay suspend deposit insurance temporarily during the hearing process for thepermanent termination of insurance, if the institution has no tangible capital.  If insurance of accounts is terminated, theaccounts at the institution at the time of the termination, less subsequentwithdrawals, shall continue to be insured for a period of six months to twoyears, as determined by the FDIC. Management of the Bank is not aware of any practice, condition orviolation that might lead to termination of the bank’s deposit insurance.

 

***Transactions with Affiliates and Insiders.*** The Company is a legal entity separate and distinct from the Bank andits other subsidiaries.  Various legallimitations restrict the Bank from lending or otherwise supplying funds to theCompany or its non-bank subsidiaries. The Company and the Bank are subject to Sections 23A and 23B of theFederal Reserve Act and Federal Reserve Regulation W.  Section 23A of the Federal Reserve Actplaces limits on the amount of loans or extensions of credit to, or investmentsin, or certain other transactions with, affiliates and on the amount ofadvances to third parties collateralized by the securities or obligations ofaffiliates.  The aggregate of all coveredtransactions is limited in amount, as to any one affiliate, to 10% of theBank’s capital and surplus and, as to all affiliates combined, to 20% of theBank’s capital and surplus.  Furthermore,within the foregoing limitations as to amount, each covered transaction mustmeet specified collateral requirements. The Bank is 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 Bankis also subject to certain restrictions on extensions of credit to executiveofficers, directors, certain principal shareholders, and their relatedinterests.  Such extensions of credit(i) must be made on substantially the same terms, including interest ratesand collateral, as those prevailing at the time for comparable transactionswith third parties and (ii) must not involve more than the normal risk ofrepayment 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.

 

The Bank is also subjectto certain restrictions on extensions of credit to executive officers,directors, certain principal shareholders, and their related interests.  Such extensions of credit (i) must bemade on substantially the same terms, including interest rates and collateral,as those prevailing at the time for comparable transactions with third partiesand (ii) must not involve more than the normal risk of repayment or presentother unfavorable features.

 

***Branching****.*  Under currentSouth Carolina law, we may open branch offices throughout South Carolina withthe prior approval of the South Carolina Board of Financial Institutions.  In addition, with prior regulatory approval,the Bank will be able to acquire existing banking operations in SouthCarolina.  Furthermore, federallegislation has been passed that permits interstate branching by banks ifallowed by state law, and interstate merging by banks.  However, South Carolina law, with limitedexceptions, currently permits branching across state lines only throughinterstate mergers.

 

***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 bankmay not extend credit, lease, sell property, or furnish any services or fix orvary the consideration for 

 

15

----

 

these on the conditionthat (i) the customer obtain or provide some additional credit, property,or services from or to the bank, the bank holding company or subsidiariesthereof or (ii) the customer may not obtain some other credit, property,or services from a competitor, except to the extent reasonable conditions areimposed to assure the soundness of the credit extended.  Certain arrangements are permissible: a bankmay offer combined-balance products and may otherwise offer more favorableterms if a customer obtains two or more traditional bank products; and certainforeign transactions are exempt from the general rule.  A bank holding company or any bank affiliatealso is subject to anti-tying requirements in connection with electronicbenefit transfer services.

 

***Community Reinvestment Act****.* The Community Reinvestment Act requires that, in connection withexaminations of financial institutions within their respective jurisdictions, afinancial institution’s primary regulator, which is the FDIC for the bank,shall evaluate the record of each financial institution in meeting the creditneeds of its local community, including low and moderate incomeneighborhoods.  These factors are alsoconsidered in evaluating mergers, acquisitions, and applications to open abranch or facility.  Failure toadequately meet these criteria could impose additional requirements andlimitations on our Bank.  Additionally,we must publicly disclose the terms of various Community ReinvestmentAct-related agreements.

 

***Finance Subsidiaries.***  Under the Gramm-Leach-BlileyAct (the “GLBA”), subject to certain conditions imposed by their respectivebanking regulators, national and state-chartered banks are permitted to form“financial subsidiaries” that may conduct financial or incidental activities,thereby permitting bank subsidiaries to engage in certain activities thatpreviously were impermissible.  The GLBAimposes several safeguards and restrictions on financial subsidiaries,including that the parent bank’s equity investment in the financial subsidiarybe deducted from the bank’s assets and tangible equity for purposes ofcalculating the bank’s capital adequacy. In addition, the GLBA imposes new restrictions on transactions between abank and its financial subsidiaries similar to restrictions applicable totransactions between banks and non-bank affiliates.

 

***Consumer Protection Regulations.*** Activities of the Bank are subject to avariety of statutes and regulations designed to protect consumers.  Interest and other charges collected orcontracted for by the Bank are subject to state usury laws and federal lawsconcerning interest rates.  The Bank’sloan operations are also subject to federal laws applicable to credittransactions, such as the:

 

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

 

·                  The Home Mortgage Disclosure Act of 1975,requiring financial institutions to provide information to enable the publicand public officials to determine whether a financial institution is fulfillingits obligation to help meet the housing needs of the community it serves;

 

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

 

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

 

·                  The Fair Debt Collection Act, governingthe manner in which consumer debts may be collected by collection agencies; 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 Privacy Act, whichimposes a duty to maintain confidentiality of consumer financial records andprescribes procedures for complying with administrative subpoenas of financialrecords; and

 

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

 

16

----

 

***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 governmentagency.  These practices can include thefailure of an institution to timely file required reports or the filing offalse or misleading information or the submission of inaccurate reports.  Civil penalties may be as high as $1,375,000a day for such violations.  Criminalpenalties for some financial institution crimes have been increased to 20years.  In addition, regulators areprovided with greater flexibility to commence enforcement actions againstinstitutions and institution-affiliated parties.  Possible enforcement actions include thetermination of deposit insurance. Furthermore, banking agencies’ power to issue cease-and-desist orderswere expanded.  Such orders may, amongother things, require affirmative action to correct any harm resulting from aviolation or practice, including restitution, reimbursement, indemnificationsor guarantees against loss.  A financialinstitution may also be ordered to restrict its growth, dispose of certainassets, rescind agreements or contracts, or take other actions as determined bythe 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.  Financialinstitutions must take reasonable steps to conduct enhanced scrutiny of accountrelationships to guard against money laundering and to report any suspicioustransactions, and recent laws provide law enforcement authorities withincreased access to financial information maintained by banks.  Anti-money laundering obligations have beensubstantially strengthened as a result of the USA Patriot Act, enacted in 2001and renewed in 2006.  Bank regulatorsroutinely examine institutions for compliance with these obligations and arerequired to consider compliance in connection with the regulatory review ofapplications.  The regulatory authoritieshave been active in imposing “cease and desist” orders and money penaltysanctions against institutions found to be violating these obligations.

 

## ***USA PATRIOT Act.***** The USA PATRIOT Act becameeffective on October 26, 2001, amended, in part, the Bank Secrecy Act, andprovides, in part, for the facilitation of information sharing amonggovernmental entities and financial institutions for the purpose of combatingterrorism and money laundering by enhancing anti-money laundering and financialtransparency laws, as well as enhanced information collection tools andenforcement mechanics for the U.S. government, including: (i) requiringstandards for verifying customer identification at account opening;(ii) rules to promote cooperation among financial institutions,regulators, and law enforcement entities in identifying parties that may beinvolved in terrorism or money laundering; (iii) reports by nonfinancialtrades and businesses filed with the Treasury Department’s Financial Crimes EnforcementNetwork for transactions exceeding $10,000; and (iv) filing suspiciousactivities reports by brokers and dealers if they believe a customer may beviolating U.S. laws and regulations and requires enhanced due diligencerequirements for financial institutions that administer, maintain, or manageprivate bank accounts or correspondent accounts for non-U.S. persons.  Bank regulators routinely examineinstitutions for compliance with these obligations and are required to considercompliance in connection with the regulatory review of applications.

## ** **

Under the USA 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 berequested, to search its records for any relationships or transactions withpersons on those lists.  If the Bankfinds any relationships or transactions, it must file a suspicious activityreport and contact the FBI.

 

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 donot engage in transactions with “enemies” of the United States, as defined byvarious Executive Orders and Acts of Congress. OFAC has sent, and will send, our banking regulatory agencies lists ofnames of persons and organizations suspected of aiding, harboring or engagingin terrorist acts.  If the Bank finds aname on any transaction, account or wire transfer that is on an OFAC list, itmust freeze such account, file a suspicious activity report and notify theFBI.  The Bank has appointed an OFACcompliance officer to oversee the inspection of its accounts and the filing ofany notifications.  The Bank activelychecks high-risk OFAC areas such as new accounts, wire transfers and customerfiles.  The Bank performs these checksutilizing software, which is updated each time a modification is made to thelists provided by OFAC and other agencies of Specially Designated Nationals andBlocked Persons.

 

17

----

 

***Privacy and Credit Reporting*****. **Financial institutions are required to disclose theirpolicies for collecting and protecting confidential information.  Customers generally may prevent financialinstitutions from sharing nonpublic personal financial information withnonaffiliated third parties except under narrow circumstances, such as theprocessing of transactions requested by the consumer or when the financial institutionis jointly sponsoring a product or service with a nonaffiliated thirdparty.  Additionally, financialinstitutions generally may not disclose consumer account numbers to anynonaffiliated third party for use in telemarketing, direct mail marketing orother marketing to consumers.  It is theBank’s policy not to disclose any personal information unless required by law.

 

Like other lendinginstitutions, the Bank utilizes credit bureau data in its underwritingactivities.  Use of such data is regulatedunder the Federal Credit Reporting Act on a uniform, nationwide basis,including credit reporting, prescreening, sharing of information betweenaffiliates, and the use of credit data. The Fair and Accurate Credit Transactions Act of 2003 (the “FACT Act”)authorizes states to enact identity theft laws that are not inconsistent withthe conduct required by the provisions of the FACT Act.

 

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

 

***Check 21.***  The CheckClearing for the 21st Century Act gives “substitute checks,” such as a digitalimage of a check and copies made from that image, the same legal standing asthe original paper check.  Some of themajor provisions include:

 

·                                          allowing check truncation without makingit mandatory;

 

·                                          demanding that every financialinstitution communicate to account holders in writing a description of itssubstitute check processing program and their rights under the law;

 

·                                          legalizing substitutions for andreplacements of paper checks without agreement from consumers;

 

·                                          retaining in place the previouslymandated electronic collection and return of checks between financialinstitutions only when individual agreements are in place;

 

·                                          requiring that when accountholdersrequest verification, financial institutions produce the original check (or acopy that accurately represents the original) and demonstrate that the accountdebit was accurate and valid; and

 

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

 

***Effect of Governmental Monetary Policies*****.** Our earnings are affected by domestic economic conditions and themonetary and fiscal policies of the United States government and itsagencies.  The Federal Reserve bank’smonetary policies have had, and are likely to continue to have, an importantimpact on the operating results of commercial banks through its power toimplement national monetary policy in order, among other things, to curbinflation or combat a recession.  Themonetary policies of the Federal Reserve Board have major effects upon thelevels of bank loans, investments and deposits through its open marketoperations in United States government securities and through its regulation ofthe discount rate on borrowings of member banks and the reserve requirementsagainst member bank deposits.  It is notpossible to predict the nature or impact of future changes in monetary and fiscalpolicies.

 

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

 

18

----

 

**Item 1A.  Risk Factors.**

 

***Difficult marketconditions in our market and economic trends have adversely affected ourindustry and our business and may continue to do so.***

 

Our business has been directly affected by marketconditions, trends in industry and finance, legislative and regulatory changes,and changes in governmental monetary and fiscal policies and inflation, all ofwhich are beyond our control.  Thecurrent economic downturn, increase in unemployment and other events that havenegatively affected both household and corporate incomes, both nationally andlocally, have decreased the demand for loans and our other products andservices and have increased the number of customers who fail to pay interestand/or principal on their loans.  As aresult, we have experienced significant declines in our real estate marketswith decreasing prices and increasing delinquencies and foreclosures, whichhave negatively affected the credit performance of our loans and resulted inincreases in the level of our nonperforming assets and charge-offs of problemloans.  At the same time, competitionamong depository institutions for deposits and quality loans has increasedsignificantly.  Bank and bank holdingcompany stock prices have been negatively affected, as has the ability of banksand bank holding companies to raise capital or borrow in the debt marketscompared to recent years.  These marketconditions and the tightening of credit have led to increased deficiencies inour loan portfolio, increased market volatility and widespread reduction ingeneral business activity.

 

Our future successsignificantly depends upon the growth in population, income levels, depositsand housing starts in our market areas. Unlike many larger institutions, we are not able to spread the risks ofunfavorable economic conditions across a large number of diversified economiesand geographic locations.  If the marketsin which we operate do not recover and grow as anticipated or if prevailingeconomic conditions locally or nationally do not improve, our business maycontinue to be negatively impacted.

 

***A significantportion of our loan portfolio is secured by real estate, and events thatnegatively affect the real estate market could hurt our business.***

 

Beginning in the secondhalf of 2007 and continuing through 2009, the financial markets were beset bysignificant volatility associated with subprime mortgages, including adverseimpacts on credit quality and liquidity within the financial markets.  The volatility has been exacerbated by a significantdecline in the value of real estate.  Asof December 31, 2009, approximately 86.8% of our loans were secured byreal estate mortgages.  The real estatecollateral for these loans provides an alternate source of repayment in theevent of default by the borrower and may deteriorate in value during the timethe credit is extended.  We do notgenerally originate traditional long term residential mortgages, but we doissue traditional second mortgage residential real estate loans and home equitylines of credit.  A further weakening ofthe real estate market in our market areas could result in an increase in thenumber of borrowers who default on their loans and a reduction in the value ofthe collateral securing their loans, which in turn could have an adverse effecton our profitability and asset quality. If we are required to liquidate the collateral securing a loan tosatisfy the debt during a period of reduced real estate values, our earningsand shareholder’s equity could be adversely affected.  Acts of nature, including hurricanes,tornados, earthquakes, fires and floods, which may cause uninsured damage andother loss of value to real estate that secures these loans, may alsonegatively impact our financial condition.

 

***We are exposed tohigher credit risk by commercial real estate, construction, and commerciallending.***

 

Commercial real estate, commercial, and constructionlending usually involves higher credit risks than that of single-familyresidential lending.  As ofDecember 31, 2009, the following loan types accounted for the statedpercentages of our total loan portfolio: commercial real estate — 30.1% ;construction — 15.5%; and commercial — 11.1%. These types of loans involve larger loan balances to a single borroweror groups of related borrowers. Commercial real estate loans may be affected to a greater extent thanresidential loans by adverse conditions in real estate markets or the economybecause commercial real estate borrowers’ ability to repay their loans dependson successful development of their properties, in addition to the factorsaffecting residential real estate borrowers. These loans also involve greater risk because they generally are notfully amortizing over the loan period, but have a balloon payment due atmaturity.  A borrower’s ability to make aballoon payment typically will depend on being able to either refinance theloan or sell the underlying property in a timely manner.

 

Risk of loss on a construction loan depends largelyupon whether our initial estimate of the property’s value at completion ofconstruction equals or exceeds the cost of the property construction (includinginterest), the availability of permanent take-out financing, and the builder’sability to ultimately sell the property. During the 

 

19

----

 

construction phase, a number of factors can result indelays and cost overruns.  If estimatesof value are inaccurate or if actual construction costs exceed estimates, thevalue of the property securing the loan may be insufficient to ensure fullrepayment when completed through a permanent loan or by seizure of collateral.

 

Commercial and industrial loans are typically based onthe borrowers’ ability to repay the loans from the cash flow of theirbusinesses.  These loans may involvegreater risk because the availability of funds to repay each loan dependssubstantially on the success of the business itself.  In addition, the collateral securing theloans have the following characteristics: (a) they depreciate over time,(b) they are difficult to appraise and liquidate, and (c) theyfluctuate in value based on the success of the business.

 

Commercial real estate, construction, and commercialloans are more susceptible to a risk of loss during a downturn in the businesscycle.  Our underwriting, review andmonitoring cannot eliminate all of the risks related to these loans.  The banking regulators are giving commercialreal estate lending greater scrutiny, and may require banks with higher levelsof commercial real estate loans to implement improved underwriting, internalcontrols, risk management policies and portfolio stress testing, as well aspossibly higher levels of allowances for losses and capital levels as a resultof commercial real estate lending growth and exposures.

 

***Our decisionsregarding credit risk and reserves for loan losses may materially and adverselyaffect our business.***

 

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

 

·                  the duration of the credit;

·                  credit risks of a particular customer;

·                  changes in economic and industryconditions; and

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

 

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

 

·                  an ongoing review of the quality, mix, and size of ouroverall loan portfolio;

·                  our historical loan loss experience;

·                  evaluation of economic conditions;

·                  regular reviews of loan delinquencies andloan portfolio quality; and

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

 

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

 

While we generally underwrite the loans in our portfolioin accordance with our own internal underwriting guidelines and regulatorysupervisory guidelines, in certain circumstances we have made loans whichexceed either our internal underwriting guidelines, supervisory guidelines, orboth.  As of December 31, 2009, wehad $7,939,201 in loans that had loan-to-value ratios that exceeded regulatorysupervisory guidelines.  In addition,supervisory limits on commercial loan to value exceptions are set at 30% of ourBank’s capital.  At December 31,2009, we had $3,964,252 in commercial loans that exceeded the supervisory loanto value ratio.  The number of loans inour portfolio with loan-to-value ratios in excess of supervisory guidelines,our internal guidelines, or both could increase the risk of delinquencies anddefaults in our portfolio.

 

20

----

 

***Lack of seasoningof our loan portfolio may increase the risk of credit defaults in the future.***

 

Due to our short operating history, all of the loansin our loan portfolio and of our lending relationships are of relatively recentorigin.  In general, loans do not beginto 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 willusually behave more predictably than a newer portfolio.  Because our loan portfolio is relatively new,the current level of delinquencies and defaults may not be representative ofthe level that will prevail when the portfolio becomes more seasoned, which maybe higher than current levels.  Ifdelinquencies and defaults increase, we may be required to increase ourprovision for loan losses, which would adversely affect our results of operationsand financial condition.

 

***Our net interestincome could be negatively affected by the lower level of short-term interestrates, recent developments in the credit and real estate markets andcompetition in our market area.***

 

As a financial institution, our earnings significantlydepend upon our net interest income, which is the difference between the incomethat we earn on interest-earning assets, such as loans and investmentsecurities, and the expense that we pay on interest-bearing liabilities, suchas deposits and borrowings.  Therefore,any change in general market interest rates, including changes resulting fromchanges in the Federal Reserve’s fiscal and monetary policies, affects us morethan non-financial institutions and can have a significant effect on our netinterest income and net income.

 

The Federal Reserve reduced interest rates on threeoccasions in 2007 by a total of 100 basis points, to 4.25%, and by another 400basis points, to a range of 0% to 0.25%, during 2008.  Rates remained steady for 2009.  On March 18, 2009, the Federal Reserveannounced its decision to purchase as much as $300 billion of long-termtreasuries in an effort to maintain low interest rates.  Approximately 53.6% of our loans werevariable rate loans at December 31, 2009. The interest rates on a significant segment of these loans decrease whenthe Federal Reserve reduces interest rates, while the interest that we earn onour assets may not change in the same amount or at the same rates.  Accordingly, increases in interest rates mayreduce our net interest income.  Inaddition, an increase in interest rates may decrease the demand for loans.  Furthermore, increases in interest rates willadd to the expenses of our borrowers, which may adversely affect their abilityto repay their loans with us.

 

Increased nonperforming loans and the decrease ininterest rates reduced our net interest income during 2009 and could causeadditional pressure on net interest income in future periods.  This reduction in net interest income mayalso be exacerbated by the high level of competition that we face in ourprimary market areas.  Any significantreduction in our net interest income could negatively affect our business andcould have a material adverse effect on our capital, financial condition andresults of operations.

 

***We expect toreceive a consent order that will require us to take certain actions.***

 

The FDIC completed asafety and soundness examination of the Bank in the fourth quarter of2009.  Based on discussions with the FDICand the Bank’s current financial condition, we expect to receive a consentorder from the FDIC during 2010 that could require the Bank to take certainactions to address concerns raised in the examination.  These actions may include but are not limitedto addressing asset quality, capital adequacy, earnings, managementeffectiveness, liquidity, and sensitivity to market risk.  Furthermore, a consent order may establishnew minimum capital ratios for the Bank. If these ratios are not met, it may change how the Bank iscategorized.  If the Bank were to becomesubject to a consent order, and if the Bank were to fail to comply with therequirements, it may be subject to further regulatory action.

 

***Recent legislativeand regulatory initiatives to address the current difficult market and economicconditions may not achieve the desired effect.***

 

Beginning in October 2008, a host of legislationand regulation has been enacted in response to the financial crises affectingthe banking system and financial markets and the threats to investment banksand other financial institutions.  Theseinclude the following:

 

·                  On October 3, 2008, President Bush signed intolaw Emergency Economic Stabilization Act (“EESA”), under which the U.S.Treasury Department has the authority, among other things, to purchase up to$700 billion of mortgages, mortgage-backed securities and certain otherfinancial 

 

21

----

 

instruments fromfinancial institutions under the Troubled Asset Relief Program for the purposeof stabilizing and providing liquidity to the U.S. financial markets.

 

·                  On October 14, 2008, the Treasury Departmentannounced the Capital Purchase Plan under the EESA under which it wouldpurchase senior preferred stock and warrants to purchase common stock fromparticipating financial institutions.

 

·                  On November 21, 2008, the FDIC adopted a FinalRule with respect to its Temporary Liquidity Guarantee Program under whichthe FDIC will guarantee certain “newly-issued unsecured debt” of banks andcertain holding companies and also guarantee, on an unlimited basis,non-interest bearing bank transaction accounts.

 

·                  On February 10, 2009, the Treasury Departmentannounced the Financial Stability Plan under the EESA, which is intended tofurther stabilize financial institutions and stimulate lending across a broadrange of economic sectors.

 

·                  On February 18, 2009, President Obama signed theAmerican Recovery and Reinvestment Act, a broad economic stimulus package thatincluded additional restrictions on, and potential additional regulation of,financial institutions.

 

·                  On March 18, 2009, the Federal Reserve announcedits decision to purchase as much as $300 billion of long-term treasuries in aneffort to maintain low interest rates.

 

·                  On March 23, 2009, the Treasury Departmentannounced the Public-Private Investment Program, which will purchase realestate related loans from banks and securities from the broader markets, and isintended to create a market for those distressed debt and securities.

 

Each of these programs was implemented to helpstabilize and provide liquidity to the financial system.  However, the long-term effect that these orany other governmental program may have on the financial markets or ourbusiness or financial performance is unknown. A continuation or worsening of current financial market conditions couldmaterially and adversely affect our business, financial condition, results ofoperations, access to credit or the trading price of our common stock.

 

***Regulatory reformof the U.S. banking system may adversely affect us.***

 

On June 17, 2009, the Obama Administrationannounced a comprehensive plan for regulatory reform of the financial servicesindustry.  The plan set forth fiveseparate initiatives that will be the focus of the regulatory reform, includingrequiring strong supervision and appropriate regulation of all financial firms,strengthening regulation of core markets and market infrastructure,strengthening consumer protection, strengthening regulatory powers toeffectively manage failing institutions and improving international regulatorystandards and cooperation.

 

Other recent developments include:

 

·                  the Federal Reserve’s proposed guidanceon incentive compensation policies at banking organizations; and

·                  proposals to limit a lender’s ability toforeclose on mortgages or make those foreclosures less economically viable,including by allowing Chapter 13 bankruptcy plans to “cram down” the value ofcertain mortgages on a consumer’s principal residence to its market valueand/or reset interest rates and monthly payments to permit defaulting debtorsto remain in their home.

 

These initiatives may increase our expenses ordecrease our income by, among other things, making it harder for us toforeclose on mortgages.  Further, theoverall effects of these and other legislative and regulatory efforts on thefinancial markets remain uncertain, and they may not have the intendedstabilization results.  These efforts mayeven have unintended harmful consequences on the U.S. financial system and ourbusiness.  Should these or other legislativeor regulatory initiatives have unintended effects, our business, financialcondition, results of operations and prospects could be materially andadversely affected.

 

22

----

 

In addition, we may need to modify our strategies andbusiness operations in response to these changes.  We may also incur increased capitalrequirements and constraints or additional costs to satisfy new regulatoryrequirements.  Given the volatile natureof the current market and the uncertainties underlying efforts to mitigate orreverse disruptions, we may not timely anticipate or manage existing, new oradditional risks, contingencies or developments in the current or futureenvironment.  Our failure to do so couldmaterially and adversely affect our business, financial condition, results ofoperations and prospects.

 

***We could experiencean unexpected inability to obtain needed liquidity.***

 

Liquidity measures the ability to meet current andfuture cash flow needs as they become due. The liquidity of a financial institution reflects its ability to meetloan requests, to accommodate possible outflows in deposits, and to takeadvantage of interest rate market opportunities.  The ability of a financial institution tomeet its current financial obligations is a function of its balance sheetstructure, its ability to liquidate assets and its access to alternativesources of funds.  We seek to ensure ourfunding needs are met by maintaining a level of liquidity throughasset/liability management as well as through, among other things, our abilityto borrow funds from the Federal Home Loan Bank and the Federal ReserveBank.  As December 31, 2009, ourborrowing capacity with the Federal Home Loan Bank was $13,290,000 of which$10,290,000 is available.  Bothinstitution specific events such as deterioration in our credit ratingsresulting from a weakened capital position or from lack of earnings andindustry-wide events such as a collapse of credit markets may result in areduction of available funding sources sufficient to cover the liquiditydemands.  If we are unable to obtainfunds when needed, it could materially adversely affect our business, financialcondition and results of operations.

 

***Because of ourparticipation in the Treasury Department’s Capital Purchase Program, we aresubject to several restrictions including restrictions on compensation paid toour executives.***

 

Pursuant to the terms of the CPP Purchase Agreementbetween us and the Treasury, we adopted certain standards for executivecompensation and corporate governance for the period during which the Treasuryholds the equity issued pursuant to the CPP Purchase Agreement, including thecommon stock which may be issued pursuant to the CPP Warrant.  These standards generally apply to our ChiefExecutive Officer, Chief Financial Officer and the three next most highlycompensated senior executive officers. The standards include (1) ensuring that incentive compensation forsenior executives does not encourage unnecessary and excessive risks thatthreaten the value of the financial institution; (2) required clawback ofany bonus or incentive compensation paid to a senior executive based onstatements of earnings, gains or other criteria that are later proven to bematerially inaccurate; (3) prohibition on making golden parachute paymentsto senior executives; and (4) agreement not to deduct for tax purposesexecutive compensation in excess of $500,000 for each senior executive.  In particular, the change to thedeductibility limit on executive compensation will likely increase the overallcost of our compensation programs in future periods and may make it moredifficult to attract suitable candidates to serve as executive officers.

 

***Legislation orregulatory changes could cause us to seek to repurchase the preferred stockthat we sold to the U.S. Treasury pursuant to the Capital Purchase Program.***

 

Legislation that has been adopted after we closed onour sale of Series A and Series B Preferred Stock to the Treasury forapproximately $3.3 million pursuant to the CPP on January 9, 2009, or anylegislation or regulations that may be implemented in the future, may have amaterial impact on the terms of our CPP transaction with theTreasury.  If we determine that any suchlegislation or any regulations, in whole or in part, alter the terms of our CPPtransaction with the Treasury in ways that we believe are adverse to ourability to effectively manage our business, then it is possible that we mayseek to unwind, in whole or in part, the CPP transaction by repurchasing someor all of the preferred stock that we sold to the Treasury pursuant to theCPP.  If we were to repurchase all or aportion of such preferred stock, then our capital levels could be materiallyreduced.

 

***The securitiespurchase agreement between us and the Treasury limits our ability to paydividends on and repurchase our common stock.***

 

The securities purchase agreement between us and theTreasury provides that prior to January 9, 2012, unless we have redeemedthe Series A Preferred Stock and Series B Preferred Stock or theTreasury has transferred the Series A Preferred Stock or Series BPreferred Stock to a third party, the consent of the Treasury will be requiredfor us to declare or pay any dividend or make any distribution on our commonstock.  The purchase agreement furtherprovides that prior to January 9, 2019, unless we have redeemed theSeries A Preferred Stock and Series B Preferred Stock or the Treasuryhas transferred the Series A Preferred Stock or Series B PreferredStock to a third

 

23

----

 

party, the consent of the Treasury will be requiredfor us to redeem, purchase or acquire any shares of our common stock or otherequity or capital securities, other than in connection with benefit plansconsistent with past practice and certain other circumstances specified in thepurchase agreement.  These restrictionscould have a negative effect on the value of our common stock.

 

***Higher FDIC DepositInsurance premiums and assessments that we are required to pay could have anadverse effect on our earnings and our ability to pay our liabilities as theycome due.***

 

As a member institutionof the FDIC, we are required to pay quarterly deposit insurance premiumassessments to the FDIC.  Due to thelarge number of recent bank failures, and the FDIC’s new Temporary LiquidityGuarantee Program, the FDIC adopted a revised risk-based deposit insuranceassessment schedule in February 2009, which raised deposit insurancepremiums.  The FDIC also implemented afive basis point special assessment of each insured depository institution’sassets minus Tier 1 capital as of June 30, 2009, which special assessmentamount was capped at 10 basis points times the institution’s assessment basefor the second quarter of 2009.  Inaddition, the FDIC recently announced a rule that requires financialinstitutions like us to prepay their estimated quarterly risk-based assessmentsfor the fourth quarter of 2009 and for all of 2010 through and including 2012to re-capitalize the Deposit Insurance Fund. The FDIC may exercise its discretion as supervisor and insurer to exemptan institution from the prepayment requirement if the FDIC determines that theprepayment would adversely affect the safety and soundness of theinstitution.  We did request exemptionfrom the prepayment requirement and were granted such exemption from theFDIC.  During 2009, we paid $290,845 in deposit insurance, which includedregular premiums and the special assessment. The rule also provides for increasing the FDIC-assessment rates bythree basis points effective January 1, 2011.  If FDIC deposit insurance premiums andassessments continue to increase, these higher payments could adversely affectour financial condition.

 

***Our small tomedium-sized business target markets may have fewer financial resources toweather a downturn in the economy.***

 

We target the banking and financial services needs ofsmall and medium-sized business.  Thesebusinesses generally have fewer financial resources in terms of capitalborrowing capacity than larger entities. If general economic conditions continue to negatively impact thesebusinesses in the markets in which we operate, our business, financialcondition and results of operations may be adversely affected.

 

***We depend on theaccuracy and completeness of information about clients and counterparties andour financial condition could be adversely affected if we rely on misleadinginformation.***

 

In deciding whether to extend credit or to enter intoother transactions with clients and counterparties, we may rely on informationfurnished to us by or on behalf of clients and counterparties, includingfinancial statements and other financial information.  We also may rely on representations ofclients and counterparties as to the accuracy and completeness of thatinformation and, with respect to financial statements, on reports ofindependent 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 financialcondition and results of operations could be negatively affected to the extentwe rely on financial statements that do not comply with GAAP or are materiallymisleading.

 

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

 

Charlie T. Lovering, our chief executive officer, hasextensive and long-standing ties within our primary service areas and providesus with an important medium through which to market our products andservices.  If we lose the services ofMr. Lovering, he could be difficult to replace and our business anddevelopment could be materially and adversely affected.

 

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

 

24

----

 

***The costs of beingan SEC registered company are proportionately higher for smaller companies likeus because of the requirements imposed by the Sarbanes-Oxley Act.***

 

The Sarbanes-Oxley Act of 2002 and the relatedrules and regulations promulgated by the SEC have increased the scope,complexity and cost of corporate governance, reporting and disclosurepractices.  These regulations areapplicable to our company.  We haveexperienced, and expect to continue to experience, increasing compliance costs,including costs related to internal controls, as a result of the Sarbanes-OxleyAct.  These necessary costs areproportionately higher for a company of our size and will affect our profitabilitymore than that of some of our larger competitors.

 

***Our continuedoperations and future growth may require us to raise additional capital in thefuture, but that capital may not be available when it is needed.***

 

We are required by regulatory authorities to maintainadequate levels of capital to support our operations.  To support our continued operations,including any additional growth, we may need to raise additional capital.  In addition, we intend to redeem theSeries A Preferred Stock that we issued to the Treasury under the CPPbefore the dividends on the Series A Preferred Stock increase from 5% perannum to 9% per annum in 2014, as we may need to raise additional capital to doso.  Our ability to raise additionalcapital will depend in part on conditions in the capital markets at that time,which are outside our control, and our financial performance.  Accordingly, we may be unable to raiseadditional capital, if and when needed, on terms acceptable to us, or at all.  If we cannot raise additional capital whenneeded, our ability to continue our current operations or further expand ouroperations through internal growth and acquisitions could be materiallyimpaired.  In addition, if we decide toraise additional equity capital, your interest could be diluted.

 

***We face strongcompetition for clients, which could prevent us from obtaining clients and maycause us to pay higher interest rates to attract deposits.***

 

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

 

***We will face riskswith respect to future expansion and acquisitions or mergers.***

 

Although we do not have any current plans to do so, wemay seek to acquire other financial institutions or parts of thoseinstitutions.  We may also expand intonew markets or lines of business or offer new products or services.  These activities would involve a number ofrisks, including:

 

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

 

·                  the time and costs of evaluating new markets, hiringor retaining experienced local management, and opening new offices and the timelags between these activities and the generation of sufficient assets anddeposits to support the costs of the expansion;

 

·                  the incurrence and possible impairment of goodwillassociated with an acquisition and possible adverse effects on our results ofoperations; and

 

·                  the risk of loss of key employees and customers.

 

25

----

 

We have never acquired another institution before, sowe lack experience in handling any of these risks.  There is the risk that any expansion effortwill not be successful.

 

***We are exposed tothe possibility of technology failure and a disruption in our operations mayadversely affect our business.***

 

We rely on our computer systems and the technology ofoutside service providers.  Our dailyoperations depend on the operational effectiveness of their technology.  We rely on our systems to accurately trackand record our assets and liabilities. If our computer systems or outside technology sources become unreliable,fail, or experience a breach of security, our ability to maintain accuratefinancial records may be impaired, which could materially affect our businessoperations and financial condition.  Inaddition, a disruption in our operations resulting from failure oftransportation and telecommunication systems, loss of power, interruptionof other utilities, natural disaster, fire, global climate changes,computer hacking or viruses, failure of technology, terrorist activity orthe domestic and foreign response to such activity or other events outsideof our control could have an adverse impact on the financial servicesindustry as a whole and/or on our business. Our business recovery plan maynot be adequate and may not prevent significant interruptions of our operationsor substantial losses.

 

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

 

Not applicable.

 

26

----

 

**Item 2.   Properties.**

 

Our Sunset office, which opened in January, 2008 islocated at the intersection of Sunset Boulevard and Kim Street approximatelyone mile east of the Lexington Medical Center. Our address is 2023 Sunset Boulevard, West Columbia, South Carolina29169.  The building is approximately4,100 square feet on a site that is approximately 1.5 acres in size and is afull service banking facility with 3 drive-thru lanes and a drive-thruATM.  The Sunset office is subject to a15 year lease, with the option to extend the lease for two consecutive renewal termsof five years each.

 

We also occupy another branch and administrationoffice located at 1201 Knox Abbot Drive, Cayce, South Carolina.  This building is approximately 7,500 squarefeet in administration area and approximately 2,100 square feet branch officewith a drive in facility.  In December 2008,we entered into a sale-lease back agreement for a portion of thisproperty.  The lease is for a period of15 years, with the option to extend the lease for three consecutive renewalterms of five years each.  This propertyis approximately 5,674 square feet which the Bank leases to other tenants.

 

**Item 3.   Legal Proceedings****.**

 

In the ordinary course of operations, we may be aparty to various legal proceedings from time to time.  We are not aware of any pending or threatenedproceeding against us which we expect to have a material effect on ourbusiness, results of operations, or financial condition.

 

**Item 4.   (Removed and Reserved)****.**

 

No matter was submitted to a vote of security holdersduring the fourth quarter of the fiscal year covered by this report.

 

**PART II**

 

**Item 5.   Market for Registrant’s Common Equity,Related Stockholder Matters and Issuer Purchases of Equity Securities****.**

 

Since February 2, 2009, our common stock has beenquoted on the OTC Bulletin Board under the symbol “CNRB.”  Quotations on the OTC Bulletin Board reflectinter-dealer prices, without retail mark-up, mark-down, or commissions, and maynot represent actual transactions. Transactions of our common stock did not begin to occur on the OTCBulletin Board until February 4, 2009.

 

The following is a summary of the high and low bidprices for our common stock reported by the OTC Bulletin Board for the periodsindicated:

 
| **2009**       | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
| First Quarter  |       | $        | 10.00      |    | $          | 1.00 |   |
| Second Quarter |       | 10.00    |       | 3.50    |       |
| Third Quarter  |       | 5.00     |       | 3.50    |       |
| Fourth Quarter |       | 6.75     |       | 2.05    |       |
|                |            |          |            |         |            |  |  |

 

As of March 25, 2010, there were 1,764,439 sharesof common stock outstanding held by approximately 1,843 shareholders ofrecord.  All of our currently issued andoutstanding common stock was issued in our initial public offering which wascompleted on October 16, 2006.

 

We have not declared or paid any cash dividends on ourcommon stock since our inception.  For theforeseeable future we do not intend to declare cash dividends.  We intend to retain earnings to grow ourbusiness and strengthen our capital base. Our ability to pay dividends depends on the ability of our subsidiary,Congaree State Bank, to pay dividends to us. As a South Carolina state bank, our Bank may only pay dividends out ofits 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.

 

27

----

 

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

 

The following table sets forth equity compensationplan information at December 31, 2009.

 

**EquityCompensation Plan Information**

 
| **Plan Category**                                                     | ** ** | **Number  of securities  to be issued  upon exercise of  outstanding options,  warrants and rights (a)** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights  (b)** | ** ** | **Number  of securities  remaining available for  future issuance under  equity compensation  plans (c)  (excluding securities  reflected in column(a))** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity compensation  plans approved by security holders (1)           |       | 138,237                                                                                                  |       | $                                                                                       | 10.00      |                                                                                                                                                      | 126,063    |   |
|                                                                  |       |                                                                                                     |       |                                                                                    |       |                                                                                                                                                      |       |
| Equity compensation  plans not approved by security holders (2)  |       | 120,000                                                                                                  |       | $                                                                                       | 10.00      |                                                                                                                                                      | —     |   |
| Total                                                                 |       | 258,237                                                                                                  |       | $                                                                                       | 10.00      |                                                                                                                                                      | 126,063    |   |

 

----

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

 

(2)                                  Each of our organizers received, for noadditional consideration, a warrant to purchase one share of common stock for$10.00 per share for each share purchased during our initial public offering upto a maximum of 10,000 warrants.  Thewarrants are represented by separate warrant agreements.  The warrants will vest over a three yearperiod beginning October 16, 2007, and they will be exercisable in wholeor in part during the 10 year period ending October 16, 2016.  If the South Carolina Board of FinancialInstitutions or the FDIC issues a capital directive or other order requiringthe Bank to obtain additional capital, the warrants will be forfeited, if notimmediately exercised.

 

**Item 6.  Selected Financial Data.**

 

Not applicable.

 

28

----

 

**Item7.  Management’s Discussion and Analysisof Financial Condition and Results of Operations.**

 

**General**

 

Our Bank opened forbusiness on October 16, 2006.  Allactivities of the Company prior to that date relate to the organization of theBank.  The following discussion describesour results of operations for the years ended December 31, 2009 and 2008and also analyzes our financial condition as of December 31, 2009. Thefollowing discussion and analysis also identifies significant factors that haveaffected our financial position and operating results during the periodsincluded in the accompanying financial statements. We encourage you to readthis discussion and analysis in conjunction with our financial statements andthe other statistical information included in this report.

 

Like most communitybanks, we derive the majority of our income from interest we receive on ourloans and investments.  Our primarysource of funds for making these loans and investments is our deposits, onwhich we pay interest.  Consequently, oneof the key measures of our success is our amount of net interest income, or thedifference between the income on our interest-earning assets, such as loans andinvestments, and the expense on our interest-bearing liabilities, such as deposits,also known as net interest margin. Another key measure is the spread between the yield we earn on theseinterest-earning assets and the rate we pay on our interest-bearingliabilities, which is referred to as net interest spread.

 

We have included a numberof tables to assist in our description of these measures.  For example, the “Average Balances, Incomeand Expenses, and Rates” tables show for the periods indicated the averagebalance for each category of our assets and liabilities, as well as the averageyield we earned or the average rate we paid with respect to each category.  A review of these tables show that our loanshistorically have provided higher interest yields than our other types ofinterest-earning assets, which is why we have invested a substantial percentageof our earning assets into our loan portfolio. Similarly, the “Rate/Volume Analysis” table helps demonstrate the impactof changing interest rates and changing volume of assets and liabilities duringthe periods shown.  We also track thesensitivity of our various categories of assets and liabilities to changes ininterest rates, and we have included “Interest Sensitivity Analysis” tables tohelp explain this.  Finally, we haveincluded a number of tables that provide detail about our investmentsecurities, our loans, our deposits and other borrowings.

 

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 and maintain this allowance bycharging a provision for loan losses against our operating earnings.  In the “Loans” and “Provision and Allowancefor Loan Losses” sections, we have included a detailed discussion of this process,as well as several tables describing our allowance for loan losses.

 

In addition to earninginterest on our loans and investments, we earn income through fees and otherexpenses we charge to our clients.  Wedescribe the various components of this non-interest income, as well as our non-interestexpense, in the following discussion.

 

**CurrentEconomic Environment**

 

Markets in the UnitedStates and elsewhere have experienced extreme volatility and disruption formore than 18 months.  These circumstanceshave exerted significant downward pressure on prices of equity securities andvirtually all other asset classes, and have resulted in substantially increasedmarket volatility, severely constrained credit and capital markets,particularly for financial institutions, and an overall loss of investorconfidence.  Loan portfolio performanceshave deteriorated at many institutions resulting from, among other factors, aweak economy and a decline in the value of the collateral supporting theirloans.  Dramatic slowdowns in the housingindustry, due in part to falling home prices and increasing foreclosures andunemployment, have created strains on financial institutions.  Many borrowers are now unable to repay theirloans, and the collateral securing these loans has, in some cases, declinedbelow the loan balance.  As discussed inthe section entitled “Supervision and Regulation” under the heading “RecentLegislative and Regulatory Initiatives to Address Financial and EconomicCrisis, the United States government has taken unprecedented actions in responseto the challenges facing the financial services sector.

 

**The Effect of the Current EconomicEnvironment on our Bank**

 

Like many financialinstitutions across the United States and in South Carolina, our operationshave been 

 

29

----

 

adversely affected by the current economiccrisis.  Beginning in 2008 and continuingthrough 2009, we recognized that construction, acquisition, and developmentreal estate projects were slowing, guarantors were becoming financiallystressed, and increasing credit losses were surfacing.  During 2009, delinquencies over 90 daysincreased resulting in an increase in non-accrual loans indicating significantcredit quality deterioration and probable losses.  The deterioration was not significant inloans secured by home equity lines of credit to owner-occupied one to fourfamily real estate and commercial and industrial loans.  These loans are primarily to small businessesthat are less able to weather the recession. This deterioration manifested itself in our borrowers in the followingways: (i) deterioration in personal income, which led to an inability forindividuals to pay their mortgages; (ii) deterioration in sales revenuesto small businesses, which led to financial stress to the business and/orguarantor(s); and (iii) illiquid personal balance sheets and increasedleverage due to a lack of cash flow, which eliminated second and/or thirdsources of repayment.

 

Asof December 31, 2009, approximately 86.8% of our loans had real estate asa primary or secondary component of collateral. Included in our loans secured by real estate, we have approximately$16,454,132 million of construction and development loans as of December 31,2009, most of which are on properties located within the Columbia MSA andconsist primarily of loans to individuals or closely held real estate holdingcompanies where the borrower was holding property for current and/or futurepersonal use.  Additionally, $3,311,287 ofall construction and development loans are single family residence constructionloans to the individual who intends on using the constructed house as theirprimary residence.  Over the last eightquarters the Bank has yet to experience any loss from its construction anddevelopment portfolio and feels that the loans we have made to date do notcarry the same risks associated with a typical bank’s construction anddevelopment portfolio.

 

Thedecrease in the provision for loan losses for 2009 was attributed to acombination of economic factors.  Theloans that were qualified as impaired during 2009 had smaller balances andrequired smaller reserves than in 2008. In addition, although the overall portfolio grew approximately 94.5%from 2007 to 2008, it decreased approximately 1.3% from 2008 to 2009.  The lack of portfolio growth was primarilydue to the economic downturn.  We believethat while the lending policy is strong, most losses for the year were due toHome Equity Lines of Credit (HELOCs) and Commercial and Industrial (C&I)loans, as opposed to CRE or C&D loans. HELOC and C&I borrowers consisted of loans to individuals and smallbusinesses that had prospered during the better economic conditions butsuffered recently during the recession. This is evidenced by the 2009 annual charge off rate of 1.62% for HELOCsand 3.20% for C&I loans where CRE and C&D loans have annual charge offrates of 0.04% and 0.00%, respectively.

 

The result of the abovewas a significant increase in the level of our non-performing assets during2009.  As of December 31, 2009, our non-performing assets equaled$2.7 million, or 1.94% of assets, as compared to $294,596, or 0.21% of assets,as of December 31, 2008.  For the year ended December 31, 2009,we recorded a provision for loan losses of $717,937 and net loan charge-offs of$907,840, or 0.83% of average loans, as compared to a $1,391,090 provision forloan losses and net loan charge-offs of $254,850, or 0.29% of average loans,for the year ended December 31, 2008.  In addition, our net interestmargin decreased to 2.97% for the year ended December 31, 2009 from 3.09%for the year ended December 31, 2008.

 

Based on discussions with the FDIC following ourmost recent safety and soundness examination in the fourth quarter of 2009, weexpect to receive a consent order from the FDIC at some point in 2010 thatcould require the Bank to take certain actions to address concerns raised inthe examination.  These actions mayinclude addressing asset quality, capital adequacy, earnings, managementeffectiveness, liquidity, and sensitivity to market risk.

 

**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, 2009, includedherein.  Management has discussed thesecritical accounting policies with the audit committee.

 

Certain accountingpolicies involve significant judgments and assumptions by us that have amaterial impact on the carrying value of certain assets and liabilities.  We consider these accounting policies to becritical accounting policies.  Thejudgment and assumptions we use are based on historical experience and otherfactors, which we believe to be reasonable under the circumstances.  Because of the nature of the judgment andassumptions 

 

30

----

 

we make, actual resultscould differ from these judgments and estimates that could have a materialimpact on the carrying values of our assets and liabilities and our results ofoperations.

 

*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 morecritical judgments supporting the amount of our allowance for loan lossesinclude judgments about the creditworthiness of borrowers, the estimated valueof the underlying collateral, the assumptions about cash flow, determination ofloss factors for estimating credit losses, the impact of current events, andconditions, and other factors impacting the level 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.  Referto the portion of this discussion that addresses our allowance for loan lossesfor a more complete discussion of our processes and methodology for determiningour allowance for loan losses.

 

*IncomeTaxes*

 

We use assumptions and estimatesin determining income taxes payable or refundable for the current year,deferred income tax liabilities and assets for events recognized differently inour financial statements and income tax returns, and income tax expense.  Determining these amounts requires analysisof certain transactions and interpretation of tax laws and regulations.  Management exercises judgment in evaluatingthe amount and timing of recognition of resulting tax liabilities and assets.  These judgments and estimates are reevaluatedon a continual basis as regulatory and business factors change.  No assurance can be given that either the taxreturns submitted by us or the income tax reported on the financial statementswill not be adjusted by either adverse rulings by the United States Tax Court,changes in the tax code, or assessments made by the Internal RevenueService.  We are subject to potentialadverse adjustments, including, but not limited to, an increase in thestatutory federal or state income tax rates, the permanent nondeductibility ofamounts currently considered deductible either now or in future periods, andthe dependency on the generation of future taxable income, including capitalgains, in order to ultimately realize deferred income tax assets.

 

**Resultsof Operations**

 

*General*

 

Our net loss was$1,142,922 and $3,302,939 for the years ended December 31, 2009 and 2008,respectively. Net loss before income tax benefit was $1,142,922 for the yearended December 31, 2009, a decrease of $2,160,017, or 65.4%, compared to$3,302,939 for the year ended December 31, 2008.  The decrease in net loss before income taxbenefit resulted from a $745,725 decrease in noninterest expense and increasesof $613,144 in net interest income and $127,995 in noninterest income.  Noninterest income increased from $208,307for the year ended December 31, 2008, to $336,302 for the year ended December 31,2009.  We also recorded a provision forloan losses of $717,937 and $1,391,090 for the years ended December 31,2009 and 2008, respectively.

 

*NetInterest Income*

 

Our primary source ofrevenue is net interest income.  Netinterest income is the difference between income earned on interest-bearingassets and interest paid on deposits and borrowings used to support suchassets. The level of net interest income is determined by the balances ofinterest-earning assets and interest-bearing liabilities and correspondinginterest rates earned and paid on those assets and liabilities,respectively.  In addition to the volumeof and corresponding interest rates associated with these interest-earningassets and interest-bearing liabilities, net interest income is affected by thetiming of the repricing of these interest-earning assets and interest-bearingliabilities.

 

Net interest income was$3,786,085 for the year ended December 31, 2009, an increase of $613,144or 19.3%, over net interest income of $3,172,941 for the year ended December 31,2008.  Interest income of $6,654,381 forthe year ended December 31, 2009, included $5,984,716 on loans, $648,748on investment securities and $20,917 on federal funds sold.  Loan interest and related fees improved$488,351, or 8.9%, over 2008, due to continued growth in the loan portfoliovolume. Total interest expense of $2,868,296 for the year ended December 

 

31

----

 

31, 2009, included$2,782,413 related to deposit accounts and $85,883 on federal funds purchasedand Federal Home Loan Bank borrowings. Interest expense on deposits decreased $204,379, or 6.8%, due to the decreasein deposit rates during 2009.

 

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, and Yields and Rates**

**Forthe Years Ended December 31,**

 
| ** **                                                       | ** ** | **2009**             | ** **  | **2008**             | ** ** |
|------------------------------------------------------------------|------------|----------------------|-------------|----------------------|------------|
| ** **                                                       | ** ** | **Average  balance** | ** **  | **Income/  expense** | ** ** | **Yield/  rate** | ** ** | **Average  balance** | ** ** | **Income/  expense** | ** ** | **Yield/  rate** | ** ** |
| **Interest-earning assets:**                                     | ** ** | ** **           | ** **  | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Federal funds sold and Certificates  of deposit with other banks |       | $                    | 5,561,344   |                 | $          | 20,917 |   | 0.38 | % | $ | 1,085,080 |   | $ | 37,912 |   | 3.49 | % |
| Investment securities and FHLB stock                             |       | 13,035,212           |        | 648,748              |       | 4.98 |   | 14,137,396 |   | 745,149 |   | 5.27 |   |
| Loans (1)                                                        |       | 108,869,938          |        | 5,984,716            |       | 5.50 |   | 87,390,666 |   | 5,496,365 |   | 6.29 |   |
| **Total interest-earning assets**                                |       | 127,466,494          |        | 6,654,381            |       | 5.22 |   | 102,613,142 |   | 6,279,426 |   | 6.12 |   |
| Non-earning assets                                               |       | 6,750,078            |        |                 |       |   |   | 4,869,322 |   |   |   |   |   |
| Total assets                                                     |       | $                    | 134,216,572 |                 |       |   |   |   | $ | 107,482,464 |   |   |   |   |   |
|                                                             |       |                 |        |                 |       |   |   |   |   |   |   |   |   |
| **Interest-bearing liabilities:**                                | ** ** | ** **           | ** **  | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest checking                                                |       | $                    | 4,395,267   |                 | 12,939     |   | 0.29 | % | $ | 4,309,880 |   | 32,922 |   | 0.76 | % |
| Savings and money market                                         |       | 29,338,372           |        | 594,589              |       | 2.03 |   | 23,914,113 |   | 685,817 |   | 2.87 |   |
| Time deposits                                                    |       | 73,340,128           |        | 2,174,885            |       | 2.97 |   | 55,965,894 |   | 2,268,053 |   | 4.05 |   |
| FHLB advances                                                    |       | 3,000,000            |        | 78,784               |       | 2.63 |   | 2,508,621 |   | 67,345 |   | 2.68 |   |
| Federal funds purchased and repurchase agreement                 |       | 1,171,462            |        | 7,099                |       | 0.61 |   | 2,009,050 |   | 52,348 |   | 2.61 |   |
| **Total interest-bearing liabilities**                           |       | 111,245,229          |        | 2,868,296            |       | 2.58 |   | 88,707,558 |   | 3,106,485 |   | 3.50 |   |
| Non-interest bearing liabilities                                 |       | 10,809,566           |        |                 |       |   |   | 8,473,870 |   |   |   |   |   |
| Shareholders’ equity                                        |       | 12,161,777           |        |                 |       |   |   | 10,301,037 |   |   |   |   |   |
| **Total liabilities and shareholders’ equity**              |       | $                    | 134,216,572 |                 |       |   |   |   | $ | 107,482,464 |   |   |   |   |   |
| **Net interest spread**                                          |       |                 |        |                 |       | 2.64 | % |   |   |   |   | 2.62 | % |
| **Net interest income/margin**                                   | ** ** | ** **           |        | $                    | 3,786,085  |   | 2.97 | % | ** ** |   | $ | 3,172,941 |   | 3.09 | % |

 

----

(1)  Loan fees,which are immaterial, are included in interest income.  There were $2,020,974 in nonaccrual loans for2009 and $294,596 nonaccrual loans in 2008. Nonaccrual loans are included inthe average balances, and income on nonaccrual loans is included on the cashbasis for yield computation purposes.

 

Our consolidated netinterest margin for the year ended December 31, 2009 was 2.97%, a decreaseof 12 basis points from the net interest margin of 3.09% for the year ended December 31,2008.  The net interest margin iscalculated by dividing net interest income by year-to-date average earningassets.  This decrease can be attributedto the costs of our funding sources.  Werelied on a higher volume of money market deposits to fund the growth of ourloan portfolio in 2009.  These depositsare priced higher than core deposits. Earning assets averaged $127,466,494 for the year ended December 31,2009, increasing from $102,613,142 for the year ended December 31, 2008.Our net interest spread was 2.64% for the year ended December 31, 2009.The net 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 than local competitors have been paid initially to attractdeposits.

 

32

----

 

*Rate/VolumeAnalysis*

 

Net interest income canbe analyzed in terms of the impact of changing interest rates and changingvolume. 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 bothrate and volume, have been allocated on a pro rata basis.

* *
| ** **                                       | ** ** | **2009 Compared to 2008** | ** ** |
|--------------------------------------------------|------------|---------------------------|------------|
| ** **                                       | ** ** | **Total  Change**         | ** ** | **Change in  Volume** | ** ** | **Change in  Rate** | ** ** |
| **Interest-earning assets:**                     | ** ** | ** **                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Federal funds sold                               |       | $                         | (16,995    | ) | $ | (51,718 | ) | $ | (34,723 | ) |
| Investment securities and FHLB stock             |       | (96,401                   | )          | (133,158 | ) | (36,757 | ) |
| Loans                                            |       | 488,351                   |       | (193,296 | ) | (681,647 | ) |
| **Total interest income**                        |       | 374,955                   |       | (378,172 | ) | (753,127 | ) |
|                                             |       |                      |       |   |   |   |   |
| **Interest-bearing liabilities:**                | ** ** | ** **                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest-bearing deposits                        |       | (204,379                  | )          | (1,037,502 | ) | (833,123 | ) |
| FHLB advances                                    |       | 11,439                    |       | 10,194 |   | (1,245 | ) |
| Federal funds purchased and Repurchase agreement |       | (45,249                   | )          | (85,430 | ) | (40,181 | ) |
| **Total interest expense**                       |       | (238,189                  | )          | (1,112,738 | ) | (874,549 | ) |
| **Net interest income**                          |       | $                         | 613,144    |   | $ | 734,566 |   | $ | (121,422 | ) |

 

*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 belowunder “Provision and Allowance for Loan Losses” for a description of thefactors we consider in determining the amount of the provision we expense eachperiod to maintain this allowance.

 

Our provision for loanlosses for the year ended December 31, 2009 was $717,937, a decrease of $673,153,or 48.4%, over our provision of $1,391,090, for the year ended December 31,2008.  The allowance as a percentage ofgross loans has been decreased from approximately 1.6% to 1.4% as of December 31,2008 and 2009, respectively, due to management’s evaluation of the adequacy ofthe reserve for possible loan losses given the size, mix, and quality of thecurrent loan portfolio. Management also relies on our limited history ofpast-dues and charge-offs, as well as peer data to determine our loan loss allowance.

 

*NoninterestIncome*

 

Noninterest income forthe year ended December 31, 2009 was $336,302 compared to $208,307 for theyear ended December 31, 2008. Service charges and other fees on deposit accounts were $138,558 for theyear ended December 31, 2009, an improvement of $57,041 over the yearended December 31, 2008, due to an increase in deposit accounts.  For the year ended December 31, 2009,mortgage loan origination fees were $98,177, a decrease of $69,945, or 41.6%,from 2008, due to the decrease in the volume of mortgage loans originated.  We expect this trend to continue and thenincrease as market conditions improve. Noninterest income included gains on sales of securitiesavailable-for-sale of $114,571 for the year ended December 31, 2009,compared to $71,599 in 2008.  However, these gains were offset by theother than temporary impairment charge on nonmarketable equity securities of$60,352 in 2009, compared to $94,993 in 2008.

 

33

----

 

*NoninterestExpenses*

 

The following table setsforth information related to our noninterest expenses for the year ended December 31,2009 and 2008.

 
| ** **                                             | ** ** | **2009**  | ** ** | **2008**  | ** ** |
|--------------------------------------------------------|------------|-----------|------------|-----------|------------|
| Compensation  and benefits                             |       | 2,361,927 |       | 3,137,426 |       |
| Occupancy  and equipment                               |       | 811,777   |       | 801,264   |       |
| Data  processing and related costs                     |       | 286,827   |       | 277,337   |       |
| Marketing,  advertising and shareholder communications |       | 118,292   |       | 166,351   |       |
| Legal  and audit                                       |       | 390,359   |       | 346,338   |       |
| Other  professional fees                               |       | 71,570    |       | 45,831    |       |
| Supplies  and postage                                  |       | 65,972    |       | 122,826   |       |
| Insurance                                              |       | 32,406    |       | 45,964    |       |
| Credit  related expenses                               |       | 57,425    |       | 131,055   |       |
| Courier  and armored carrier service                   |       | 7,050     |       | 19,961    |       |
| Regulatory  fees and FDIC insurance                    |       | 290,845   |       | 96,370    |       |
| Other                                                  |       | 52,922    |       | 102,374   |       |
| Total  noninterest expense                             |       | $         | 4,547,372  |      | $          | 5,293,097 |   |
|                                                        |            |           |            |           |            |  |  |

 

Noninterest expense was$4,547,372 for the year ended December 31, 2009, compared to $5,293,097for the year ended December 31, 2008. The most significant component of noninterest expense is compensationand benefits, which totaled $2,361,927 for the year ended December 31,2009, compared to $3,137,426 for the year ended December 31, 2008. Thedecrease is primarily related to staff reductions.  Occupancy andequipment expense of $811,777 in 2009 decreased from $801,264 in 2008.  Data processing and related expense increasedfrom $277,337 in 2008 to $286,827 in 2009, primarily due to an increase in ourcore processor charges because of the increased volume of new accounts. Legaland audit fees increased from $346,338 in 2008 to $390,359 in 2009, as a resultof complying with the Sarbanes-Oxley Act of 2002 and other regulatorychanges.  Other professional feesincreased from $45,831 in 2008 to $71,570 in 2009.  Supplies and postage related expensesdecreased from $122,826 in 2008 to $65,972 in 2009, as a result of the effortsto reduce expenses.  Credit relatedexpenses decreased from $131,055 in 2008 to $57,425 in 2009 as a result slowloan activity during the year. Regulatory fees and FDIC insurance increased from $96,370 in 2008 to$290,845 in 2009, primarily due to an increase in FDIC insurance assessmentsand the special assessment. The decrease in other expenses from $102,374 in2008 to $57,651 was due to management’s efforts to reduce the Bank’s expenses.

 

*IncomeTax Benefit*

 

The Company had nocurrently taxable income for the years ended December 31, 2009 and2008.  The Company has recorded a valuation allowance equal to the netdeferred tax asset as the realization of this asset is dependent on theCompany’s ability to generate future taxable income during the periods in whichtemporary differences become deductible.

 

***Balance Sheet Review***

 

*General*

 

At December 31,2009, total assets were $140,036,471 compared to $132,004,104 at December 31,2008, for an increase of $8,032,367, or 6.1%. The increase in assets resulted from increases in our investmentportfolios and federal funds sold and related increases in our funding sourcesof deposits.  Interest-earning assetscomprised approximately 92.9% and 93.7% of total assets at December 31,2009 and December 31, 2008.  Grossloans totaled $106,143,726 at December 31, 2009, a decrease of $1,403,930,or 1.3%, from $107,547,656 at December 31, 2008.  Investment securities were $18,439,961 at December 31,2009, an increase of $4,160,791, or 29.1%, from $14,279,170 at December 31,2008.  Investment in overnight federalfunds increased $1,701,000 to $5,195,000 at December 31, 2009.

 

Deposits totaled$124,596,710 at December 31, 2009, a $6,062,150, or 5.1% ,increase from$118,534,560 at December 31, 2008. Shareholders’ equity was $12,196,323 and $10,063,099 at December 31,2009 and December 31, 2008, respectively.

 

34

----

 

*Investments*

 

At December 31,2009, our available for sale investment securities portfolio was $17,965,661and represented approximately 12.8% of our total assets. Investments increased$4,122,443 from $13,843,218 at December 31, 2008.  Our portfolio consisted of U.S. governmentsponsored agencies of $10,749,191, mortgage-backed agencies of $6,786,659 andstate, county and municipal of $429,811.

 

Contractual maturitiesand yields on our investment securities available for sale at December 31,2009 are shown in the following table. Expected maturities may differ from contractual maturities becauseissuers may have the right to call or prepay obligations with or without callor prepayment penalties.

 
| ** **                          | ** ** | **Less  than** | ** ** | **One year  to** | ** ** | **Five  years**   | ** ** | ** **          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|----------------|------------|------------------|------------|-------------------|------------|---------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                          | ** ** | **one year**   | ** ** | **five  years**  | ** ** | **to ten  years** | ** ** | **Over ten  years** | ** ** | **Total**  | ** ** |
| ** **                          | ** ** | **Amount**     | ** ** | **Yield**        | ** ** | **Amount**        | ** ** | **Yield**           | ** ** | **Amount** | ** ** | **Yield**  | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** |
| U.S.  Government sponsored agencies |       | $              | 5,222,977  |             | 2.73       | %                 | $          | 2,657,491           |       | 4.47       | %          | $          | 2,868,723  |       | 5.33       | % | $ | — |   | — |   | $ | 10,749,191 |   | 3.85 | % |
|                                |       |           |       |             |       |              |       |                |       |       |       |       |       |       |       |   |   |   |   |   |   |
| Mortgage-backed  agencies           |       | —         |       | —           |       | 655,637           |       | 2.37                | %          | 179,530    |       | 5.40       | %          | 5,951,492  |       | 4.55 | % | 6,786,659 |   | 4.36 | % |
|                                |       |           |       |             |       |              |       |                |       |       |       |       |       |       |       |   |   |   |   |   |   |
| State,  county and municipal        |       | —         |       | —           |       | —            |       | —              |       | 429,811    |       | 4.75       | %          | —     |       | — |   | 429,811 |   | 4.75 | % |
|                                |       |           |       |             |       |              |       |                |       |       |       |       |       |       |       |   |   |   |   |   |   |
| **Total**                           |       | $              | 5,222,977  |             | 2.73       | %                 | $          | 3,313,128           |       | 4.05       | %          | $          | 3,478,064  |       | 5.26       | % | $ | 5,951,492 |   | 4.55 | % | $ | 17,965,661 |   | 5.28 | % |

 

The amortized costs andthe fair value of our investment securities at December 31, 2009 and 2008are shown in the following table.

 
| ** **                          | ** ** | **2009**                  | ** **     | **2008**              | ** ** |
|-------------------------------------|------------|---------------------------|----------------|-----------------------|------------|
| ** **                          | ** ** | **Amortized********Cost** | ** **     | **Fair********Value** | ** ** | **Amortized********Cost** | ** ** | **Fair********Value** | ** ** |
| **Available for Sale**              | ** ** | ** **                | ** **     | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                |       |                      |           |                  |       |   |   |   |   |
| U.S.  Government sponsored agencies |       | $                         | 10,603,783     |                  | $          | 10,749,191 |   | $ | 7,017,105 |   | $ | 7,134,445 |   |
| Mortgage-backed  agencies           |       | 6,662,003                 |           | 6,786,659             |       | 6,489,572 |   | 6,708,773 |   |
| State,  county and municipal        |       | 449,666                   |           | 429,811               |       | — |   | — |   |
|                                |       |                      |           |                  |       |   |   |   |   |
| **Total**                           | ** ** | **$**                     | **17,715,452** | ** **            | **$**      | **17,965,661** | ** ** | **$** | **13,503,677** | ** ** | **$** | **13,843,218** | ** ** |

 

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 the ability and intent to hold thesesecurities until such time as the value recovers or the securities mature.

 

Investmentsecurities with market values of approximately $3,783,988 and $6,753,584 at December 31,2009 and 2008, respectively, were pledged to secure public deposits and tosecure the borrowings from the FHLB, as required by law.

 

Proceedsfrom sales of available-for-sale securities during 2009 and 2008 were $3,530,088and $2,244,612, respectively.  Grossgains of $114,571 and $71,599 were recognized on these sales in 2009 and 2008,respectively.

 

Weheld non-marketable equity securities, which consisted of Federal Home LoanBank stock of $372,300 and Pacific Coast Bankers Bank stock of $102,000 at December 31,2009.  These investments are carried atcost, which approximates fair market value. During 2009, we recognized an other-than-temporary impairment charge onthe remaining Silverton Bank stock balance of $60,352.

 

35

----

 

Managementevaluates securities for other-than-temporary impairment at least on aquarterly basis, and more frequently when economic or market concerns warrantsuch evaluation.  Consideration is given to(1) the length of time and the extent to which the fair value has beenless than cost, (2) the financial condition and near-term prospects of theissuer, and (3) the intent and ability of the Company to retain itsinvestment in the issuer for a period of time sufficient to allow for anyanticipated recovery in fair value.

 

In analyzing anissuer’s financial condition, management considers whether the securities areissued by the federal government or its agencies, whether downgrades by bondrating agencies have occurred, and industry analysts’ reports.  As management has the ability to hold debtsecurities until maturity, or for the foreseeable future if classified asavailable for sale, no declines are deemed to be other than temporary.

 

*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, 2009 were$106,143,726, or 81.6% of interest-earning and 75.8% of total assets, comparedto $107,547,656, or 87.1% of interest-earning and 81.5% of total assets at December 31,2008.  Due to the economic environment,the Bank made selective decisions related to originating loans in 2009.  In addition, as the Bank moved into its thirdyear of operations it experienced the attrition of loans due to refinancingand/or payoffs from borrowers.

 

Loans secured by realestate mortgages comprised approximately 86.8% of loans outstanding at December 31,2009 and 86.2% at December 31, 2008. Most of our real estate loans are secured by residential and commercialproperties.  We do not generallyoriginate traditional long term residential mortgages, but we do issuetraditional second mortgage residential real estate loans and home equity linesof credit.  We obtain a security interestin real estate whenever possible, in addition to any other availablecollateral.  This collateral is taken toincrease the likelihood of the ultimate repayment of the loan. Generally, welimit the loan-to-value ratio on loans we make to 80%.

 

Commercial loans andlines of credit represented approximately 11.1% and 11.0% of our loan portfolioat December 31, 2009 and 2008, respectively.

 

Our construction anddevelopment, and land loan portfolio represented approximately 15.5% and 15.9%at December 31, 2009 and 2008, respectively.

 

The following tablesummarizes the composition of our loan portfolio as of December 31, 2009and 2008:

 
| ** **                             | ** ** | **2009**    | ** **  | **2008**                 | ** ** |
|----------------------------------------|------------|-------------|-------------|--------------------------|------------|
| ** **                             | ** ** | **Amount**  | ** **  | **Percentage  of Total** | ** ** | **Amount** | ** ** | **Percentage  of Total** | ** ** |
| Real  Estate:                          | ** ** | ** **  | ** **  | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Construction  and development and land |       | $           | 16,454,132  |                     | 15.50      | % | $ | 17,150,969 |   | 15.95 | % |
| Commercial                             |       | 31,926,392  |        | 30.08                    |       | 29,539,423 |   | 27.46 |   |
| Residential  mortgages                 |       | 16,375,098  |        | 15.43                    |       | 20,646,023 |   | 19.20 |   |
| Home  equity lines                     |       | 27,425,120  |        | 25.83                    |       | 25,414,399 |   | 23.63 |   |
| Total  real estate                     |       | 92,180,742  |        | 86.84                    |       | 92,750,814 |   | 86.24 |   |
|                                   |       |        |        |                     |       |   |   |   |   |
| Commercial                             |       | 11,738,295  |        | 11.06                    |       | 11,870,971 |   | 11.04 |   |
| Consumer                               |       | 2,224,689   |        | 2.10                     |       | 2,925,871 |   | 2.72 |   |
| Gross  loans                           |       | 106,143,726 |        | 100                      | %          | 107,547,656 |   | 100 | % |
| Less  allowance for loan losses        |       | (1,498,937  | )           |                     |       | (1,688,840 | ) |   |   |
| Total  loans, net                      |       | $           | 104,644,789 |                     |       |   | $ | 105,858,816 |   |   |   |

 

36

----

 

*Maturitiesand Sensitivity of Loans to Changes in Interest Rates*

 

The information in thefollowing table is based on the contractual maturities of individual loans,including loans which may be subject to renewal at their contractualmaturity.  Renewal of such loans issubject to review and credit approval, as well as modification of terms uponmaturity.  Actual repayments of loans maydiffer from the maturities reflected below because borrowers have the right toprepay obligations with or without prepayment penalties.

 

The following tablesummarizes the loan maturity distribution by composition and interest ratetypes at December 31, 2009.

 
| ** **                                   | ** ** | ** **    | ** ** | **After one**   | ** ** | ** **      | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|---------------|------------|-----------------|------------|-----------------|------------|------------|------------|
| ** **                                   | ** ** | **One  year** | ** ** | **but  within** | ** ** | **After  five** | ** ** | ** ** | ** ** |
|                                         | ** ** | **or  less**  | ** ** | **five  years** | ** ** | **years**       | ** ** | **Total**  | ** ** |
| Real  estate- mortgage                       |       | $             | 12,025,169 |            | $          | 44,917,100      |       | $          | 31,540,975 |   | $ | 88,483,244 |   |
| Real  estate- construction                   |       | 2,449,939     |       | 1,247,559       |       | —          |       | 3,697,498  |       |
| Total  real estate                           |       | 14,475,108    |       | 46,164,659      |       | 31,540,975      |       | 92,180,742 |       |
|                                         |       |          |       |            |       |            |       |       |       |
| Commercial                                   |       | 5,290,076     |       | 5,289,388       |       | 918,138         |       | 11,497,602 |       |
| Consumer-  other                             |       | 839,602       |       | 1,554,159       |       | 71,621          |       | 2,465,382  |       |
| Total  gross loans, net ofdeferred loan fess |       | $             | 20,604,786 |            | $          | 53,008,206      |       | $          | 32,530,734 |   | $ | 106,143,726 |   |
|                                         |       |          |       |            |       |            |       |       |       |
| Gross  loans maturing after one year with    |       |          |       |            |       |            |       |       |       |
| Fixed  interest rates                        |       |          |       |            |       |            |       | $          | 41,625,430 |   |
| Floating  interest rates                     |       |          |       |            |       |            |       | $          | 43,913,510 |   |
| Total                                        |       |          |       |            |       |            |       | $          | 85,538,940 |   |

 

*Provisionand Allowance for Loan Losses*

 

We haveestablished an allowance for loan losses through a provision for loan lossescharged to expense on our consolidated statement of operations. The allowancefor loan losses was $1,498,937 and $1,688,840 as of December 31, 2009 and December 31,2008, respectively, and represented 1.4% of outstanding loans at December 31,2009 and 1.6% of outstanding loans at December 31, 2008.The allowance for loan losses representsan amount which we believe will be adequate to absorb probable losses onexisting loans that may become uncollectible. Our judgment as to the adequacyof the allowance for loan losses is based on a number of assumptions aboutfuture events, which we believe to be reasonable, but which may or may notprove to be accurate. Our determination of the allowance for loan losses isbased on evaluations of the collectability of loans, including consideration offactors such 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. We adjust the amount of the allowance periodically based onchanging circumstances as a component of the provision for loan losses.

 

We calculate theallowance for loan losses for specific types of loans and evaluate the adequacyon an overall portfolio basis utilizing our credit grading system which weapply to each loan.  We combine our estimates of the reserves needed foreach component of the portfolio, including loans analyzed on a pool basis andloans analyzed individually.  The allowance is divided into two portions: (1) anamount for specific allocations on significant individual credits and (2) ageneral reserve amount.

 

*Specific Reserve*

 

We analyze individualloans within the portfolio and make allocations to the allowance based on eachindividual loan’s specific factors and other circumstances that affect thecollectability of the credit. Significant individual credits classified asdoubtful or substandard/special mention within our credit grading system requireboth individual analysis and specific allocation.

 

37

----

 

Loans in the substandardcategory are characterized by deterioration in quality exhibited by any numberof well-defined weaknesses requiring corrective action such as declining ornegative earnings trends and declining or inadequate liquidity.  Loans inthe doubtful category exhibit the same weaknesses found in the substandardloan; however, the weaknesses are more pronounced.  These loans, however, arenot yet rated as loss because certain events may occur which could salvage thedebt such as injection of capital, alternative financing, or liquidation ofassets.

 

In these situations wherea loan is determined to be impaired (primarily because it is probable that allprincipal and interest due according to the terms of the loan agreement willnot be collected as scheduled), the loan is excluded from the general reservecalculations described below and is assigned a specific reserve.  Thesereserves are based on a thorough analysis of the most probable source ofrepayment which is usually the liquidation of the underlying collateral, butmay also include discounted future cash flows or, in rare cases, the marketvalue of the loan itself.

 

Generally, for largercollateral dependent loans, current market appraisals are ordered to estimatethe current fair value of the collateral.  However, in situations where acurrent market appraisal is not available, management uses the best availableinformation (including recent appraisals for similar properties, communicationswith qualified real estate professionals, information contained in reputabletrade publications and other observable market data) to estimate the currentfair value.  The estimated costs to sell the subject property are thendeducted from the estimated fair value to arrive at the “net realizable value”of the loan and to determine the specific reserve on each impaired loanreviewed.  The credit risk management group periodically reviews the fairvalue assigned to each impaired loan and adjusts the specific reserveaccordingly.

 

*General Reserve*

 

We calculate our generalreserve based on a percentage allocation for each of the effective categoriesof unclassified loan types.  We apply our historical trend loss factors toeach category and adjust these percentages for qualitative or environmentalfactors, as discussed below.  The general estimate is then added to thespecific allocations made to determine the amount of the total allowance for loanlosses.

 

We also maintain ageneral reserve in accordance with December 2006 regulatory interagencyguidance in our assessment of the loan loss allowance.  This generalreserve considers qualitative or environmental factors that are likely to causeestimated credit losses including, but not limited to:  changes indelinquent loan trends, trends in risk grades and net charge offs,concentrations of credit, trends in the nature and volume of the loanportfolio, general and local economic trends, collateral valuations, theexperience and depth of lending management and staff, lending policies andprocedures, the quality of loan review systems, and other external factors.

 

In addition, thecurrent downturn in the real estate market has resulted in an increase in loandelinquencies, defaults and foreclosures, and we believe these trends arelikely to continue.  In some cases, this downturn has resulted in asignificant impairment to the value of our collateral and our ability to sellthe collateral upon foreclosure, and there is a risk that this trend willcontinue.  The real estate collateral in each case provides an alternatesource of repayment in the event of default by the borrower and may deterioratein value during the time the credit is extended.  If real estate valuescontinue to decline, it is also more likely that we would be required toincrease our allowance for loan losses.  Based on present information andan ongoing evaluation, management considers the allowance for loan losses to beadequate to meet presently known and inherent losses in the loanportfolio.  Management’s judgment about the adequacy of the allowance isbased upon a number of assumptions about future events which it believes to bereasonable but which may or may not be accurate.  Thus, there can be noassurance that charge-offs in future periods will not exceed the allowance forloan losses or that additional increases in the allowance for loan losses willnot be required, especially considering the overall weakness in the commercialreal estate market in our market areas.  Management believes estimates ofthe level of allowance for loan losses required have been appropriate and ourexpectation is that the primary factors considered in the provision calculationwill continue to be consistent with prior trends.

 

The Companyidentifies impaired loans through its normal internal loan reviewprocess.  Loans on the Company’s potential problem loan list areconsidered potentially impaired loans.  These loans are evaluated indetermining whether all outstanding principal and interest are expected to becollected.  Loans are not considered impaired if a minimal payment delayoccurs and all amounts due, including accrued interest at the contractualinterest rate for the period of delay, are expected to be collected. During 2009, we identified additional loans to be reviewed individually forimpairment driven primarily by the deterioration in the real estate market inSouth

 

38

----

 

Carolina.  During this time period, we began toexperience increased delinquencies as real estate projects and borrowerpersonal cash reserves became increasingly strained and the underlying projectsbegan to slow significantly.  At the sametime, market appraisal assumptions were declining and, therefore, fair valueswere rapidly revised downward.  Thesefactors contributed to the increase in impaired loans reviewed individually forimpairment and the charge-offs related to such loans during 2009.  Management has determined that the Companyhad $5,015,580 and $421,542 in impaired loans at December 31, 2009 and December 31,2008, respectively.  At December 31, 2009, most of the impaired loansidentified by management are collateral dependent loans therefore theimpairment amount is recorded as a charge-off. Our valuation allowance related to impaired loans totaled $107,822 and$310,804 at December 31, 2009 and December 31, 2008, respectively.

 

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

 

The following table presents a summary related to ourallowance for loan losses for the years ended December 31, 2009 and 2008:

 
| ** **                                     | ** ** | **For the years ended December 31,** | ** **  |
|------------------------------------------------|------------|-------------------------------------------|-------------|
| ** **                                     | ** ** | **2009**                                  | ** **  | **2008** | ** ** |
|                                           |       |                                      |        |   |   |
| Balance  at the beginning of period            |       | $                                         | 1,688,840   |   | $ | 552,600 |   |
| Charge-offs:                                   |       |                                      |        |   |   |
| Commercial,  financial and agricultural        |       | 401,588                                   |        | 53,011 |   |
| Real  estate - mortgage                        |       | 539,851                                   |        | 201,012 |   |
| Real estate - construction                     |       | —                                    |        | — |   |
| Consumer                                       |       | —                                    |        | 827 |   |
| Total  Charged-off                             |       | $                                         | 941,439     |   | $ | 254,850 | - |
| Recoveries:                                    |       |                                      |        |   |   |
| Commercial,  financial and agricultural        |       | 32,599                                    |        | — |   |
| Real  estate - mortgage                        |       | 1,000                                     |        | — |   |
| Consumer                                       |       | —                                    |        | — |   |
| Total  Recoveries                              |       | $                                         | 33,599      |   | $ | -0 | - |
|                                           |       |                                      |        |   |   |
| Net  Charge-offs                               |       | $                                         | 907,840     |   | $ | 254,850 |   |
|                                           |       |                                      |        |   |   |
| Provision  for Loan Loss                       |       | $                                         | 717,937     |   | $ | 1,391,090 |   |
|                                           |       |                                      |        |   |   |
| Balance  at end of period                      |       | $                                         | 1,498,937   |   | $ | 1,688,840 |   |
|                                           |       |                                      |        |   |   |
| Total  loans at end of period                  |       | $                                         | 106,143,726 |   | $ | 107,547,656 |   |
|                                           |       |                                      |        |   |   |
| Average  loans outstanding                     |       | $                                         | 108,869,938 |   | $ | 87,390,666 |   |
|                                           |       |                                      |        |   |   |
| As a  percentage of average loans:             |       |                                      |        |   |   |
| Net  loans charged-off                         |       | .83                                       | %           | .29 | % |
| Provision  for loan losses                     |       | .66                                       | %           | 1.59 | % |
|                                           |       |                                      |        |   |   |
| Allowance  for loan losses as a percentage of: |       |                                      |        |   |   |
| Year  end loans                                |       | 1.41                                      | %           | 1.57 | % |

 

39

----

 

*Non-PerformingAssets*

 

The following table summarizes non-performing assetsand the income that would have been reported on non-accrual loans as of December 31,2009 and 2008:

 
| ** **                              | ** ** | **December 31,** | ** ** |
|-----------------------------------------|------------|-----------------------|------------|
| ** **                              | ** ** | **2009**              | ** ** | **2008** | ** ** |
|                                    |       |                  |       |   |   |
| Other real estate and repossessions     |       | $                     | 501,037    |   | $ | 0 |   |
|                                    |       |                  |       |   |   |
| Non-accrual loans                       |       | $                     | 2,020,974  |   | $ | 294,596 |   |
|                                    |       |                  |       |   |   |
| Accruing loans 90 days or more past due |       | $                     | 196,373    |   | $ | 0 |   |
|                                    |       |                  |       |   |   |
| Total non-performing assets             |       | $                     | 2,718,384  |   | $ | 294,596 |   |
|                                    |       |                  |       |   |   |
| As a percentage of gross loans:         |       | 2.56                  | %          | .27 | % |

 

The Bank charged offloans in the amount of $907,840 for the year ended December 31, 2009,compared to $254,850 charged off in 2008. Approximately $295,000 of the charge-offs for 2009 related to loansidentified as impaired in 2008 and approximately $646,000 of the charge-offsfor 2009 related to loans identified as impaired loans during 2009.  At December 31, 2009, there were 13loans in non-accrual status totaling $2,020,974 compared to 4 loans innonaccrual status that totaling $294,596 at December 31, 2008.  There was one loan totaling $196,373 that wascontractually past due 90 days or more still accruing interest at December 31,2009 and none at December 31, 2008. In addition, there were 9 loans restructured or otherwise impairedtotaling $2,994,606 not already included in nonaccrual status at December 31,2009.  There were no loans restructuredor otherwise impaired not already included in nonaccrual status at December 31,2008.  At December 31, 2009 and2008, impaired loans totaled $5,015,580 and $421,542, respectively.  Management is concerned about the changes inthe nonperforming assets but believes that the allowance has been appropriatelyfunded for additional losses on existing loans, based on currently availableinformation.  The Company will continueto monitor nonperforming assets closely and make changes to the allowance forloan losses when necessary.

 

Generally, a loan will beplaced on 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 loan that is classified as nonaccrual will berecognized as income when received. During the year ended December 31, 2009 and 2008, we received approximately$65,716 and $1,302 in interest income in relation to loans on non-accrualstatus and forgone interest income related to loans on non-accrual status wasapproximately $23,066 and $2,427, respectively.

 

Management believes thatthe amount of nonperforming assets could continue to have a negative effect onthe Company’s condition if current economic conditions do not improve.  As was seen in the 2009 financial results,the effect would be lower earnings caused by larger contributions to the loanloss provision arising from a larger impairment in the loan portfolio and ahigher level of loan charge-offs. Management believes the Company has credit quality review processes inplace to identify problem loans quickly. Management will work with customers that are having difficulties meetingtheir loan payments.  The last resort isforeclosure.

 

*PotentialProblem Loans*

 

Potential problem loansconsist of loans that are generally performing in accordance with contractualterms but for which we have concerns about the ability of the borrower tocontinue to comply with repayment terms because of the borrower’s potentialoperating or financial difficulties.  Managementmonitors these loans closely and reviews performance on a regular basis.  As of December 31, 2009 and 2008,potential problem loans that were not already categorized as nonaccrual totaled$2,994,606 and $126,946, respectively. These loans are considered in determining management’s assessment of theadequacy of the allowance for loan losses.

 

40

----

 

*Deposits*

 

Our primary source for our loans and investments isour deposits.  Total deposits as of theyears ended December 31, 2009 and 2008 were $124,596,710 and $118,534,560,respectively.  The following table showsthe average balance outstanding and the average rates paid on deposits during2009 and 2008.

 
| ** **                            | ** ** | **2009**                  | ** **  | **2008** | ** ** |
|---------------------------------------|------------|---------------------------|-------------|----------|------------|
| ** **                            | ** ** | **Average********Amount** | ** **  | **Rate** | ** ** | **Average********Amount** | ** ** | **Rate** | ** ** |
| Non-interest  bearing demand deposits |       | $                         | 10,460,441  |     | —     | % | $ | 8,189,339 |   | — | % |
| Interest-bearing  checking            |       | 4,395,267                 |        | 0.30     |       | 4,309,880 |   | 0.76 |   |
| Money  market                         |       | 28,665,265                |        | 2.06     |       | 23,309,167 |   | 2.91 |   |
| Savings                               |       | 673,106                   |        | 0.79     |       | 561,479 |   | 0.95 |   |
| Time  deposits less than $100,000     |       | 30,911,199                |        | 2.90     |       | 29,151,636 |   | 4.03 |   |
| Time  deposits $100,000 and over      |       | 42,428,929                |        | 3.06     |       | 26,885,298 |   | 4.05 |   |
| Total                                 |       | $                         | 117,534,207 |     | 2.60       | % | $ | 92,406,799 |   | 3.54 | % |

 

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$81,529,139 at December 31, 2009, compared to $67,718,445 at December 31,2008.  Our loan-to-deposit ratio was85.19% and 90.73% at December 31, 2009 and 2008, respectively.  Due to the competitive interest rateenvironment in our market, we utilized brokered certificates of deposit as afunding source when we were able to procure these certificates at interestrates less than those in the local market. Brokered certificates of deposit purchased outside our primary market totaled$5,295,000 at December 31, 2009, compared to $12,943,000 at December 31,2008.  We expect to continue to decreaseour reliance on brokered deposits as our core deposits continue to grow.

 

The maturity distributionof our time deposits of $100,000 or more and brokered time deposits at December 31,2009 was as follows:

 
| Three  months or less           |   | $          | 11,329,393 |   |
|---------------------------------|--------|------------|------------|--------|
| Over  three through six months  |   | 8,740,399  |       |
| Over  six through twelve months |   | 14,536,816 |       |
| Over  twelve months             |   | 8,460,963  |       |
| Total                           |   | $          | 43,067,571 |   |

 

*Borrowingsand lines of credit*

 

At December 31, 2009, the Bank had short-termlines of credit with correspondent banks to purchase a maximum of $4,300,000 inunsecured federal funds on a one to fourteen day basis and $3,300,000 in unusedfederal funds on a one to thirty day basis for general corporate purposes.  The interest rate on borrowings under theselines is the prevailing market rate for federal funds purchased.  These accommodation lines of credit arerenewable annually and may be terminated at any time at the correspondentbanks’ sole discretion.  At December 31,2009 and 2008, we had no borrowings outstanding on these lines.

 

We are also a member ofthe Federal Home Loan Bank.  At December 31,2009 and 2008, we had $3,000,000 outstanding at an interest rate of 2.615%,with a maturity date of February 25, 2013. The Bank borrowed the funds to reduce the cost of funds on money used tofund loans.  The Bank has remainingcredit availability of $10,290,000 at the Federal Home Loan Bank.

 

41

----

 

**CapitalResources**

 

Total shareholders’equity was $12,196,323 at December 31, 2009, an increase of $2,133,224from $10,063,099 at December 31, 2008. The increase is primarily due to the $3,285,000 the Company receivedunder the TARP CPP during 2009.  Capitalsurplus increased due to stock compensation expense of $222,670 in 2009.Shareholders’ equity was reduced by our net loss of $1,142,922 for the yearended December 31, 2009.  Unrealizedloss on investment securities available for sale decreased shareholders’ equityby $56,978 during 2009.

 

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 Reserveguidelines contain an exemption from the capital requirements for “small bankholding companies”, which in 2006 were amended to cover most bank holding companieswith less than $500 million in total assets that do not have a material amountof debt or equity securities outstanding registered with the SEC.  Although our class of common stock isregistered under Section 12 of the Securities Exchange Act, we believethat because our stock is not listed on any exchange or otherwise activelytraded, the FRB will interpret its new guidelines to mean that we qualify as asmall bank holding company. Nevertheless, our Bank remains subject to these capital requirements.  Failure to meet minimum capital requirementscan initiate certain mandatory and possibly additional discretionary actions byregulators that, if undertaken, could have a direct material effect on theBank’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 calculated under regulatory accounting practices.  The Bank’s capital amounts andclassifications are also subject to qualitative judgments by the regulatorsabout components, risk weightings, and other factors.

 

Under the capitaladequacy guidelines, regulatory capital is classified into two tiers.  These guidelines require an institution tomaintain a certain level of Tier 1 and Tier 2 capital to risk-weightedassets.  Tier 1 capital consists ofcommon shareholders’ equity, excluding the unrealized gain or loss onsecurities available for sale, minus certain intangible assets.  In determining the amount of risk-weightedassets, all assets, including certain off-balance sheet assets, are multipliedby a risk-weight factor of 0% to 100% based on the risks believed to beinherent in the type of asset.  Tier 2capital consists of Tier 1 capital plus the general reserve for loan losses,subject to certain limitations.  We arealso required to maintain capital at a minimum level based on total averageassets, 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.  Under the regulationsadopted by the federal regulatory authorities, a bank will be categorized as:

 

·                  Well capitalized if the institution has a total risk-based capitalratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 6.0% orgreater, a leverage ratio of 5.0% or greater, and is not subject to any orderor written directive by any such regulatory authority to meet and maintain aspecific capital level for any capital measure.

·                  Adequately capitalized if the institution has a total risk-basedcapital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of4.0% or greater, a leverage ratio of 4.0% or greater, and is not categorized aswell capitalized.

·                  Undercapitalized if the institution has a total risk-based capitalratio that is less than 8.0%, a Tier 1 risk-based capital ratio of less than4.0%, or a leverage ratio of less than 4.0%.

·                  Significantly undercapitalized if the institution has a totalrisk-based capital ratio of less than 6.0%, a Tier 1 risk-based capitalratio of less than 3.0%, or a leverage ratio of less than 3.0%.

·                  Critically undercapitalized if the institution’s tangible equity isequal to or less than 2.0% of average quarterly tangible assets.

 

In addition, aninstitution may be downgraded to, or deemed to be in, a capital category thatis lower than indicated by its capital ratios if it is determined to be in anunsafe or unsound condition or if it receives an unsatisfactory examinationrating with respect to certain matters. A bank’s capital category is determined solely for the purpose ofapplying prompt corrective action regulations, and the capital category may notconstitute an accurate representation of a bank’s overall financial conditionor prospects for other purposes.

 

42

----

 

The following table setsforth the Bank’s capital ratios at December 31, 2009 and 2008.  As of December 31, 2009, the Bank wasconsidered “well capitalized.”  As of December 31,2008, the Bank was considered “adequately capitalized.”

 
|                       |   | **2009** |   | **2008** |   |
|----------------------------|--------|----------|--------|----------|--------|
|                       |   |     |   |     |   |   |   |   |   |
| Total  risk-based capital  |   | $        | 10,836 |     | 10.57  | % | $ | 8,878 |   | 8.37 | % |
| Tier  1 risk-based capital |   | 9,542    |   | 9.30     | %      | 7,548 |   | 7.12 | % |
| Leverage  capital          |   | 9,542    |   | 6.99     | %      | 7,548 |   | 5.95 | % |
|                            |        |          |        |          |        |  |  |  |  |  |  |

 

**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 years ended December 31, 2009 and 2008.

 
| ** **                | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|
| Return  on average assets |       | (0.85    | )%         | (3.07    | )%         |
|                      |       |     |       |     |       |
| Return  on average equity |       | (9.40    | )%         | (32.06   | )%         |
|                      |       |     |       |     |       |
| Equity  to assets ratio   |       | 9.06     | %          | 9.58     | %          |

 

**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 have been prepared on an historicalcost basis in accordance with accounting principles generally accepted in theUnited States of America.

 

Unlike most industrialcompanies, our assets and liabilities are primarily monetary in nature.  Therefore, the effect of changes in interestrates will have a more significant impact on our performance than will theeffect of changing prices and inflation in general.  In addition, interest rates may generallyincrease as the rate of inflation increases, although not necessarily in thesame magnitude.  We attempt to manage therelationships 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 commitmentsare legally binding agreements to lend money to our clients at predeterminedinterest rates for a specified period of time. We evaluate each client’s creditworthiness on a case-by-case basis.  The amount of collateral obtained, if deemednecessary by us upon extension of credit, is based on our credit evaluation ofthe borrower.  Collateral varies but mayinclude accounts receivable, inventory, property, plant and equipment,commercial and residential real estate. We manage the credit risk on these commitments by subjecting them tonormal underwriting and risk management processes.  At December 31, 2009, we had issuedcommitments to extend credit of approximately $13,940,000 through various typesof lending arrangements.  There were twostandby letters of credit included in the commitments for $125,000.  Fixed rate commitments were $876,867 andvariable rate commitments were $13,939,784. At December 31, 2008, commitments to extend credit amounted to$23,394,000, which included letters of credit of $110,000.

 

Commitments generallyhave fixed expiration dates or other termination clauses and may require thepayment of a fee. A significant portion of the unfunded commitments relate toconsumer equity lines of credit and commercial lines of credit.  Based on historical experience, we anticipatethat a portion of these lines of credit will not be funded.

 

Except as disclosed inthis document, we are not involved in off-balance sheet contractual relationships,unconsolidated related entities that have off-balance sheet arrangements ortransactions that could result in liquidity needs or other commitments thatsignificantly impact earnings.

 

43

----

 

**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 involvesmonitoring our sources and uses of funds in order to meet our day-to-day cashflow requirements while maximizing profits. Liquidity management is made more complicated because different balancesheet components are subject to varying degrees of management control.  For example, the timing of maturities of ourinvestment portfolio is fairly predictable and subject to a high degree ofcontrol at the time investment decisions are made.  However, net deposit inflows and outflows arefar less predictable and are not subject to the same degree of control.

 

At December 31,2009, our liquid assets, consisting of cash and due from banks, federal fundssold and certificates of deposit with other banks, amounted to $12,451,491, orapproximately 8.9% of total assets.  Ourinvestment securities available for sale at December 31, 2009 amounted to$17,965,661, or approximately 12.8% of total assets.  Unpledged investment securities traditionallyprovide a secondary source of liquidity since they can be converted into cashin a timely manner.  At December 31,2009, $3,783,988 ofour investment securities were pledged to secure public entity deposits and ascollateral for advances from the Federal Home Loan Bank (“FHLB”).

 

Our ability to maintainand expand our deposit base and borrowing capabilities serves as our primarysource of liquidity.  We plan to meet ourfuture cash needs through the liquidation of temporary investments and thegeneration of deposits. In addition, we will receive cash upon the maturitiesand sales of loans and maturities, calls and prepayments on investmentsecurities.  We maintain federal fundspurchased lines of credit with correspondent banks totaling $7,600,000.  Availability on these lines of credit was$7,600,000 at December 31, 2009.  Weare a member of the FHLB, from which applications for borrowings can bemade.  The FHLB requires that investmentsecurities or qualifying mortgage loans be pledged to secure advances fromthem. We are also required to purchase FHLB stock in a percentage of eachadvance.  At December 31, 2009 we hadborrowed $3,000,000 from FHLB.

 

**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 as foreign currency exchange rate riskand commodity price risk, do not generally arise in the normal course of ourbusiness.

 

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 ratesensitivity can be managed by repricing assets or liabilities, sellingsecurities available for sale, replacing an asset or liability at maturity, oradjusting the interest rate during the life of 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 generally would benefit from increasingmarket rates of interest when we have an asset-sensitive gap position andgenerally would benefit from decreasing market rates of interest when we areliability-sensitive.  The Company iscumulatively liability sensitive over the three-month to twelve month periodand asset sensitive over all periods greater than one year. The analysispresents only a static view of the timing of maturities and repricingopportunities, without taking into consideration that changes in interest ratesdo not affect all assets and liabilities equally.  For example, rates paid on a substantial portionof core deposits may change contractually within a relatively short time frame,but those rates are viewed by us as significantly less interest-sensitive thanmarket-based rates such as those paid on noncore deposits.  Net interest income may be affected by othersignificant factors in a given interest rate environment, including changes inthe volume and mix of interest-earning assets and interest-bearing liabilities.

 

**InterestRate Sensitivity**

 

Asset-liabilitymanagement is the process by which we monitor and control the mix and maturitiesof our assets and liabilities.  Theessential purposes of asset-liability management are to ensure adequateliquidity and to maintain an appropriate balance between interest sensitiveassets and liabilities in order to minimize potentially adverse impacts onearnings from changes in market interest rates. Our asset-liability management committee monitors and considers methodsof managing exposure to interest rate risk. The asset-liability management committee is responsible for maintainingthe level of interest rate sensitivity of our interest sensitive assets andliabilities within board-approved limits.

 

44

----

 

The following table setsforth information regarding our rate sensitivity, as of December 31, 2009at each of the time intervals.  Theinformation in the table may not be indicative of our rate sensitivity positionat other points in time.  In addition,the repricing distribution indicated in the table differs from the contractualmaturities of certain interest-earning assets and interest-bearing liabilitiespresented due to consideration of prepayment speeds under various interest ratechange scenarios in the application of the interest rate sensitivity methodsdescribed above.

 
| ** **                                                | ** ** | ** **               | ** ** | **After three**                     | ** ** | **After one but**            | ** ** | ** **            | ** ** | ** ** | ** ** |
|-----------------------------------------------------------|------------|--------------------------|------------|-------------------------------------|------------|------------------------------|------------|-----------------------|------------|------------|------------|
| **December 31,  2009**                               | ** ** | **Within three  months** | ** ** | **But within********twelve months** | ** ** | **within five********years** | ** ** | **After five  years** | ** ** | **Total**  | ** ** |
| Interest-earning  assets:(in thousands)                   |       |                     |       |                                |       |                         |       |                  |       |       |       |
| Certificates  of deposits with other                      |       | $                        | 250        |                                | $          | —                       |       | $                     | —     |       | $          | — |   | $ | 250 |   |
| Federal  funds sold                                       |       | 5,195                    |       | —                              |       | —                       |       | —                |       | 5,195      |       |
| Investment  securities                                    |       | 1,503                    |       | 6,207                               |       | 7,196                        |       | 3,534                 |       | 18,440     |       |
| Loans                                                     |       | 63,038                   |       | 9,003                               |       | 31,062                       |       | 3,041                 |       | 106,144    |       |
| Total  interest-earning assets                            |       | $                        | 69,986     |                                | $          | 15,210                       |       | $                     | 38,258     |       | $          | 6,575 |   | $ | 130,029 |   |
|                                                      |       |                     |       |                                |       |                         |       |                  |       |       |       |
| Interest-bearing  liabilities:(in thousands)              |       |                     |       |                                |       |                         |       |                  |       |       |       |
| Interest-bearing  checking                                |       | $                        | 4,756      |                                | $          | —                       |       | $                     | —     |       | $          | — |   | $ | 4,756 |   |
| Money  market and savings                                 |       | 33,707                   |       | —                              |       | —                       |       | —                |       | 33,707     |       |
| Time  deposits                                            |       | 17,941                   |       | 44,361                              |       | 12,113                       |       | —                |       | 74,415     |       |
| Federal  funds purchased                                  |       | —                   |       | —                              |       | —                       |       | —                |       | —     |       |
| FHLB  Advances                                            |       | —                   |       | —                              |       | 3,000                        |       |                  |       | 3,000      |       |
| Total  interest-bearing                                   |       |                     |       |                                |       |                         |       |                  |       |       |       |
| Liabilities                                               |       | $                        | 56,404     |                                | $          | 44,361                       |       | $                     | 15,113     |       | $          | — |   | $ | 115,878 |   |
|                                                      |       |                     |       |                                |       |                         |       |                  |       |       |       |
| Period  gap                                               |       | $                        | 13,582     |                                | $          | (29,151                      | )          | $                     | 23,145     |       | $          | 6,575 |   | 14,151 |   |
| Cumulative  gap                                           |       | $                        | (3,662     | )                                   | $          | (12,642                      | )          | $                     | (23,769    | )          | $          | 34,150 |   | (5,923 | ) |
| Ratio  of cumulative gap to total interest-earning assets |       | (2.82                    | )%         | (9.72                               | )%         | (18.28                       | )%         | 26,26                 | %          | 4.56       | %          |

 

**Item 7A.  Quantitativeand Qualitative Disclosures About Market Risk.**

 

Not applicable.

 

45

----

 

**Item 8.  FinancialStatements and Supplementary Data**

 

**INDEX TO AUDITED FINANCIAL STATEMENTS**

 

**CONGAREE BANCSHARES, INC. AND SUBSIDIARY**

 
| ** **                                                                              | ** ** | **Page No.** |
|-----------------------------------------------------------------------------------------|------------|-------------------|
|                                                                                    |       |              |
| Report of Independent Registered Public Accounting  Firm                                |       | 47                |
| Consolidated  Balance Sheets                                                            |       | 48                |
| Consolidated Statements of Operations                                                   |       | 49                |
| Consolidated Statements of Changes in Shareholders’  Equity and Comprehensive Loss |       | 50                |
| Consolidated Statements of Cash Flows                                                   |       | 51                |
| Notes  to Consolidated Financial Statements                                             |       | 52                |

 

46

----

 

## **REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM**

## ** **

The Board of Directors

Congaree Bancshares, Inc.and Subsidiary

Cayce, South Carolina

 

We have audited theaccompanying consolidated balance sheets of Congaree Bancshares, Inc. andSubsidiary as of December 31, 2009 and 2008, and the related consolidatedstatements of operations, changes in shareholders’ equity and comprehensiveloss, and cash flows for theyears then ended.  Thesefinancial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these consolidated financial statements based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable 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, 2009 and 2008, and the results of theiroperations and cash flows forthe years then ended, in conformity with accounting principlesgenerally accepted in the United States of America.

 

We were not engaged toexamine management’s assessment about the effectiveness of Congaree Bancshares, Inc.and its Subsidiary’s internal control over financial reporting as of December 31,2009 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

Elliott Davis, LLC

Columbia, South Carolina

March 29, 2010

 

47

----

 

# **CONGAREE BANCSHARES, INC. AND SUBSIDIARY**

# ** **

# **ConsolidatedBalance Sheets**

# ** **

| ** **                                                                                                                                       | ** ** | **December 31,** | ** **      |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|-----------------|
| ** **                                                                                                                                       | ** ** | **2009**              | ** **      | **2008** | ** ** |
| **Assets:**                                                                                                                                      |       |                  |            |   |   |
| Cash and cash equivalents:                                                                                                                       |       |                  |            |   |   |
| Cash and due from banks                                                                                                                          |       | $                     | 7,006,281       |   | $ | 4,130,319 |   |
| Federal funds sold                                                                                                                               |       | 5,195,000             |            | 3,494,000 |   |
| Certificates of deposit with other banks                                                                                                         |       | 250,210               |            | — |   |
|                                                                                                                                             |       |                  |            |   |   |
| Total cash and cash equivalents                                                                                                                  |       | 12,451,491            |            | 7,624,319 |   |
|                                                                                                                                             |       |                  |            |   |   |
| Securities available-for-sale                                                                                                                    |       | 17,965,661            |            | 13,843,218 |   |
| Nonmarketable equity securities                                                                                                                  |       | 474,300               |            | 435,952 |   |
|                                                                                                                                             |       |                  |            |   |   |
| Loans receivable                                                                                                                                 |       | 106,143,726           |            | 107,547,656 |   |
| Less allowance for loan losses                                                                                                                   |       | 1,498,937             |            | 1,688,840 |   |
|                                                                                                                                             |       |                  |            |   |   |
| Loans, net                                                                                                                                       |       | 104,644,789           |            | 105,858,816 |   |
|                                                                                                                                             |       |                  |            |   |   |
| Premises, furniture and equipment, net                                                                                                           |       | 3,410,687             |            | 3,667,099 |   |
| Accrued interest receivable                                                                                                                      |       | 479,112               |            | 472,880 |   |
| Other real estate owned                                                                                                                          |       | 501,037               |            | — |   |
| Other assets                                                                                                                                     |       | 109,394               |            | 101,820 |   |
|                                                                                                                                             |       |                  |            |   |   |
| Total assets                                                                                                                                     | ** ** | **$**                 | **140,036,471** | ** ** | **$** | **132,004,104** | ** ** |
|                                                                                                                                             | ** ** | ** **            | ** **      | ** ** | ** ** |
| **Liabilities:**                                                                                                                                 |       |                  |            |   |   |
| Deposits:                                                                                                                                        |       |                  |            |   |   |
| Noninterest-bearing transaction accounts                                                                                                         |       | $                     | 11,719,046      |   | $ | 11,190,632 |   |
| Interest-bearing transaction accounts                                                                                                            |       | 4,756,331             |            | 4,358,995 |   |
| Savings and money market                                                                                                                         |       | 33,706,925            |            | 24,905,711 |   |
| Time deposits $100,000 and over                                                                                                                  |       | 43,067,571            |            | 45,288,107 |   |
| Other time deposits                                                                                                                              |       | 31,346,837            |            | 32,791,115 |   |
|                                                                                                                                             |       |                  |            |   |   |
| Total deposits                                                                                                                                   |       | 124,596,710           |            | 118,534,560 |   |
|                                                                                                                                             |       |                  |            |   |   |
| Federal Home Loan Bank advances                                                                                                                  |       | 3,000,000             |            | 3,000,000 |   |
| Accrued interest payable                                                                                                                         |       | 70,436                |            | 224,434 |   |
| Other liabilities                                                                                                                                |       | 173,002               |            | 182,011 |   |
|                                                                                                                                             |       |                  |            |   |   |
| Total liabilities                                                                                                                                |       | 127,840,148           |            | 121,941,005 |   |
|                                                                                                                                             |       |                  |            |   |   |
| Commitments and contingencies (Notes 13, 14 and  19)                                                                                             |       |                  |            |   |   |
|                                                                                                                                             |       |                  |            |   |   |
| **Shareholders’ equity:**                                                                                                                   |       |                  |            |   |   |
| Preferred stock, $.01 par value, 10,000,000 shares  authorized:                                                                                  |       |                  |            |   |   |
| Series A cumulative perpetual preferred  stock; 3,285 and 0 shares issued and outstanding at  December 31, 2009 and 2008, respectively |       | 3,135,530             |            | — |   |
| Series B cumulative perpetual preferred  stock; 164 and 0 shares issued and  outstanding at December 31, 2009 and 2008, respectively   |       | 178,599               |            | — |   |
| Common stock, $.01 par value, 10,000,000 shares  authorized; 1,764,439 shares issued and outstanding                                             |       | 17,644                |            | 17,644 |   |
| Capital surplus                                                                                                                                  |       | 17,658,940            |            | 17,436,270 |   |
| Retained deficit                                                                                                                                 |       | (8,959,528            | )               | (7,612,931 | ) |
| Accumulated other comprehensive income                                                                                                           |       | 165,138               |            | 222,116 |   |
|                                                                                                                                             |       |                  |            |   |   |
| Total shareholders’ equity                                                                                                                  |       | 12,196,323            |            | 10,063,099 |   |
|                                                                                                                                             |       |                  |            |   |   |
| Total liabilities and shareholders’ equity                                                                                                  | ** ** | **$**                 | **140,036,471** | ** ** | **$** | **132,004,104** | ** ** |

 

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

 

48

----

 

# **CONGAREE BANCSHARES, INC. AND SUBSIDIARY**

 

**Consolidated Statements of Operations**

 
| ** **                                                          | ** ** | **For the years ended  December 31,** | ** **     |
|---------------------------------------------------------------------|------------|--------------------------------------------|----------------|
| ** **                                                          | ** ** | **2009**                                   | ** **     | **2008** | ** ** |
| **Interest income:**                                                |       |                                       |           |   |   |
| Loans,  including fees                                              |       | $                                          | 5,984,716      |   | $ | 5,496,365 |   |
| Securities  available-for-sale, taxable                             |       | 648,748                                    |           | 745,149 |   |
| Federal  funds sold                                                 |       | 20,917                                     |           | 37,912 |   |
|                                                                |       |                                       |           |   |   |
| Total                                                               |       | 6,654,381                                  |           | 6,279,426 |   |
|                                                                |       |                                       |           |   |   |
| **Interest expense:**                                               |       |                                       |           |   |   |
| Time  deposits $100,000 and over                                    |       | 1,228,896                                  |           | 1,081,167 |   |
| Other  deposits                                                     |       | 1,553,517                                  |           | 1,905,625 |   |
| Other  borrowings                                                   |       | 85,883                                     |           | 119,693 |   |
|                                                                |       |                                       |           |   |   |
| Total                                                               |       | 2,868,296                                  |           | 3,106,485 |   |
|                                                                |       |                                       |           |   |   |
| **Net interest income**                                             |       | 3,786,085                                  |           | 3,172,941 |   |
| ** **                                                          |       |                                       |           |   |   |
| Provision  for loan losses                                          |       | 717,937                                    |           | 1,391,090 |   |
|                                                                |       |                                       |           |   |   |
| **Net interest income after provision for loan  losses**            |       | 3,068,148                                  |           | 1,781,851 |   |
| ** **                                                          |       |                                       |           |   |   |
| **Noninterest income:**                                             |       |                                       |           |   |   |
| Service  charges on deposit accounts                                |       | 138,558                                    |           | 81,517 |   |
| Residential  mortgage origination fees                              |       | 98,177                                     |           | 168,122 |   |
| Gain  on sale of securities available-for-sale                      |       | 114,571                                    |           | 71,599 |   |
| Gain  (loss) on sale of assets                                      |       | 3,423                                      |           | (83,570 | ) |
| Other-than-temporary  impairment on nonmarketable equity securities |       | (60,352                                    | )              | (94,993 | ) |
| Other                                                               |       | 41,925                                     |           | 65,632 |   |
|                                                                |       |                                       |           |   |   |
| Total  noninterest income                                           |       | 336,302                                    |           | 208,307 |   |
|                                                                |       |                                       |           |   |   |
| **Noninterest expenses:**                                           |       |                                       |           |   |   |
| Salaries  and employee benefits                                     |       | 2,361,927                                  |           | 3,137,426 |   |
| Net  occupancy                                                      |       | 420,116                                    |           | 379,300 |   |
| Furniture  and equipment                                            |       | 391,661                                    |           | 421,964 |   |
| Professional  fees                                                  |       | 397,060                                    |           | 263,491 |   |
| Regulatory  fees and FDIC assessment                                |       | 290,845                                    |           | 96,370 |   |
| Other  operating                                                    |       | 685,763                                    |           | 994,546 |   |
|                                                                |       |                                       |           |   |   |
| Total  noninterest expense                                          |       | 4,547,372                                  |           | 5,293,097 |   |
|                                                                |       |                                       |           |   |   |
| **Loss before income taxes**                                        |       | (1,142,922                                 | )              | (3,302,939 | ) |
| ** **                                                          |       |                                       |           |   |   |
| Income  tax benefit                                                 |       | —                                     |           | — |   |
|                                                                |       |                                       |           |   |   |
| **Net loss**                                                        | ** ** | **$**                                      | **(1,142,922** | **)** | **$** | **(3,302,939** | **)** |
| ** **                                                          | ** ** | ** **                                 | ** **     | ** ** | ** ** |
| Net  accretion of preferred stock to redemption value               |       | $                                          | 29,129         |   | $ | — |   |
| Preferred  dividends accrued                                        |       | 174,546                                    |           | — |   |
|                                                                |       |                                       |           |   |   |
| **Net loss available to common shareholders**                       | ** ** | **$**                                      | **(1,346,597** | **)** | **$** | **(3,302,939** | **)** |
| ** **                                                          | ** ** | ** **                                 | ** **     | ** ** | ** ** |
| **Loss per common share**                                           |       |                                       |           |   |   |
| Basic  loss per share                                               | ** ** | **$**                                      | **(0.76**      | **)** | **$** | **(1.87** | **)** |
|                                                                | ** ** | ** **                                 | ** **     | ** ** | ** ** |
| Average  common shares outstanding                                  | ** ** | **1,764,439**                              | ** **     | **1,764,439** | ** ** |

 

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

 

49

----

 

**CONGAREEBANCSHARES, INC. AND SUBSIDIARY**

 

**Consolidated Statements of Changes inShareholders’ Equity and Comprehensive Loss**

**Forthe years ended December 31, 2009 and 2008**

 
| ** **                                                | ** ** | ** **        | ** ** | ** **           | ** ** | ** **  | ** ** | ** **   | ** ** | ** **        | ** ** | ** **  | ** **     | **Accumulated** | ** ** | ** **     | ** ** |
|-----------------------------------------------------------|------------|-------------------|------------|----------------------|------------|-------------|------------|--------------|------------|-------------------|------------|-------------|----------------|-----------------|------------|----------------|------------|
| ** **                                                | ** ** | ** **        | ** ** | ** **           | ** ** | ** **  | ** ** | ** **   | ** ** | ** **        | ** ** | ** **  | ** **     | **Other**       | ** ** | ** **     | ** ** |
| ** **                                                | ** ** | **Common  Stock** | ** ** | **Preferred  Stock** | ** ** | **Capital** | ** ** | **Retained** | ** ** | **Comprehensive** | ** ** | ** **  | ** **     |
| ** **                                                | ** ** | **Shares**        | ** ** | **Amount**           | ** ** | **Shares**  | ** ** | **Amount**   | ** ** | **Surplus**       | ** ** | **Deficit** | ** **     | **Income**      | ** ** | **Total**      | ** ** |
| **Balance,****December 31,  2007**                   |       | 1,764,439         |       | $                    | 17,644     |        | —     |         | $          | —            |       | $           | 17,141,232     |            | $          | (4,309,992     | )          | $ | 86,904 |   | $ | 12,935,788 |   |
| ** **                                                |       |              |       |                 |       |        |       |         |       |              |       |        |           |            |       |           |       |
| Net loss                                                  |       |              |       |                 |       |        |       |         |       |              |       | (3,302,939  | )              |            |       | (3,302,939     | )          |
|                                                      |       |              |       |                 |       |        |       |         |       |              |       |        |           |            |       |           |       |
| Other comprehensive income, net  of taxes of ($69,655)    |       |              |       |                 |       |        |       |         |       |              |       |        |           | 135,212         |       | 135,212        |       |
|                                                      |       |              |       |                 |       |        |       |         |       |              |       |        |           |            |       |           |       |
| Comprehensive loss                                        |       |              |       |                 |       |        |       |         |       |              |       |        |           |            |       | (3,167,727     | )          |
|                                                      |       |              |       |                 |       |        |       |         |       |              |       |        |           |            |       |           |       |
| Stock and warrant compensation  expense                   |       |              |       |                 |       |        |       |         |       | 295,038           |       |        |           |            |       | 295,038        |       |
|                                                      |       |              |       |                 |       |        |       |         |       |              |       |        |           |            |       |           |       |
| **Balance,****December 31,  2008**                   |       | 1,764,439         |       | 17,644               |       | —      |       | —       |       | 17,436,270        |       | (7,612,931  | )              | 222,116         |       | 10,063,099     |       |
| ** **                                                |       |              |       |                 |       |        |       |         |       |              |       |        |           |            |       |           |       |
| Issuance of Series A preferred  stock                |       |              |       |                 |       | 3,285       |       | 3,103,339    |       |              |       |        |           |            |       | 3,103,339      |       |
| Issuance of Series B preferred  stock                |       |              |       |                 |       | 164         |       | 181,661      |       |              |       |        |           |            |       | 181,661        |       |
| Accretion of Series A discount on  preferred stock   |       |              |       |                 |       |        |       | 32,191       |       |              |       | (32,191     | )              |            |       | —         |       |
| Amortization of Series B premium  on preferred stock |       |              |       |                 |       |        |       | (3,062       | )          |              |       | 3,062       |           |            |       | —         |       |
| Dividends paid on preferred stock                         |       |              |       |                 |       |        |       |         |       |              |       | (174,546    | )              |            |       | (174,546       | )          |
| Net loss                                                  |       |              |       |                 |       |        |       |         |       |              |       | (1,142,922  | )              |            |       | (1,142,922     | )          |
| Other comprehensive loss, net  of taxes of $29,355        |       |              |       |                 |       |        |       |         |       |              |       |        |           | (56,978         | )          | (56,978        | )          |
|                                                      |       |              |       |                 |       |        |       |         |       |              |       |        |           |            |       |           |       |
| Comprehensive loss                                        |       |              |       |                 |       |        |       |         |       |              |       |        |           |            |       | (1,199,900     | )          |
|                                                      |       |              |       |                 |       |        |       |         |       |              |       |        |           |            |       |           |       |
| Stock and warrant compensation  expense                   |       |              |       |                 |       |        |       |         |       | 222,670           |       |        |           |            |       | 222,670        |       |
|                                                      |       |              |       |                 |       |        |       |         |       |              |       |        |           |            |       |           |       |
| **Balance,****December 31,  2009**                   |       | **1,764,439**     |       | **$**                | **17,644** |        | **3,449**  |         | **$**      | **3,314,129**     |       | **$**       | **17,658,940** |            | **$**      | **(8,959,528** | **)**      | **$** | **165,138** |   | **$** | **12,196,323** |   |

 

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

 

50

----

 

**CONGAREE BANCSHARES, INC. ANDSUBSIDIARY**

 

**Consolidated Statements of Cash Flows**

**Forthe years ended December 31, 2009 and 2008**

 
| ** **                                                                   | ** ** | **For the years ended  December 31,** | ** **     |
|------------------------------------------------------------------------------|------------|--------------------------------------------|----------------|
| ** **                                                                   | ** ** | **2009**                                   | ** **     | **2008** | ** ** |
| **Cash flows from operating activities:**                                    |       |                                       |           |   |   |
| Net loss                                                                     |       | $                                          | (1,142,922     | ) | $ | (3,302,939 | ) |
| Adjustments to reconcile net loss to net cash used  by operating activities: |       |                                       |           |   |   |
| Provision for loan losses                                                    |       | 717,937                                    |           | 1,391,090 |   |
| Depreciation and amortization expense                                        |       | 256,213                                    |           | 271,210 |   |
| Discount accretion and premium amortization                                  |       | (23,336                                    | )              | (50,519 | ) |
| Stock and warrant compensation expense                                       |       | 222,670                                    |           | 295,038 |   |
| Increase in accrued interest receivable                                      |       | (6,232                                     | )              | (134,697 | ) |
| Increase (decrease) in accrued interest payable                              |       | (153,998                                   | )              | 159,415 |   |
| Gain on sale of securities available-for-sale                                |       | (114,571                                   | )              | (71,599 | ) |
| Loss (gain) on sale of assets                                                |       | (3,423                                     | )              | 83,570 |   |
| Other-than-temporary impairment on nonmarketable equity securities           |       | 60,352                                     |           | 94,993 |   |
| (Increase) decrease in other assets                                          |       | 21,780                                     |           | (59,737 | ) |
| Increase (decrease) in other liabilities                                     |       | (31,396                                    | )              | 72,277 |   |
|                                                                         |       |                                       |           |   |   |
| Net cash used by operating activities                                        |       | (196,926                                   | )              | (1,251,898 | ) |
|                                                                         |       |                                       |           |   |   |
| **Cash flows from investing activities:**                                    |       |                                       |           |   |   |
| Purchase of nonmarketable equity securities                                  |       | (98,700                                    | )              | (262,700 | ) |
| Proceeds from maturities/calls of securities  available-for-sale             |       | 3,122,852                                  |           | 2,344,843 |   |
| Proceeds from sales of securities  available-for-sale                        |       | 3,530,088                                  |           | 2,244,612 |   |
| Purchases of securities available-for-sale                                   |       | (10,723,808                                | )              | (3,275,134 | ) |
| Net increase in loans receivable                                             |       | (4,947                                     | )              | (52,779,202 | ) |
| Purchase of premises, furniture and equipment                                |       | (87,243                                    | )              | (443,386 | ) |
| Proceeds from sales of other real estate owned                               |       | —                                     |           | 226,165 |   |
| Proceeds from sales of premises, furniture and  equipment                    |       | 90,865                                     |           | 496,874 |   |
|                                                                         |       |                                       |           |   |   |
| Net cash used by investing activities                                        |       | (4,170,893                                 | )              | (51,447,928 | ) |
|                                                                         |       |                                       |           |   |   |
| **Cash flows from financing activities:**                                    |       |                                       |           |   |   |
| Increase in noninterest-bearing deposits                                     |       | 528,414                                    |           | 6,278,915 |   |
| Increase in interest-bearing deposits                                        |       | 5,533,736                                  |           | 51,975,835 |   |
| Decrease in federal funds purchased                                          |       | —                                     |           | (3,658,000 | ) |
| Decrease in securities sold under agreements to  repurchase                  |       | —                                     |           | (1,395,326 | ) |
| Proceeds from Federal Home Loan Bank advances                                |       | —                                     |           | 3,000,000 |   |
| Proceeds from issuance of preferred stock                                    |       | 3,285,000                                  |           | — |   |
| Dividends paid on preferred stock                                            |       | (152,159                                   | )              | — |   |
|                                                                         |       |                                       |           |   |   |
| Net cash provided by financing activities                                    |       | 9,194,991                                  |           | 56,201,424 |   |
|                                                                         |       |                                       |           |   |   |
| **Net increase in cash and cash equivalents**                                |       | 4,827,172                                  |           | 3,501,598 |   |
| ** **                                                                   |       |                                       |           |   |   |
| **Cash and cash equivalents, beginning of period**                           |       | 7,624,319                                  |           | 4,122,721 |   |
| ** **                                                                   |       |                                       |           |   |   |
| **Cash and cash equivalents, end of period**                                 | ** ** | **$**                                      | **12,451,491** | ** ** | **$** | **7,624,319** | ** ** |

 

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

 

51

----

 

**CONGAREE BANCSHARES, INC. ANDSUBSIDIARY**

 

### **NOTE1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

### ** **

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

 

**Management’sEstimates** -The preparation of consolidated financial statements in conformity withaccounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofincome and expenses during the reporting period.  Actual results could differ from thoseestimates.

 

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 the determination of the allowances for losses onloans and foreclosed real estate, management obtains independent appraisals forsignificant properties.  Management mustalso make estimates in determining the estimated useful lives and methods fordepreciating 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 integral part of their examination process,periodically review the Company’s allowances for losses on loans and foreclosedreal 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 reasonablypossible that the allowances for losses on loans and foreclosed real estate maychange materially in the near term.

 

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

 

The Company makes loansto individuals and small businesses for various personal and commercialpurposes primarily in the Lexington County region of South Carolina.  The Company’s loan portfolio is notconcentrated in loans to any single borrower or a relatively small number ofborrowers.  Additionally, Management isnot aware of any concentrations of loans to classes of borrowers or industriesthat would 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 is no concentration of credit riskassociated with its lending policies or practices.  Additionally, there are industry practicesthat could subject the Company to increased credit risk should economic conditionschange over the course of a loan’s life. For example, the Company makesvariable rate loans and fixed rate principal-amortizing loans with maturitiesprior to the loan being fully paid (i.e. balloon payment loans).  These loans are underwritten and monitored tomanage the associated risks.  Therefore,management believes that these particular practices do not subject the Companyto unusual credit risk.

 

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

 

52

----

 

**NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES***- continued*

### ** **

**Securities Available-for-Sale******- Securities available-for-sale are carried atamortized cost and adjusted to estimated market value by recognizing theaggregate unrealized gains or losses in a valuation account.  Aggregate market valuation adjustments arerecorded in shareholders’ equity net of deferred income taxes.  Management evaluates investment securitiesfor other-than-temporary impairment on a quarterly basis. A decline in themarket value of any investment below cost that is deemed other-than-temporaryis charged to earnings for the decline in value deemed to be credit related.The decline in value attributed to non-credit related factors is recognized inother comprehensive income and a new cost basis in the security isestablished.  The adjusted cost basis ofinvestments available-for-sale is determined by specific identification and isused in computing the gain or loss upon sale.

 

**Nonmarketable Equity Securities** - Nonmarketable equity securitiesinclude the cost of the Company’s investment in the stock of the Federal HomeLoan Bank, Pacific Coast Bankers Bank, and Silverton Bank.  These stocks have no quoted market value andno ready market exists.  The Company’sinvestment in Federal Home Loan Bank stock at December 31, 2009 and 2008was $372,300 and $273,600, respectively. The Company’s investment in Pacific Coast Bankers Bank stock at December 31,2009 and 2008 was $102,000.  The Company’sinvestment in Silverton Bank stock at December 31, 2008 was $60,352 afteran other-than-temporary impairment charge of $94,993 during 2008.  During 2009, the Bank recognized another-than-temporary impairment charge on the remaining Silverton Bank stockbalance of $60,352.

 

**LoansReceivable** -Loans are stated at their unpaid principal balance.  Interest income is computed using the simpleinterest method and is 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.  Wheninterest accruals are discontinued, income earned but not collected isreversed.

 

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 on the Company’s problem loan watchlist are considered potentially impaired loans. These loans are evaluated in determining whether all outstandingprincipal and interest are expected to be collected.  Loans are not considered impaired if aminimal payment delay occurs and all amounts due, including accrued interest atthe contractual interest rate for the period of delay, are expected to becollected.

 

**Allowancefor Loan Losses** - Allowance for loanlosses is established through a provision for loan losses charged to expense.Loans are charged against the allowance for loan losses when managementbelieves that the collection of the principal is unlikely. The allowancerepresents an amount, which, in management’s judgment, will be adequate toabsorb probable losses on existing loans that may become uncollectible.

 

Management’s judgment in determining the adequacy of the allowance isbased on evaluations of the probability of collection of loans. Theseevaluations take into consideration such factors as changes in the nature andvolume of the loan portfolio, current economic conditions that may affect theborrower’s ability to pay, overall portfolio quality, and review of specificproblem loans.

 

Management uses an outsourced independent loan review specialist on anannual basis to corroborate and challenge the internal loan grading system andmethods used to determine the adequacy of the allowance for loan losses.

 

Management believes the allowance for loan losses is adequate. While managementuses available information to recognize losses on loans, future additions tothe allowance may be necessary based on changes in economic conditions. Inaddition, regulatory agencies, as an integral part of their examinationprocess, periodically review the allowance for loan losses. Such regulators mayrequire additions to the allowance based on their judgments of informationavailable to them at the time of their examination.

 

53

----

 

**NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES*********- continued*

 

**Premises,Furniture and Equipment** - Premises, furniture and equipment are stated atcost, less accumulated depreciation. The provision for depreciation is computedby the straight-line method, based on the estimated useful lives for buildingsand improvements of 40 years, furniture and equipment of 5 to 10 years andsoftware of 5 years.  The cost of assetssold or otherwise disposed of and the related allowance for depreciation areeliminated from the accounts and the resulting gains or losses are reflected inthe income statement when incurred. Maintenance and repairs are charged to current expense. The costs ofmajor renewals and improvements are capitalized.

 

**Other Real Estate Owned** - Other real estate owned represents properties acquired through or inlieu of loan foreclosure and is initially recorded at fair market value lessestimated disposal costs.  Costs ofimprovements are capitalized, whereas costs relating to holding other realestate and valuation adjustments are expensed. Revenue and expenses from operations and changes in valuation allowanceare included in net expenses from foreclosed assets.

 

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

 

**Advertising Expense** - Advertising and public relations costsare generally expensed as incurred. External costs incurred in producing media advertising are expensed thefirst time the advertising takes place. External costs relating to direct mailing costs are expended in theperiod in which the direct mailings are sent.

 

**Loss PerShare** - Basicloss per share represents income available to shareholders divided by theweighted-average number of common shares outstanding during the period.  Dilutive loss per share reflects additionalcommon shares that would have been outstanding if dilutive potential commonshares had been issued.  The onlypotential common share equivalents are those related to stock options andwarrants.  Stock options and warrantswhich are antidilutive are excluded from the calculation of diluted net incomeper share.  Since the Company is in a netloss position for the years ended December 31, 2009 and 2008, potentialdilutive common shares were not included, because to do so would beantidilutive.

 

**Stock-BasedCompensation**- The Company accountsfor its stock compensation plans using a fair value based method wherebycompensation cost is measured at the grant date based on the value of the awardand is recognized over the service period, which is usually the vesting period.

 

**Comprehensive Income** - Accounting principles generallyrequire that recognized income, expenses, gains, and losses be included in netincome.  Although certain changes inassets and liabilities, such as unrealized gains and losses on available-for-salesecurities, are reported as a separate component of the equity section of thebalance sheet, such items, along with net income, are components ofcomprehensive income.

 

The components of othercomprehensive income and related tax effects are as follows for the years endedDecember 31, 2009 and 2008.

 
| ** **                                                             | ** ** | **2009** | ** **  | **2008** | ** ** |
|------------------------------------------------------------------------|------------|----------|-------------|----------|------------|
|                                                                   |       |     |        |     |       |
| Unrealized  gains (losses) on securities available-for-sale            |       | $        | 28,238      |     | $          | 276,466 |   |
| Reclassification  adjustment for (gains) losses realized in net income |       | (114,571 | )           | (71,599  | )          |
|                                                                   |       |     |        |     |       |
| Net  unrealized gains (losses) on securities                           |       | (86,333  | )           | 204,867  |       |
|                                                                   |       |     |        |     |       |
| Tax  effect                                                            |       | 29,355   |        | (69,655  | )          |
|                                                                   |       |     |        |     |       |
| Net-of-tax  amount                                                     | ** ** | **$**    | **(56,978** | **)**    | **$**      | **135,212** | ** ** |

 

54

----

 

**NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES***- continued*

 

**Statementof Cash Flows**- For purposes of reporting cash flows in the financial statements, the Companyconsiders certain highly liquid debt instruments purchased with a maturity ofthree months or less to be cash equivalents. Cash equivalents include amounts due from banks and federal fundssold.  Generally, federal funds are soldfor one-day periods.

 

Interest paid on depositsand other borrowings totaled $3,022,294 and $2,947,000 for the years ended December 31,2009 and 2008, respectively.  Changes inthe valuation account for securities available-for-sale, including deferred taxeffects, are considered non-cash transactions for purposes of the statement ofcash flows and are presented in detail in the notes to the financialstatements.  In addition, transfers ofloans to other real estate owned and changes in dividends payable are alsoconsidered non-cash transactions.  TheBank transferred loans in the amount of $501,037 and $230,600 to other realestate owned during the years ended December 31, 2009 and 2008,respectively.  The change in dividendspayable was $22,387 during the years ended December 31, 2009.  The Company did not have any dividendspayable during 2008.

 

There were no income taxpayments during the years ended December 31, 2009 and 2008.

 

**Off-BalanceSheet Financial Instruments** - In the ordinary course of business, the Companyenters into off-balance sheet financial instruments consisting of commitmentsto extend credit and letters of credit. These financial instruments are recorded in the financial statementswhen they become payable by the customer.

 

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

 

The Company is subject tothe regulations of various governmental agencies.  These regulations can and do changesignificantly from period to period.  TheCompany also undergoes periodic examinations by the regulatory agencies, whichmay subject it to further changes with respect to asset valuations, amounts ofrequired loss allowances and operating restrictions from the regulators’judgments based on information available to them at the time of theirexamination.

 

**RecentAccounting Pronouncements** - The following is a summary of recent authoritativepronouncements that may affect accounting, reporting, and disclosure offinancial information by the Company:

 

In June 2009, the Financial AccountingStandards Board (“FASB”) issued guidance which restructured generally acceptedaccounting principles (“GAAP”) and simplified access to all authoritativeliterature by providing a single source of authoritative nongovernmentalGAAP.  The guidance is presented in atopically organized structure referred to as the FASB Accounting StandardsCodification (“ASC”). The new structure is effective for interim or annualperiods ending after September 15, 2009. All existing accounting standardshave been superseded and all other accounting literature not included isconsidered nonauthoritative.

 

The FASB issued new accounting guidance onaccounting for transfers of financial assets in June 2009.  The guidance limits the circumstances inwhich a financial asset should be derecognized when the transferor has nottransferred the entire financial asset by taking into consideration thetransferor’s continuing involvement.  Thestandard requires that a transferor recognize and initially measure at fairvalue all assets obtained (including a transferor’s beneficial interest) andliabilities incurred as a result of a transfer of financial assets accountedfor as a sale.  The concept of aqualifying special-purpose entity is no longer applicable.  The standard is effective for the firstannual reporting period that begins after November 15, 2009, for interimperiods within the first annual reporting period, and for interim and annualreporting periods thereafter.  Earlierapplication is prohibited.  The Companydoes not expect the guidance to have any impact on the Company’s financialstatements.

 

55

----

 

**NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES***- continued*

### ** **

**Recent Accounting Pronouncements***(continued)* - In January, 2010, guidance was issued toalleviate diversity in the accounting for distributions to shareholders thatallow the shareholder to elect to receive their entire distribution in cash orshares but with a limit on the aggregate amount of cash to be paid.  The amendment states that the stock portionof a distribution to shareholders that allows them to elect to receive cash orshares with a potential limitation on the total amount of cash that allshareholders can elect to receive in the aggregate is considered a shareissuance.  The amendment is effective forinterim and annual periods ending on or after December 15, 2009 and had noimpact on the Company’s financial statements.

 

Also in January, 2010, an amendment was issuedto clarify the scope of subsidiaries for consolidation purposes.  The amendment provides that the decrease inownership guidance should apply to (1) a subsidiary or group of assetsthat is a business or nonprofit activity, (2) a subsidiary that is a businessor nonprofit activity that is transferred to an equity method investee or jointventure, and (3) an exchange of a group of assets that constitutes a businessor nonprofit activity for a noncontrolling interest in an entity.  The guidance does not apply to a decrease inownership in transactions related to sales of in substance real estate orconveyances of oil and gas mineral rights. The update is effective for the interim or annual reporting periodsending on or after December 15, 2009 and had no impact on the Company’sfinancial statements.

 

Other accounting standards that have beenissued or proposed by the FASB or other standards-setting bodies are notexpected to have a material impact on the Company’s financial position, resultsof operations or cash flows.

 

**Reclassifications** - Certain captions and amounts in the2008 consolidated financial statements were reclassified to conform with the2009 presentation.  The reclassificationsdid not have an impact on the net loss or shareholders’ equity.

 

**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, 2009and 2008, the requirement was met by the cash balance in the vault.

 

**NOTE 3 - INVESTMENT SECURITIES**

 

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

 
| ** **                        | ** ** | **Amortized** | ** **     | **Gross  Unrealized** | ** ** | **Estimated** | ** ** |
|-----------------------------------|------------|---------------|----------------|-----------------------|------------|---------------|------------|
| ** **                        | ** ** | **Costs**     | ** **     | **Gains**             | ** ** | **Losses**    | ** ** | **Fair  Value** | ** ** |
| **December 31, 2009**        |       |          |           |                  |       |          |       |   |   |
| Government  sponsored enterprises |       | $             | 10,603,783     |                  | $          | 251,076       |       | $ | 105,668 |   | $ | 10,749,191 |   |
| Mortgage-backed  securities       |       | 6,662,003     |           | 176,778               |       | 52,122        |       | 6,786,659 |   |
| State,  county and municipal      |       | 449,666       |           | —                |       | 19,855        |       | 429,811 |   |
| ** **                        | ** ** | **$**         | **17,715,452** | ** **            | **$**      | **427,854**   | ** ** | **$** | **177,645** | ** ** | **$** | **17,965,661** |   |
|                              |       |          |           |                  |       |          |       |   |   |
| **December 31, 2008**        |       |          |           |                  |       |          |       |   |   |
| Government  sponsored enterprises |       | $             | 7,017,105      |                  | $          | 121,566       |       | $ | 4,226 |   | $ | 7,134,445 |   |
| Mortgage-backed  securities       |       | 6,489,572     |           | 220,921               |       | 1,720         |       | 6,708,773 |   |
| ** **                        | ** ** | **$**         | **13,506,677** | ** **            | **$**      | **342,487**   | ** ** | **$** | **5,946** | ** ** | **$** | **13,843,218** |   |

 

Proceeds from sales ofavailable-for-sale securities during 2009 and 2008 were $3,530,088 and$2,244,612, respectively. Gross gains of $114,571 and $71,599 were recognizedon those sales in 2009 and 2008, respectively. The amortized costs and fair values of investment securities at December 31,2009, by contractual maturity, are shown in the following chart. Expectedmaturities may differ from contractual maturities because borrowers may havethe right to call or prepay obligations with or without call or prepaymentpenalties.  Callable securities and mortgage-backedsecurities are included in the year of their contractual maturity date.

 

56

----

 

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

 
| ** **                        | ** ** | **December 31,  2009** | ** **     |
|-----------------------------------|------------|-----------------------------|----------------|
| ** **                        | ** ** | **Amortized  Cost**         | ** **     | **Fair  Value** | ** ** |
|                              |       |                        |           |   |   |
| Due  within one year              |       | $                           | 5,325,000      |   | $ | 5,222,977 |   |
| Due  after one through five years |       | 3,198,777                   |           | 3,313,128 |   |
| Due  after five through ten years |       | 3,352,936                   |           | 3,478,064 |   |
| Due  after ten years              |       | 5,838,739                   |           | 5,951,492 |   |
|                              |       |                        |           |   |   |
| Total  securities                 | ** ** | **$**                       | **17,715,452** | ** ** | **$** | **17,965,661** | ** ** |

 

The followingtable shows gross unrealized losses and fair value, aggregated by investmentcategory, and length of time that individual securities have been in acontinuous realized loss position, at December 31, 2009.

 
| ** **                       | ** ** | **Less  than 12 months** | ** **    | **12  months or more** | ** ** | **Total**   | ** ** |
|----------------------------------|------------|--------------------------|---------------|------------------------|------------|-------------|------------|
| ** **                       | ** ** | **Fair**                 | ** **    | **Unrealized**         | ** ** | **Fair**    | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** |
| ** **                       | ** ** | **Value**                | ** **    | **Losses**             | ** ** | **Value**   | ** ** | **Losses** | ** ** | **Value** | ** ** | **Losses** | ** ** |
|                             |       |                     |          |                   |       |        |       |   |   |   |   |   |   |
| Government sponsored enterprises |       | $                        | 5,718,617     |                   | $          | 105,668     |       | $ | — |   | $ | — |   | $ | 5,718,617 |   | 105,668 |   |
| Mortgage-backed securities       |       | 2,477,725                |          | 52,122                 |       | —      |       | — |   | 2,477,725 |   | 52,122 |   |
| State, county and municipal      |       | 429,811                  |          | 19,855                 |       | —      |       | — |   | 429,811 |   | 19,855 |   |
|                             |       |                     |          |                   |       |        |       |   |   |   |   |   |   |
|                             | ** ** | **$**                    | **8,626,153** | ** **             | **$**      | **177,645** | ** ** | **$** | **—** | ** ** | **$** | **—** | ** ** | **$** | **8,626,153** | ** ** | **$** | **177,645** |   |
|                                  |            |                          |               |                        |            |             |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

The followingtable shows gross unrealized losses and fair value, aggregated by investmentcategory, and length of time that individual securities have been in acontinuous realized loss position, at December 31, 2008.

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

 

Securities classified asavailable-for-sale are recorded at fair market value.  There were no securities in a continuous lossposition for more than twelve months at December 31, 2009 or 2008.

 

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) thelength of time and the extent to which the fair value has been less than cost, (2) thefinancial condition and near-term prospects of the issuer, and (3) theintent and ability of the Company to retain its investment in the issuer for aperiod of 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 ratingagencies have occurred, and industry analysts’ reports. As management has theability to hold debt securities until maturity, or for the foreseeable futureif classified as available for sale, no declines are deemed to beother-than-temporary.

 

At December 31, 2009and 2008, securities with estimated fair value of $3,783,988 and $6,753,584,respectively, were pledged to secure public deposits and to secure theborrowings from the FHLB, as required by law.

 

57

----

 

**NOTE 4 - LOANS RECEIVABLE**

 

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

 
| ** **                  | ** ** | **2009**   | ** **      | **2008**   | ** ** |
|-----------------------------|------------|------------|-----------------|------------|------------|
|                        |       |       |            |       |       |
| Real  estate - mortgage     |       | $          | 75,726,610      |       | $          | 75,599,845 |   |
| Real  estate - construction |       | 16,454,132 |            | 17,150,969 |       |
| Commercial  and industrial  |       | 11,738,295 |            | 11,870,971 |       |
| Consumer  and other         |       | 2,224,689  |            | 2,925,871  |       |
|                        |       |       |            |       |       |
| Total  gross loans          | ** ** | **$**      | **106,143,726** | ** ** | **$**      | **107,547,656** | ** ** |

 

Transactions in theallowance for loan losses during 2009 and 2008 are summarized below:

 
| ** **                                  | ** ** | **2009** | ** **    | **2008**   | ** ** |
|---------------------------------------------|------------|----------|---------------|------------|------------|
|                                        |       |     |          |       |       |
| Balance,  beginning of year                 |       | $        | 1,688,840     |       | $          | 552,600 |   |
| Provision  charged to operations            |       | 717,937  |          | 1,391,090  |       |
| Loans  charged-off                          |       | (941,439 | )             | (350,835   | )          |
| Recoveries  of loans previously charged-off |       | 33,599   |          | 95,985     |       |
|                                        |       |     |          |       |       |
| Balance,  end of year                       | ** ** | **$**    | **1,498,937** | ** ** | **$**      | **1,688,840** | ** ** |

 

The Company considers aloan to be impaired when it is probable that it will be unable to collect allamounts due according to the original terms of the loan agreement.  The Company measures impairment of a loan ona loan-by-loan basis. Impaired loans and related amounts included in theallowance for loan losses at December 31, 2009 and 2008 are as follows:

 
| ** **                                                | ** ** | **December 31,** | ** **    |
|-----------------------------------------------------------|------------|-----------------------|---------------|
| ** **                                                | ** ** | **2009**              | ** **    | **2008** | ** ** |
|                                                      |       |                  |          |   |   |
| Impaired  loans without a valuation allowance             |       | $                     | 3,894,891     |   | $ | — |   |
| Impaired  loans with a valuation allowance                |       | 1,120,689             |          | 421,542 |   |
|                                                      |       |                  |          |   |   |
| Total  impaired loans                                     | ** ** | **$**                 | **5,015,580** | ** ** | **$** | **421,542** | ** ** |
|                                                      |       |                  |          |   |   |
| Valuation  allowance related to impaired loans            |       | $                     | 107,822       |   | $ | 310,804 |   |
| Average  of impaired loans during the year                |       | $                     | 3,593,707     |   | $ | 121,195 |   |
| Total  nonaccrual loans                                   |       | $                     | 2,020,974     |   | $ | 294,596 |   |
| Total  loans past due 90 days and still accruing interest |       | $                     | 196,373       |   | $ | — |   |

 

At December 31,2009, the Company had 13 impaired loans totaling $2,020,974 or 1.90% of grossloans, in nonaccrual status.  At December 31,2008, the Company had 4 loans totaling $294,596 or 2.74% of gross loans, innonaccrual status. There was one loan totaling $196,373 that was contractuallypast due 90 days or more still accruing interest at December 31,2009.  There were no loans contractuallypast due 90 days or more still accruing interest at December 31,2008.  In addition, there were 10 loansrestructured or otherwise impaired totaling $2,994,606 not already included innonaccrual status at December 31, 2009. There were no loans restructured or otherwise impaired not alreadyincluded in nonaccrual status at December 31, 2008.

 

The Company’sanalysis under generally accepted accounting principles indicates that thelevel of the allowance for loan losses is appropriate to cover estimated creditlosses on individually evaluated loans as well as estimated credit lossesinherent in the remainder of the portfolio. We recognized $264,640 in interest income on loans that are impairedduring the year ended December 31, 2009. The amount of interest income recognized on impaired loans in 2008 wasnot material to the financial statements.

 

58

----

 

**NOTE 5 - OTHER REAL ESTATE OWNED**

 

Transactions in otherreal estate owned for the years ended December 31, 2009 and 2008 aresummarized below:

 
| ** **                  | ** ** | **2009** | ** **  | **2008** | ** ** |
|-----------------------------|------------|----------|-------------|----------|------------|
|                        |       |     |        |     |       |
| Balance,  beginning of year |       | $        | —      |     | $          | — |   |
| Additions                   |       | 501,037  |        | 230,600  |       |
| Sales                       |       | —   |        | (202,710 | )          |
| Write  downs                |       | —   |        | (27,890  | )          |
|                        |       |     |        |     |       |
| Balance,  end of year       | ** ** | **$**    | **501,037** |     | **$**      | **—** |   |

 

**NOTE 6 - PREMISES, FURNITURE ANDEQUIPMENT**

 

Premises, furniture andequipment consisted of the following:

 
| ** **                              | ** ** | **December 31,** | ** **    |
|-----------------------------------------|------------|-----------------------|---------------|
| ** **                              | ** ** | **2009**              | ** **    | **2008** | ** ** |
|                                    |       |                  |          |   |   |
| Land                                    |       | $                     | 1,015,000     |   | $ | 1,015,000 |   |
| Building  and improvements              |       | 1,902,901             |          | 1,860,994 |   |
| Furniture  and equipment                |       | 1,052,653             |          | 1,101,286 |   |
| Automobiles                             |       | 98,496                |          | 138,982 |   |
|                                    |       |                  |          |   |   |
| Total                                   |       | 4,069,050             |          | 4,116,262 |   |
|                                    |       |                  |          |   |   |
| Less,  accumulated depreciation         |       | 658,363               |          | 449,163 |   |
|                                    |       |                  |          |   |   |
| Premises,  furniture and equipment, net | ** ** | **$**                 | **3,410,687** | ** ** | **$** | **3,667,099** | ** ** |

 

Depreciationexpense was $256,213 and $271,210 for the years ended 2009 and 2008,respectively.

 

### **NOTE7 - DEPOSITS**

 

At December 31,2009, the scheduled maturities of certificates of deposit were as follows:

 
| **Maturing  In:** | ** ** | **Amount** | ** **     |
|-------------------|------------|------------|----------------|
|              |       |       |           |
| 2010              |       | $          | 62,407,048     |   |
| 2011              |       | 9,593,673  |           |
| 2012              |       | 1,983,000  |           |
| 2013              |       | 23,572     |           |
| 2014              |       | 407,115    |           |
|              |       |       |           |
| Total             | ** ** | **$**      | **74,414,408** | ** ** |

 

At December 31, 2009and 2008, the Company had approximately $5,295,000 and $12,943,000, respectively,in time deposits obtained through third party brokers.

 

**NOTE 8 - FHLB ADVANCES**

 

Advances outstanding at December 31,2009 and 2008 consisted of:

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

 

59

----

 

**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 CEOand President was granted 79,399 stock options, the Chief Business DevelopmentOfficer 61,755 options and the CFO 44,110 options.  The CEO and President resigned on January 21,2009 at which time 79,399 options were forfeited.  All options granted to the executive officersvest 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 did not grant any options during2009.  The Company granted 1,000 optionsduring 2008.  These options vest overfive years.  The options have an exerciseprice of $10.00 per share and terminate ten years after the grant date.

 

The Company recognized$127,942 and $168,913 of stock-based employee compensation expense during 2009and 2008, respectively, associated with 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 of December 31, 2009, there was$148,062 of unrecognized compensation cost related to stock option grants.  The cost is expected to be recognized withinthe next twelve months.

 

As noted above, therewere no options granted during 2009.  Theweighted average grant-date fair value of each option granted during 2008 was$3.97.  The fair value for each option isestimated on the date of grant using the Black-Scholes Model.  The following weighted average assumptionswere used for grants in 2008:

 
| Dividend  yield          |   | 0.00    | %      |
|--------------------------|--------|---------|--------|
| Expected  volatility     |   | 30.00   | %      |
| Risk-free  interest rate |   | 3.65    | %      |
| Expected  term           |   | 7 years |   |

 

A summary of the activityunder the stock option plan for the year ended December 31, 2009 follows:

 
| ** **                            | ** ** | ** **  | ** ** | **Weighted** | ** ** |
|---------------------------------------|------------|-------------|------------|--------------|------------|
| ** **                            | ** ** | ** **  | ** ** | **Average**  | ** ** |
| ** **                            | ** ** | ** **  | ** ** | **Exercise** | ** ** |
| ** **                            | ** ** | **Shares**  | ** ** | **Price**    | ** ** |
|                                  |       |        |       |         |       |
| Outstanding,  beginning of the period |       | 225,636     |       | $            | 10.00      |   |
| Granted  during the period            |       | —      |       | 10.00        |       |
| Exercised  during the period          |       | —      |       | —       |       |
| Forfeited  during the period          |       | (87,399     | )          | 10.00        |       |
|                                  |       |        |       |         |       |
| Outstanding,  end of the period       | ** ** | **138,237** | ** ** | **$**        | **10.00**  | ** ** |
|                                  |       |        |       |         |       |
| Options  exercisable at year end      | ** ** | **65,661**  | ** ** | **$**        | **10.00**  | ** ** |

 

The weighted averagecontractual life of the options outstanding as of December 31, 2009 is7.11 years.  There was no aggregateintrinsic value of options outstanding or exercisable at December 31,2009.

 

A summary of the statusof the Company’s nonvested shares as of December 31, 2009 is presentedbelow:

 
| ** **                           | ** ** | ** ** | ** ** | **Weighted**   | ** ** |
|--------------------------------------|------------|------------|------------|----------------|------------|
| ** **                           | ** ** | ** ** | ** ** | **Average**    | ** ** |
| ** **                           | ** ** | ** ** | ** ** | **Grant Date** | ** ** |
| ** **                           | ** ** | **Shares** | ** ** | **Fair Value** | ** ** |
|                                 |       |       |       |           |       |
| Nonvested  at January 1, 2009   |       | 138,657    |       | $              | 3.32       |   |
| Granted                              |       | —     |       | —         |       |
| Forfeited                            |       | (50,648    | )          | 3.35           |       |
| Vested                               |       | (32,997    | )          | 3.34           |       |
|                                 |       |       |       |           |       |
| Nonvested  at December 31, 2009 | ** ** | **55,012** | ** ** | **$**          | **3.34**   | ** ** |

 

60

----

 

**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 expireon October 16, 2016.  Warrants heldby directors of the Company will expire 90 days after the director ceases to bea director or officer of the Bank (365 days if due to death ordisability).  Upon resignation of the CEOand President, 10,000 warrants were forfeited.

 

At December 31, 2009and 2008, 120,000 and 86,667 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 towarrants was $94,728 and $126,125 for the years ended December 31, 2009and 2008, respectively.

 

**NOTE 11 -INCOME TAXES**

 

The Company had no incometax expense for the years ended December 31, 2009 or 2008 as it recorded afull valuation allowance against its deferred tax asset.

 

The gross amounts ofdeferred tax assets and deferred tax liabilities are as follows:

 
| ** **                                        | ** ** | **Years ended December 31,** | ** **  |
|---------------------------------------------------|------------|-----------------------------------|-------------|
| ** **                                        | ** ** | **2009**                          | ** **  | **2008** | ** ** |
|                                              |       |                              |        |   |   |
| Deferred  tax assets:                             |       |                              |        |   |   |
| Allowance  for loan losses                        |       | $                                 | 401,162     |   | $ | 465,729 |   |
| Net  operating loss carryforward                  |       | 2,226,893                         |        | 1,827,447 |   |
| Organization  and start-up costs                  |       | 232,102                           |        | 251,718 |   |
| Other                                             |       | 137,659                           |        | 76,151 |   |
|                                              |       |                              |        |   |   |
| Deferred  tax assets                              |       | 2,997,816                         |        | 2,621,045 |   |
|                                              |       |                              |        |   |   |
| Valuation  allowance                              |       | (2,767,796                        | )           | (2,425,623 | ) |
|                                              |       |                              |        |   |   |
| Net  deferred tax assets                          |       | 230,020                           |        | 195,422 |   |
|                                              |       |                              |        |   |   |
| Deferred  tax liabilities:                        |       |                              |        |   |   |
| Unrealized  gain on securities available for sale |       | 85,071                            |        | 114,426 |   |
| Accumulated  depreciation                         |       | 125,199                           |        | 81,867 |   |
| Prepaid  expenses                                 |       | 40,702                            |        | 37,720 |   |
| Loan  origination costs                           |       | 64,119                            |        | 75,835 |   |
|                                              |       |                              |        |   |   |
| Total  deferred tax liabilities                   |       | 315,091                           |        | 309,848 |   |
|                                              |       |                              |        |   |   |
| Net  deferred tax asset (liability)               | ** ** | **$**                             | **(85,071** | **)** | **$** | **(114,426** | **)** |

 

Deferred taxassets represent the future tax benefit of deductible differences and, if it ismore likely than not that a tax asset will not be realized, a valuationallowance is required to reduce the recorded deferred tax assets to netrealizable value.  As of December 31,2009 and 2008, in consideration of the lack of an established earnings history,management has provided a valuation allowance of 100% to reflect its netrealizable value.

 

61

----

 

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

 

The Company has anet operating loss for income tax purposes of $6,492,495 and $5,329,224 as of December 31,2009 and 2008, respectively.  These netoperating losses expire in the years 2026 through 2029.

 

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

 
| ** **                      | ** ** | **2009** | ** ** | **2008**  | ** ** |
|---------------------------------|------------|----------|------------|-----------|------------|
|                            |       |     |       |      |       |
| Tax (benefit) at statutory rate |       | $        | (388,593   | )         | $          | (1,122,999 | ) |
| Stock compensation expense      |       | (75,708  | )          | 100,313   |       |
| Change in valuation allowance   |       | 342,173  |       | 1,028,653 |       |
| Other                           |       | (29,288  | )          | (5,967    | )          |
|                            |       |     |       |      |       |
| Income tax benefit              | ** ** | **$**    | **—** |      | **$**      | **—** |   |

 

### **The Company had analyzed the tax positions taken orexpected to be taken in its tax returns and concluded it has no liabilityrelated to uncertain tax positions.**

 

### **NOTE12 - RELATED PARTY TRANSACTIONS**

 

Certain parties(principally certain directors and executive officers of the Company, theirimmediate families and business interests) were loan customers of and had othertransactions in the normal course of business with the Company.  Related party loans are made on substantiallythe same terms, including interest rates and collateral, as those prevailing atthe time for comparable transactions with unrelated persons and do not involvemore than the normal risk of collectibility. The following table summarizes the Bank’s related party loan activityfor the year ended December 31, 2009 and 2008:

 
| ** **                 | ** ** | **2009**  | ** **    | **2008**   | ** ** |
|----------------------------|------------|-----------|---------------|------------|------------|
|                       |       |      |          |       |       |
| Balance, January 1    |       | $         | 3,211,211     |       | $          | 3,030,076 |   |
| Disbursements              |       | 1,293,807 |          | 1,196,313  |       |
| Repayments                 |       | (558,004  | )             | (1,015,178 | )          |
|                       |       |      |          |       |       |
| Balance, December 31, | ** ** | **$**     | **3,947,014** | ** ** | **$**      | **3,211,211** | ** ** |

 

Deposits by directors, including their affiliates and executiveofficers, at December 31, 2009 and 2008 were approximately $1,106,064 and$2,054,031, respectively.

 

### **NOTE 13 - LEASES**

 

The Company has enteredinto an agreement to lease an office facility under a noncancellable operatinglease agreement expiring in 2023.  TheCompany may, at its option, extend the lease of its office facility at 2023Sunset Boulevard in West Columbia, South Carolina, for two additional five yearperiods.  The Company also entered into alease agreement for an office located on Devine Street for a thirty-six monthperiod.  The lease expires in September 2010.  The Company also entered into a sale-leasebackagreement in December 2008 for a portion of the property located in Cayce,South Carolina.  The lease is for aperiod of fifteen years. The Company may, at its option, extend the lease forthree consecutive renewal terms of five years each.  Minimum rental commitments as of December 31,2009 are as follows:

 
| 2010                 |       | $         | 178,688       |       |
|----------------------|------------|-----------|---------------|------------|
| 2011                 |       | 163,270   |          |
| 2012                 |       | 166,538   |          |
| 2013                 |       | 169,865   |          |
| 2014  and thereafter |       | 1,767,572 |          |
|                 |       |      |          |
| Total                | ** ** | **$**     | **2,445,933** | ** ** |

 

62

----

 

The leases havevarious renewal options and require increased rentals under cost of livingescalation clauses.  Rental expensescharged to occupancy and equipment expense in 2009 and 2008 were $172,518 and$134,840, respectively.

 

63

----

 

**NOTE 14 - COMMITMENTS ANDCONTINGENCIES**

 

The Company is subject toclaims and lawsuits which arise primarily in the ordinary course ofbusiness.  Management is not aware of anylegal proceedings which would have a material adverse effect on the financialposition or operating results of the Company.

 

**NOTE 15 - LOSS PER SHARE**

 

Basic loss per share is computed by dividing net loss by theweighted-average number of common shares outstanding.  Diluted loss per share is computed bydividing net loss by the weighted-average number of common shares outstandingand dilutive common share equivalents using the treasury stock method.  There were no dilutive common shareequivalents outstanding during 2009 and 2008 due to the net loss; therefore,basic and diluted loss per share were the same.

 
| ** **                                  | ** ** | **2009** | ** **     | **2008**   | ** ** |
|---------------------------------------------|------------|----------|----------------|------------|------------|
|                                        |       |     |           |       |       |
| **Net loss per share - basic computation:** |       |     |           |       |       |
|                                        |       |     |           |       |       |
| Net  loss available to common shareholders  | ** ** | **$**    | **(1,346,597** | **)**      | **$**      | **(3,302,939** | **)** |
|                                        |       |     |           |       |       |
| Average  common shares outstanding - basic  | ** ** | **$**    | **1,764,439**  | ** ** | **$**      | **1,764,439** | ** ** |
|                                        |       |     |           |       |       |
| Basic  loss per share                       | ** ** | **$**    | **(0.76**      | **)**      | **$**      | **(1.87** | **)** |

 

### **NOTE16 - REGULATORY MATTERS**

 

The Bank is subject tovarious regulatory capital requirements administered by the federal bankingagencies.  Failure to meet minimumcapital requirements can initiate certain mandatory, and possibly additionaldiscretionary actions by regulators that, if undertaken, could have a directadverse material effect on the Bank’s financial statements.  Under capital adequacy guidelines and theregulatory framework for prompt corrective action, the Bank must meet specificcapital guidelines that involve quantitative measures of the Bank’s assets,liabilities, and certain off-balance-sheet items as calculated under regulatoryaccounting practices.  The Bank’s capitalamounts and classification are also subject to qualitative judgments by theregulators about components, risk weightings, and other factors.

 

Quantitativemeasures established by regulation to ensure capital adequacy require the Bankto maintain minimum ratios of Tier 1 and total capital as a percentage ofassets and off-balance-sheet exposures, adjusted for risk weights ranging from0% to 100%.  Tier 1 capital consists ofcommon shareholders’ equity, excluding the unrealized gain or loss onsecurities available-for-sale, minus certain intangible assets.  Tier 2 capital consists of the allowance forloan losses subject to certain limitations. Total capital for purposes of computing the capital ratios consists ofthe sum of Tier 1 and Tier 2 capital. The regulatory minimum requirements are 4% for Tier 1 and 8% for totalrisk-based capital.

 

The Bank is also requiredto maintain capital at a minimum level based on total assets, which is known asthe leverage ratio.  Only the strongestbanks are allowed to maintain capital at the minimum requirement of 3%.  All others are subject to maintaining ratios1% to 2% above the minimum.

 

As of December 31,2009, management believes it is categorized as well-capitalized under theregulatory framework for prompt corrective action.

 

64

----

 

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

 

The followingtable summarizes the capital amounts and ratios of the Bank and the regulatoryminimum requirements at December 31:

 
| ** **                               | ** ** | ** ** | ** ** | ** **            | ** ** | ** **            | ** ** | ** **            | ** ** | **To Be Well-**       | ** ** |
|------------------------------------------|------------|------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                               | ** ** | ** ** | ** ** | ** **            | ** ** | ** **            | ** ** | ** **            | ** ** | **Capitalized Under** | ** ** |
| ** **                               | ** ** | ** ** | ** ** | ** **            | ** ** | **For Capital**       | ** ** | **Prompt Corrective** | ** ** |
| ** **                               | ** ** | **Actual** | ** ** | **Adequacy Purposes** | ** ** | **Action Provisions** | ** ** |
| **(Dollars  in thousands)**              | ** ** | **Amount** | ** ** | **Ratio**             | ** ** | **Amount**            | ** ** | **Ratio**             | ** ** | **Amount**            | ** ** | **Ratio** | ** ** |
| **December 31, 2009**               |       |       |       |                  |       |                  |       |                  |       |                  |       |   |   |
| Total capital (to risk-weighted assets)  |       | $          | 10,836     |                  | 10.57      | %                     | $          | 8,204                 |       | 8.00                  | %          | $ | 10,255 |   | 10.00 | % |
| Tier 1 capital (to risk-weighted assets) |       | 9,542      |       | 9.30                  | %          | 4,102                 |       | 4.00                  | %          | 6,153                 |       | 6.00 | % |
| Tier 1 capital (to average assets)       |       | 9,542      |       | 6.99                  | %          | 5,459                 |       | 4.00                  | %          | 6,824                 |       | 5.00 | % |
|                                     |       |       |       |                  |       |                  |       |                  |       |                  |       |   |   |
| **December 31, 2008**               |       |       |       |                  |       |                  |       |                  |       |                  |       |   |   |
| Total capital (to risk-weighted assets)  |       | $          | 8,878      |                  | 8.37       | %                     | $          | 8,485                 |       | 8.00                  | %          | $ | 10,607 |   | 10.00 | % |
| Tier 1 capital (to risk-weighted assets) |       | 7,548      |       | 7.12                  | %          | 4,240                 |       | 4.00                  | %          | 6,361                 |       | 6.00 | % |
| Tier 1 capital (to average assets)       |       | 7,548      |       | 5.95                  | %          | 5,074                 |       | 4.00                  | %          | 6,343                 |       | 5.00 | % |

 

**NOTE 17 -UNUSED LINES OF CREDIT**

 

As of December 31,2009 and 2008, the Company had unused lines of credit to purchase federal fundsfrom unrelated banks totaling $7,600,000 and $9,300,000, respectively.  These lines of credit are available on a oneto thirty day basis for general corporate purposes.  The Company also has a credit line to borrowfunds from the FHLB.  The remainingcredit availability as of December 31, 2009 was $10,290,000.

 

**NOTE18 - 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, certain restrictions exist regardingthe ability of the subsidiary to transfer funds in the form of cash dividendsto the Company.  State chartered banksare authorized to pay cash dividends up to 100% of net income in any calendaryear without obtaining the prior approval of the State Board of FinancialInstitutions or the Commissioner of Banking provided that the Bank received acomposite rating of one or two at the last examination conducted by the Stateor Federal regulatory authority. Otherwise, the Bank must file an income and expense report and obtainthe specific approval of the State Board.

 

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

 

**NOTE 19 - FINANCIAL INSTRUMENTSWITH OFF-BALANCE SHEET RISK**

 

The Company is a party tofinancial instruments with off-balance sheet risk in the normal course of businessto meet the financing needs of its customers. These financial instruments include commitments to extend credit andstandby letters of credit.  Thoseinstruments involve, to varying degrees, elements of credit, interest rate, andliquidity risk.  The Company’s exposureto credit loss in the event of nonperformance by the other party to thefinancial instrument for commitments to extend credit and standby letters ofcredit is essentially the same as that involved in extending loan facilities tocustomers.  The Company uses the samecredit policies in making commitments and conditional obligations as it doesfor on-balance sheet instruments.

 

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 have fixed expiration dates or other terminationclauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawnupon, the total commitment amounts do not necessarily represent future cashrequirements.  The amount of collateralobtained if deemed necessary by the Company upon extension of credit is basedon management’s credit evaluation of the borrower. Collateral held varies, butmay include accounts receivable, negotiable instruments, inventory, property,plant and equipment, and real estate. Commitments to extend credit, including unused lines of credit, amountedto $13,814,784 and $23,284,400 at December 31, 2009 and 2008,respectively.

 

65

----

 

**NOTE 19 - FINANCIAL INSTRUMENTSWITH OFF-BALANCE SHEET RISK** - *continued*

 

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 may entail either financial or nonfinancialobligations and may involve such things as the shipment of goods, performanceof a contract, or repayment of an obligation. Under the terms of a standby letter, generally drafts will be drawn onlywhen the underlying event fails to occur as intended.  The Company can seek recovery of the amountspaid from the borrower.  The majority ofthese standby letters of credit are unsecured. Commitments under standby letters of credit are usually for one year orless.  At December 31, 2009 and2008, the Company has recorded no liability for the current carrying amount ofthe obligation to perform as a guarantor; as such amounts are not consideredmaterial. The Company had approximately $125,000 and $110,000 in letters ofcredit outstanding as of December 31, 2009 and 2008, respectively.

 

The Company originatescertain fixed rate residential loans and commits these loans for sale.  The commitments to originate fixed rateresidential loans and the sales commitments are freestanding derivativeinstruments.  The fair value of thesecommitments was not significant at December 31, 2009 and 2008.

 

**NOTE 20 - PREFERRED STOCK**

 

On January 9, 2009,as part of the Capital Purchase Program established by the U.S. Department ofthe Treasury (“Treasury”) under the Emergency Economic Stabilization Act of2008 (the “EESA”),  the Company enteredinto a Letter Agreement with Treasury dated January 9, 2009, pursuant towhich the Company issued and sold to Treasury 3,285 shares of the Company’sFixed Rate Cumulative Perpetual Preferred Stock, Series A, having aliquidation preference of $1,000 per share (the “Series A Preferred Stock”),and a ten-year warrant to purchase 164 shares of the Company’s Fixed RateCumulative Perpetual Preferred Stock, Series B, (the “Series BPreferred Stock”), having a liquidation preference of $1,000 per share, at aninitial exercise price of $0.01 per share (the “Warrant”), for an aggregatepurchase price of $3,285,000 in cash.  The Warrant was immediatelyexercised.  The Preferred Stock, Series A,has a dividend rate of 5% for the first five years and 9% thereafter.  The Preferred Stock, Series B, has adividend rate of 9% per year.  ThePreferred Stock may not be redeemed for a period of three years from the dateof the original investment unless certain conditions are met through aqualified equity offering.

 

**NOTE 21 - FAIR VALUE OF FINANCIALINSTRUMENTS**

 

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

 

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

 

***Cash,Due from Banks and Certificates of Deposit*** - The carryingamount is a reasonable estimate of fair value, due to the short-term nature ofsuch items.

 

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

 

***SecuritiesAvailable-for-Sale*** - Investment securities available-for-sale are recordedat fair value on a recurring basis. Fair value measurement is based upon quotedprices, if available.  If quoted pricesare not available, fair values are measured using independent pricing models orother model-based valuation techniques such as the present value of future cashflows, adjusted for security’s credit rating, prepayment assumptions and otherfactors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such asthe New York Stock Exchange, U.S. Treasury securities that are traded bydealers or brokers in active over-the-counter markets and money market funds.Level 2 securities include mortgage-backed securities issued by governmentsponsored entities, municipal bonds and corporate debt securities.  Securities classified as Level 3 includeasset-backed securities in less liquid markets.

 

66

----

 

**NOTE 21 - FAIR VALUE OF FINANCIALINSTRUMENTS***- continued*

 

***NonmarketableEquity Securities*** - The carrying value of these securities approximates the fair valuesince no ready market exists for the stocks.

 

***Loansreceivable*******- Forcertain categories of loans, such as variable rate loans which are repricedfrequently and have no significant change in credit risk, fair values are basedon the carrying amounts.  The fair valueof other types of loans is estimated by discounting the future cash flows usingthe current rates at which similar loans would be made to borrowers withsimilar credit ratings and for the same remaining maturities.  However, from time to time, a loan is consideredimpaired and an allowance for loan losses is established.  Loans for which it is probable that paymentof interest and principal will not be made in accordance with contractual termsof the loan agreement are considered impaired. The fair value of impaired loans is estimated using one of severalmethods, including collateral value, market value of similar debt, enterprisevalue, liquidation value and discounted cash flows.  Those impaired loans not requiring anallowance represent loans for which the fair value of the expected repaymentsor collateral exceed the recorded investments in such loans.

 

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

 

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

 

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

 

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

 

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

 
| ** **                                                          | ** ** | **December 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                          | ** ** | **Carrying**                | ** ** | **Estimated**               | ** ** | **Carrying** | ** ** | **Estimated** | ** ** |
| ** **                                                          | ** ** | **Amount**                  | ** ** | **Fair Value**              | ** ** | **Amount** | ** ** | **Fair Value** | ** ** |
| **Financial Assets:**                                               |       |                        |       |                        |       |   |   |   |   |
| Cash and due from banks                                             |       | $                           | 7,006,281  |                        | $          | 7,006,281 |   | $ | 4,130,319 |   | $ | 4,130,319 |   |
| Federal funds sold                                                  |       | 5,195,000                   |       | 5,195,000                   |       | 3,494,000 |   | 3,494,000 |   |
| Certificates of deposit                                             |       | 250,210                     |       | 250,210                     |       | — |   | — |   |
| Securities available-for-sale                                       |       | 17,965,661                  |       | 17,965,661                  |       | 13,843,218 |   | 13,843,218 |   |
| Nonmarketable equity securities                                     |       | 474,300                     |       | 474,300                     |       | 435,952 |   | 435,952 |   |
| Loans receivable, net                                               |       | 104,664,789                 |       | 104,758,655                 |       | 105,858,816 |   | 106,069,160 |   |
| Accrued interest receivable                                         |       | 479,112                     |       | 479,112                     |       | 472,880 |   | 472,880 |   |
|                                                                |       |                        |       |                        |       |   |   |   |   |
| **Financial Liabilities:**                                          |       |                        |       |                        |       |   |   |   |   |
| Demand deposit, interest-bearing transaction, and  savings accounts |       | 50,182,302                  |       | 50,182,302                  |       | 40,455,338 |   | 40,455,338 |   |
| Certificates of deposit and other time deposits                     |       | 74,414,408                  |       | 74,577,405                  |       | 78,079,222 |   | 78,662,000 |   |
| Federal Home Loan Bank advances                                     |       | 3,000,000                   |       | 3,001,890                   |       | 3,000,000 |   | 3,104,207 |   |
| Accrued interest payable                                            |       | 70,436                      |       | 70,436                      |       | 224,434 |   | 224,434 |   |
|                                                                     |            |                             |            |                             |            |  |  |  |  |  |  |  |  |

 
| ** **                                    | ** ** | **Notional** | ** ** | **Estimated**  | ** ** | **Notional** | ** ** | **Estimated**  | ** ** |
|-----------------------------------------------|------------|--------------|------------|----------------|------------|--------------|------------|----------------|------------|
| ** **                                    | ** ** | **Amount**   | ** ** | **Fair Value** | ** ** | **Amount**   | ** ** | **Fair Value** | ** ** |
| **Off-Balance Sheet Financial  Instruments:** |       |         |       |           |       |         |       |           |       |
| Commitments to extend credit                  |       | $            | 13,814,784 |           | $          | —       |       | $              | 23,284,400 |   | $ | — |   |
| Financial standby letters of credit           |       | 125,000      |       | —         |       | 110,000      |       | —         |       |
|                                               |            |              |            |                |            |              |            |                |            |  |  |  |  |

 

67

----

 

**NOTE 21 - FAIR VALUE OF FINANCIALINSTRUMENTS***- continued*

 

Accountingstandards require disclosure that establishes a framework for measuring fairvalue, and requires disclosure about fair value measurements for all assets andliabilities that are measured and reported on a fair value basis.  The objective is to enable the reader of thefinancial statements to assess the inputs used to develop those measurements byestablishing a hierarchy for ranking the quality and reliability of theinformation used to determine fair values. Assets and liabilities carried atfair value are classified and disclosed in one of the following threecategories:

 

·                  Level 1: Quoted market prices in active markets for identical assets orliabilities.

 

·                  Level 2: Observable market based inputs or unobservable inputs that arecorroborated by market data.

 

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

 

In determining theappropriate levels, the Bank performs a detailed analysis of the assets andliabilities that are subject to fair value measurement.  At each reporting period, all assets andliabilities for which the fair value measurement is based on significantunobservable inputs are classified as Level 3.

 

The table belowpresents the balances of assets and liabilities measured at fair value on arecurring basis by level within the hierarchy.

 
| ** **                    | ** ** | **December 31,  2009** | ** ** |
|-------------------------------|------------|-----------------------------|------------|
| ** **                    | ** ** | **Total**                   | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Securities available-for-sale |       | $                           | 17,965,661 |   | $ | — |   | $ | 17,965,661 |   | $ | — |   |
|                               |            |                             |            |  |  |  |  |  |  |  |  |  |  |

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

 

Certain assets andliabilities are measured at fair value on a nonrecurring basis; that is, theinstruments are not measured at fair value on an ongoing basis but are subjectto fair value adjustments in certain circumstances (for example, when there isevidence of impairment).  The followingtable presents the assets and liabilities measured at fair value on a nonrecurringbasis as of December 31, 2009 and 2008, aggregated by level in the fairvalue hierarchy within which those measurements fall.

 
| ** **               | ** ** | **December 31,  2009** | ** ** |
|--------------------------|------------|-----------------------------|------------|
| ** **               | ** ** | **Total**                   | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|                     |       |                        |       |   |   |   |   |   |   |
| Impaired  loans          |       | $                           | 5,015,580  |   | $ | — |   | $ | 5,015,580 |   | $ | — |   |
| Other  real estate owned |       | 501,037                     |       | — |   | 501,037 |   | — |   |
|                     |       |                        |       |   |   |   |   |   |   |
| Total                    |       | $                           | 5,516,617  |   | $ | — |   | $ | 5,516,617 |   | $ | — |   |

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

 

68

----

 

**NOTE 22 - CONGAREE BANCSHARES,INC. (PARENT COMPANY ONLY)**

 

Presented beloware the condensed financial statements for Congaree Bancshares, Inc.(Parent Company Only).

 

**CondensedBalance Sheets**

 
| ** **                                      | ** ** | **December 31,** | ** **     |
|-------------------------------------------------|------------|-----------------------|----------------|
| ** **                                      | ** ** | **2009**              | ** **     | **2008** | ** ** |
| **Assets:**                                     |       |                  |           |   |   |
| Cash                                            |       | $                     | 48,365         |   | $ | 20,372 |   |
| Premises and equipment, net                     |       | 2,463,904             |           | 2,482,288 |   |
| Investment in banking subsidiary                |       | 9,706,441             |           | 7,560,439 |   |
|                                            |       |                  |           |   |   |
| Total assets                                    | ** ** | **$**                 | **12,218,710** | ** ** | **$** | **10,063,099** | ** ** |
|                                            |       |                  |           |   |   |
| **Liabilities and shareholders’ equity:**  |       |                  |           |   |   |
| Other liabilities                               |       | $                     | 22,387         |   | $ | — |   |
|                                            |       |                  |           |   |   |
| Total liabilities                               |       | 22,387                |           | — |   |
|                                            |       |                  |           |   |   |
| Shareholders’ equity                       |       | 12,196,323            |           | 10,063,099 |   |
|                                            |       |                  |           |   |   |
| Total liabilities and shareholders’ equity | ** ** | **$**                 | **12,218,710** | ** ** | **$** | **10,063,099** | ** ** |

 

**CondensedStatements of Operations**

 
| ** **                                                                               | ** ** | **For  the years ended** | ** **     |
|------------------------------------------------------------------------------------------|------------|--------------------------|----------------|
| ** **                                                                               | ** ** | **December 31,**    | ** **     |
| ** **                                                                               | ** ** | **2009**                 | ** **     | **2008** | ** ** |
|                                                                                     |       |                     |           |   |   |
| **Income**                                                                               |       | $                        | 18,000         |   | $ | 37,268 |   |
|                                                                                     |       |                     |           |   |   |
| **Expenses:**                                                                            |       |                     |           |   |   |
| Stock based compensation expense                                                         |       | 222,670                  |           | 295,038 |   |
| Other expenses                                                                           |       | 141,232                  |           | 264,514 |   |
|                                                                                     |       |                     |           |   |   |
| Total expense                                                                            |       | 363,902                  |           | 559,552 |   |
|                                                                                     |       |                     |           |   |   |
| **Loss before income taxes and equity in undistributed  earnings of banking subsidiary** |       | (345,902                 | )              | (522,284 | ) |
|                                                                                     |       |                     |           |   |   |
| Equity in undistributed losses of banking  subsidiary                                    |       | (797,020                 | )              | (2,780,655 | ) |
|                                                                                     |       |                     |           |   |   |
| **Net loss**                                                                             | ** ** | **$**                    | **(1,142,922** | **)** | **$** | **(3,302,939** | **)** |

 

69

----

 

**NOTE 22 - CONGAREE BANCSHARES,INC. (PARENT COMPANY ONLY)** - *continued*

 

**Condensed Statements of Cash Flows**

 
| ** **                                                                   | ** ** | **For  the years ended** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                                   | ** ** | **December 31,**    | ** ** |
| ** **                                                                   | ** ** | **2009**                 | ** ** | **2008** | ** ** |
| **Cash flows from operating activities:**                                    |       |                     |       |   |   |
| Net loss                                                                     |       | $                        | (1,142,922 | ) | $ | (3,302,939 | ) |
| Adjustments to reconcile net loss to net cash used  by operating activities: |       |                     |       |   |   |
| Depreciation expense                                                         |       | 58,319                   |       | 63,468 |   |
| Equity in undistributed net loss of banking  subsidiary                      |       | 797,020                  |       | 2,780,655 |   |
| Loss on sale of assets                                                       |       | —                   |       | 44,134 |   |
| Decrease (increase) in other assets                                          |       | —                   |       | 18,440 |   |
| Increase (decrease) in other liabilities                                     |       | —                   |       | (29,785 | ) |
| Stock and warrant compensation expense                                       |       | 222,670                  |       | 295,038 |   |
|                                                                         |       |                     |       |   |   |
| Net cash used by operating activities                                        |       | (64,913                  | )          | (130,989 | ) |
|                                                                         |       |                     |       |   |   |
| **Cash flows from investing activities:**                                    |       |                     |       |   |   |
| Purchase of premises and equipment                                           |       | (39,935                  | )          | (376,667 | ) |
| Sale of premises and equipment                                               |       | —                   |       | 496,874 |   |
| Capital contribution to Bank                                                 |       | (3,000,000               | )          | (500,000 | ) |
|                                                                         |       |                     |       |   |   |
| Net cash used by investing activities                                        |       | (3,039,935               | )          | (379,793 | ) |
|                                                                         |       |                     |       |   |   |
| **Cash flows from financing activities:**                                    |       |                     |       |   |   |
| Proceeds from issuance of preferred stock                                    |       | 3,285,000                |       | — |   |
| Dividends paid on preferred stock                                            |       | (152,159                 | )          | — |   |
|                                                                         |       |                     |       |   |   |
| Net cash provided by financing activities                                    |       | 3,132,841                |       | — |   |
|                                                                         |       |                     |       |   |   |
| **Net increase (decrease) in cash and cash equivalents**                     |       | 27,993                   |       | (510,782 | ) |
|                                                                         |       |                     |       |   |   |
| **Cash and cash equivalents, beginning of period**                           |       | 20,372                   |       | 531,154 |   |
|                                                                         |       |                     |       |   |   |
| **Cash and cash equivalents, end of period**                                 | ** ** | **$**                    | **48,365** | ** ** | **$** | **20,372** | ** ** |

 

**NOTE 23 -SUBSEQUENT EVENTS**

 

In preparing theseconsolidated financial statements, subsequent events were evaluated through thetime the consolidated financial statements were issued.  Financial statements are considered issuedwhen they are widely distributed to all shareholders and other financialstatement users, or filed with the Securities and Exchange Commission.  In conjunction with applicable accountingstandards, all material subsequent events have been either recognized in theconsolidated financial statements or disclosed in the notes to the consolidatedfinancial statements.

 

Based ondiscussions with the FDIC following its most recent safety and soundnessexamination of the Bank during 2009, the Bank expects to receive a consentorder from the FDIC at some point in 2010 which could require the Bank to takecertain actions to address concerns raised in the examination.  These actions may include but are not limitedto addressing asset quality, capital adequacy, earnings, managementeffectiveness, liquidity, and sensitivity to market risk. Furthermore, theconsent order may establish new minimum capital ratios for the Bank.  If these ratios are not met, it may changehow the Bank is categorized.  If the Bankwere to become subject to a consent order, and if the Bank were to fail tocomply with the requirements, it may be subject to further regulatory action.

 

On February 25, 2010, the Company entered into a contract to sellits Cayce branch and business center property for the amount of$2,320,000.  The contract requiresclosing to be completed within sixty days. At the time of closing, the Company plans to enter into a fifteen yearlease of the property with the purchaser which will include the option toextend for consecutive renewal terms of five years each.

 

70

----

 

**Item 9.  Changes in and Disagreements with Accountantson Accounting and Financial Disclosure.**

 

None.

 

**Item 9A.  Controls and Procedures.**

 

**Evaluation of Disclosure Controlsand Procedures**

 

As of the end ofthe period 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 ChiefExecutive Officer and Chief Financial Officer have concluded that our currentdisclosure controls and procedures are effective as of December 31,2009.  There have been no significantchanges in our internal controls over financial reporting during the fourthfiscal quarter ended December 31, 2009 that have materially affected, orare reasonably likely to materially affect, our internal controls overfinancial reporting.

 

The design of any systemof controls and procedures is based in part upon certain assumptions about thelikelihood of future events.  There canbe no assurance that any design will succeed in achieving its stated goalsunder all potential future conditions, regardless of how remote.

 

**Management’s Report on InternalControl Over Financial Reporting**

 

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

 

Under the supervision andwith the participation of management, including the principal executive officerand the principal financial officer, our management has evaluated theeffectiveness of our internal control over financial reporting as of December 31,2009 based on the criteria established in a report entitled “Internal Control —Integrated Framework issued by the Committee of Sponsoring Organizations of theTreadway Commission” and the interpretive guidance issued by the Commission inRelease No. 34-55929.  Based on thisevaluation, our management has evaluated and concluded that our internalcontrol over financial reporting was effective as of December 31, 2009.

 

We are continuouslyseeking to improve the efficiency and effectiveness of our operations and ofour internal controls.  This results inmodifications to our processes throughout the company.  However, there has been no change in ourinternal control over financial reporting that occurred during our most recentfiscal quarter that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

 

This annual report doesnot include an attestation report of the Company’s registered public accountingfirm regarding internal control over financial reporting.  Management’s report was not subject toattestation by the company’s registered public accounting firm pursuant totemporary rules of the Securities and Exchange Commission that permit thecompany to provide only management’s report in this annual report.

 

**Item9B.  Other Information.**

 

None.

 

71

----

 

**PART III**

 

**Item 10.  Directors, Executive Officers and CorporateGovernance.**

 

Informationrequired by Item 10 is hereby incorporated by reference from our proxystatement for our 2010 annual meeting of shareholders to be held on June 16,2010.

 

**Item11.  Executive Compensation.**

 

Informationrequired by Item 11 is hereby incorporated by reference from our proxystatement for our 2010 annual meeting of shareholders to be held on June 16,2010.

 

**Item 12.  Security Ownership of Certain BeneficialOwners and Management and Related Stockholder Matters.**

 

Information required by Item12 is hereby incorporated by reference from our proxy statement for our 2010annual meeting of shareholders to be held on June 16, 2010.

 

**Item 13.  Certain Relationships and RelatedTransactions, and Director Independence.**

 

Information required by Item 13 is herebyincorporated by reference from our proxy statement for our 2010 annual meetingof shareholders to be held on June 16, 2010.

 

**Item 14.  Principal Accountant and Fees.**

 

Information required by Item14 is hereby incorporated by reference from our proxy statement for our 2010annual meeting of shareholders to be held on June 16, 2010.

 

72

----

 

**PART IV**

 

**Item 15.  Exhibits.**

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

 

73

----

 
| 10.7   |   | Form of Waiver, executed by each of Messrs. F. Harvin  Ray, Jr., Charlie T. Lovering, Jr. and Stephen P. Nivens  (incorporated by reference to Exhibit 10.2 of the Company’s  Form 8-K filed on January 12, 2009).                            |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                  |
| 10.8   |   | Form of Letter Agreement, executed by each of Messrs. F. Harvin  Ray, Jr., Charlie T. Lovering, Jr. and Stephen P. Nivens with the  Company (incorporated by reference to Exhibit 10.3 of the Company’s  Form 8-K filed on January 12, 2009). |
|   |   |                                                                                                                                                                                                                                                                                  |
| 21     |   | Subsidiaries of the  Company.                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                  |
| 24     |   | 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.                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                  |
| 99     |   | Certification of the Chief Executive Officer and Chief Financial  Officer Pursuant to Section 111(b)(4) of the Emergency Economic  Stabilization Act of 2008.                                                                                                               |

 

----

| *      |   | Management  contract of compensatory plan or arrangement required to be filed as an  Exhibit to this Annual Report on Form 10-K.                           |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                 |
| *      |   | Copies of  exhibits are available upon written request to Corporate Secretary, Congaree  Bancshares, Inc., 1201 Knox Abbott Drive, Cayce, South Carolina 29033. |

 

74

----

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.

 

 
|   | **CONGAREE  BANCSHARES, INC.**                       |
|--------|------------------------------------------------------|
|   |                                                 |
| Dated: | March 31, 2010                                  |   | By: | /s/ Charlie T. Lovering |
|   | Charlie T. Lovering                                  |
|   | Chief Executive  Officer and Chief Financial Officer |
|        |                                                      |  |  |  |

 

KNOW ALL MEN BY THESE PRESENTS, that each person whosesignature appears below constitutes and appoints Charlie T. Lovering, his trueand lawful attorney-in-fact and agent, with full power of substitution andresubstitution, for him and in his name, place and stead, in any and allcapacities, to sign any and all amendments to this Annual Report on Form 10-K,and to file the same, with all exhibits thereto, and other documents inconnection therewith, with the Securities and Exchange Commission, grantingunto attorney-in-fact and agent full power and authority to do and perform eachand every act and thing requisite or necessary to be done in and about the premises,as fully to all intents and purposes as he might or could do in person, herebyratifying and confirming all that attorney-in-fact and agent, or his substituteor substitutes, may lawfully do or cause to be done by virtue hereof.

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant in thecapacities and on the dates indicated.

 

| **Signature**            | ** ** | **Title**                                 | ** ** | **Date**            |
|--------------------------|------------|-------------------------------------------|------------|---------------------|
|                     |       |                                      |       |                |
| /s/ Thomas Hal  Derrick  |       | Director                                  |       | March 31, 2010 |
| Thomas Hal  Derrick      |       |                                      |       |                |
|                     |       |                                      |       |                |
| /s/ Stephen P.  Nivens   |       | Senior Vice President, Director           |       | March 31, 2010 |
| Stephen P.  Nivens       |       |                                      |       |                |
|                     |       |                                      |       |                |
| /s/ E. Daniel  Scott     |       | Director                                  |       | March 31, 2010 |
| E. Daniel Scott          |       |                                      |       |                |
|                     |       |                                      |       |                |
| /s/ Nitin C.  Shah       |       | Director                                  |       | March 31, 2010 |
| Nitin C. Shah            |       |                                      |       |                |
|                     |       |                                      |       |                |
| /s/ J. Larry  Stroud     |       | Director                                  |       | March 31, 2010 |
| J. Larry Stroud          |       |                                      |       |                |
|                     |       |                                      |       |                |
| /s/ Donald E.  Taylor    |       | Director                                  |       | March 31, 2010 |
| Donald E. Taylor         |       |                                      |       |                |
|                     |       |                                      |       |                |
| /s/ John D.  Thompson    |       | Director                                  |       | March 31, 2010 |
| John D. Thompson         |       |                                      |       |                |
|                     |       |                                      |       |                |
| /s/ Charlie T.  Lovering |       | Chief Financial Officer, Chief Executive  |       | March 31, 2010 |
| Charlie T.  Lovering     |       | Officer, Director (Principal Executiveand |       |                |
|                     |       | Financial Officer)                        |       |                |

 

75

----

 

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

 

76

----

 

**EXHIBIT INDEX**

 
| **Exhibit** | ** ** | **Description**                                                                                                                                                         |
|-------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                                                    |
| 21          |       | Subsidiaries of the  Company.                                                                                                                                           |
|        |       |                                                                                                                                                                    |
| 24          |       | 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.                                                                                                                                      |
|        |       |                                                                                                                                                                    |
| 99          |       | Certification of the Chief Executive Officer and Chief Financial  Officer Pursuant to Section 111(b)(4) of the Emergency Economic  Stabilization Act of 2008. |

 

77

----