**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-KSB**

 

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

 

**Commission file number 000-52592**

 

**CongareeBancshares, Inc.**

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

 

| **South Carolina**                       | ** ** | **20-1734180**                       |
|------------------------------------------|------------|--------------------------------------|
| (State of Incorporation)                 |       | (I.R.S. Employer Identification No.) |
|                                     |       |                                 |
| **1201 Knox Abbott Drive,  Cayce, SC**   | ** ** | **29033**                            |
| (Address of principal executive offices) |       | (Zip Code)                           |
| **(803) 794-2265**                       |
| (Issuer’s Telephone Number)         |

 

Securities registered under Section 12(b) ofthe Exchange Act:  **None**

 

Securities registered under Section 12(g) ofthe Exchange Act: **Common Stock**

 

Checkwhether the issuer is not required to file reports pursuant to Section 13or 15(d) of the Exchange Act  o

 

Checkwhether the issuer (1) filed all reports required to be filed by Section 13or 15(d) of the Exchange Act during the past 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.  Yes  x  No  o

 

Check if there is no disclosure of delinquent filers inresponse to Item 405 of Regulation S-B in this form, and no disclosure will becontained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-KSBor any amendment to this Form 10-KSB. x

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). Yes o  No  x

 

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

 

The aggregate market value of the Common Stock held bynon-affiliates (shareholdersholding less than 5% of an outstanding class of stock, excluding directors andexecutive officers) of the Company on March 20,2008 was $10.00.  Because there is not anactive trading market for the Common Stock, we have used our book value of$7.97 as of March 20, 2008 to calculate our public float.

 

Transitional Small Business DisclosureFormat.  (Check one):  Yes  o  No  x

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

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

 

 

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**Part I**

 

**Item 1.  Description of Business**

 

ThisReport contains statements which constitute forward-looking statements withinthe meaning of Section 27A of the Securities Act of 1933 and theSecurities Exchange Act of 1934.  Forward-lookingstatements may relate to our financial condition, results of operation, plans,objectives, or future performance.  Thesestatements are based on many assumptions and estimates and are not guarantees offuture performance.  Our actual resultsmay differ materially from those anticipated in any forward-looking statements,as they 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,” aswell as similar expressions, are meant to identify such forward-lookingstatements.  Potential risks anduncertainties include, but are not limited to, those described below under “RiskFactors” and the following:

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

 

Weundertake no obligation to publicly update or revise any forward-lookingstatements, whether as a result of new information, future events orotherwise.  In light of these risks,uncertainties, and assumptions, the forward-looking events discussed in thisreport might not occur.

 

**General**

 

CongareeBancshares, Inc. (the “Company”) is a South Carolina corporation organizedto operate as a bank holding company pursuant to the Federal Bank HoldingCompany Act of 1956 and the South Carolina Bank Holding Company Act, and to ownand control all of the capital stock of Congaree State Bank (the “Bank”). TheBank currently maintains a main office in Cayce, South Carolina.  Since our inception in November 2005 andbefore our opening the Bank for business on October 16, 2006, we engagedin organizational and pre-opening activities necessary to obtain regulatoryapprovals and to prepare our subsidiary bank to commence business as afinancial institution. We completed the renovation of our Cayce office at 1201Knox Abbott Drive, Cayce, South Carolina and moved our headquarters and openeda full service banking office at this location on May 14, 2007.

 

Ourassets consist primarily of our investment in the Bank and liquid investments.Our primary activities are conducted through the Bank. As of December 31,2007, our consolidated total assets were $79,840,567, our consolidated totalloans were $54,736,304, our consolidated total deposits were $60,279,810, andour total shareholders’ equity was approximately $14,332,678.

 

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

 

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Ouroperations are significantly affected by prevailing economic conditions,competition, and the monetary, fiscal, and regulatory policies of governmentalagencies. Lending activities are influenced by a number of factors, includingthe general credit needs of individuals and small and medium-sized businessesin our market areas, competition among lenders, the level of interest rates,and the availability of funds. Deposit flows and costs of funds are influencedby prevailing market rates of interest, primarily the rates paid on competinginvestments, account maturities, and the levels of personal income and savingsin our market areas.

 

**Marketing Focus**

 

CongareeState Bank is a locally-owned and operated bank organized to serve consumersand small- to mid-size businesses and professional concerns.  A primary reason for operating the bank liesin our belief that a community-based bank, with a personal focus, can betteridentify and serve local relationship banking needs than can a branch orsubsidiary of larger outside banking organizations.  We believe that we can be successful byoffering a higher level of customer service and a management team more focusedon the needs of the community than most of our competitors.  We believe that this approach will beenthusiastically supported by the community. Our future profitability, however, is dependent on a number of factors,including the continued success of the economy and the successfulimplementation of our business strategies. No assurance can be given that economic conditions will remain favorablein our market or that we successfully achieve or maintain profitability in thefuture.

 

**Banking Services**

 

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

 

**Location and Service Area**

 

Ourprimary service area consists of Lexington and Richland Counties, with aprimary focus on an area within a 15 mile radius of our office in WestColumbia, South Carolina.  Our Sunsetoffice is located in West Columbia on a major artery that connects Columbiawith Lexington.  We opened the Sunsetoffice in January, 2008.  The site islocated approximately one mile east of the Lexington Medical Center andprovides excellent visibility for the Bank. In May, 2007, we opened a new branch and administration office at 1201Knox Abbot Drive, Cayce, South Carolina. Our anticipated expansion plans include opening an additional branchstrategically located in our primary service area by the end of 2008.  This branch will extend the market reach ofour bank, and it will increase our personal service delivery capabilities toall of our customers.  We plan to takeadvantage of existing contacts and relationships with individuals and companiesin this area to more effectively market the services of the bank.

 

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

 

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Ourprimary service area has also experienced solid population growth.  Since 1950, the population in LexingtonCounty has increased over 380%.  Based onU.S. Census data, West Columbia is the largest city in Lexington County withapproximately 13,000 residents in 2000, representing a growth rate ofapproximately 23% from 1990 to 2000. This significantly outpaced the rates of population growth of the Stateof South Carolina and the United States during this period which wereapproximately 15% and 13%, respectively. Lexington County shared similar population growth.  From 1990 to 2000, Lexington County’s growthrate of approximately 29% ranked in the top five of all counties in SouthCarolina.  Together, Lexington andRichland Counties had a population of over 536,000 as of the 2000 census, whichis expected to increase to approximately 600,000 by 2010, or 12%.  Within a 15 mile radius of our proposed mainbank, the population grew at a rate of approximately 14% between 1990 and2000.  This growth in population hascontributed to a significant increase in construction activity in thearea.  According to the Central MidlandsCouncil of Governments, new single family housing units approved forconstruction in Lexington and Richland Counties increased from 2,172 in 1990 to4,941 in 2004, an increase of over 127%. We believe that these trends will continue and presents a growthopportunity for our bank.  Ultimately,the success of our bank will depend on the economy of the community, and aneconomic downturn would hurt our business. We believe that the demographic factors in Lexington and RichlandCounties make it a desirable market in which to grow our bank.

 

**LendingActivities**

 

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

 

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

 

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

 

*Allowance for Loan Losses.*  We maintain an allowance forloan losses, which we establish through a provision for loan losses chargedagainst income.  We charge loans againstthis allowance when we believe that the collectibility of the principal isunlikely.  The allowance is an estimatedamount that we believe is adequate to absorb losses inherent in the loanportfolio based on evaluations of its collectibility.  Our allowance for loan losses isapproximately 1.00% of the average outstanding balance of our loans, based onour consideration of several factors, including regulatory guidelines, mix ofour loan portfolio, and evaluations of local economic conditions as well aspeer data.  Over time, we willperiodically determine the amount of the allowance based on our considerationof several factors, including:

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

 

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

 

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

 

*Real Estate Loans. *One of the primary components of our loanportfolio is loans secured by first or second mortgages on real estate.  As of December 31, 2007, loans securedby first or second mortgages on real estate made up approximately $46,122,196,or 83.4% of our loan portfolio. These loans will generally fall into one of twocategories: real estate – mortgage and real estate – construction.  These categories are discussed in more detailbelow, including their specific risks. Interest rates for all categories may be fixed or adjustable, and willmore likely be fixed for shorter-term loans. The bank will generally charge an origination fee for each loan.

 

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

 

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

 

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

 

·                  *Residential Real EstateLoans. *At December 31, 2007, our individualresidential real estate loans ranged in size from $120,000 to $975,000, with anaverage loan size of approximately $385,000. These loans generally have longer terms of up to 30 years.  We offer fixed and adjustable rate mortgages,and we intend to sell most, if not all, of the residential real estate loansthat we generate in the secondary market soon after we originate them.  We do not intend to retain servicing 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 exposure to creditrisk because the loans will be underwritten through a third party agent withoutany recourse against the bank.  At December 31,2007, residential real estate loans (other than construction loans) totaled$3,803,706, or 6.9% of our loan portfolio.

 

·                  *Commercial Real Estate Loans*.  At December 31,2007, our individual commercial real estate loans ranged in size from $45,000to $1,700,000, with an average loan size of approximately $325,000.  Commercial real estate loans generally 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 a 

 

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commercial real estate loan’ssecured real estate will decrease, and thereby be insufficient to satisfy theloan.  To mitigate these risks, weevaluate each borrower on an individual basis and attempt to determine itsbusiness risks and credit profile.  Weattempt to reduce credit risk in the commercial real estate portfolio byemphasizing loans on owner-occupied office and retail buildings where theloan-to-value ratio is established by independent appraisals.  We typically review the personal financialstatements of the principal owners and require their personal guarantees.  These reviews often reveal secondary sourcesof payment and liquidity to support a loan request.  At December 31, 2007, commercial realestate loans (other than construction loans) totaled $22,048,484, or 39.9% ofour loan portfolio.

 

·                  *Real Estate - Construction. *We offer adjustable and fixed rate residential and commercialconstruction loans to builders and developers and to consumers who wish tobuild their own home.  The term ofconstruction and development loans will generally be limited to 18 months,although payments may be structured on a longer amortization basis.  Most loans will mature and require payment infull upon the sale of the property. Construction and development loans generally carry a higher degree ofrisk 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 risk by obtaining personalguarantees where possible, and by keeping the loan-to-value ratio of thecompleted project below specified percentages. We may also reduce risk by selling participations in larger loans toother institutions when possible.  At December 31,2007, total construction loans amounted to $8,188,004, or 14.8% of our loanportfolio.

 

*Commercial Loans*.  Thebank makes loans for commercial purposes in various lines of businesses. Wefocus our 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 atmaturity.  Trade letters of credit,standby letters of credit, and foreign exchange are handled through acorrespondent bank as agent for the bank. Commercial loans primarily have riskthat the primary source of repayment, the borrowing business, will beinsufficient to service the debt.  Oftenthis occurs as the result of changes in local economic conditions or in theindustry in which the borrower operates which impact cash flow or collateralvalue.

 

We also offer small business loans utilizinggovernment enhancements such as the Small Business Administration’s 7(a) andSBA’s 504 programs.  These loans aretypically partially guaranteed by the government which may help to reduce thebank’s risk.  Government guarantees ofSBA loans will not exceed 80% of the loan value, and will generally beless.  At December 31, 2007,commercial loans amounted to $7,505,415, or 13.6% of our loan portfolio.

 

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*Equity and Consumer Loans*.  Thebank makes a variety of loans to individuals for personal and householdpurposes, including secured and unsecured installment loans and revolving linesof credit such as credit cards. Installment loans typically carry balances of less than $50,000 and areamortized over periods up to 60 or more months. Consumer loans may be offered on a single maturity basis where aspecific source of repayment is available. Revolving loan products typically require monthly payments of interestand a portion of the principal.

 

Consumer loans are generallyconsidered to have greater risk than first or second mortgages on real estatebecause the value of the secured property may depreciate rapidly, they areoften dependent on the borrower’s employment status as the sole source ofrepayment, 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 equity loans.  Our underwriting criteria for and the risksassociated with home equity loans and lines of credit will generally be thesame as those for first mortgage loans. Home equity lines of credit typically have terms of 15 years or less,typically carry balances less than $125,000, and may extend up to 90% of theavailable equity of each property. At December 31, 2007, individual homeequity lines of credit, which are secured by real estate, amounted to$12,082,002, or 21.9% of our loan portfolio. Consumer loans which are notsecured by real estate amounted to $1,661,293, or 3.0% of our loan portfolio.

 

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

 

**Deposit Services**

 

We offer a full range of deposit services that aretypically available in most banks and savings and loan associations, includingchecking accounts, NOW accounts, commercial accounts, savings accounts, andother time deposits of various types, ranging from daily money market accountsto longer-term certificates of deposit. The transaction accounts and time certificates are typically tailored toour primary service area at competitive rates. In addition, we offer certain retirement account services, includingIRAs.  We solicit these accounts fromindividuals, businesses, and other organizations.

 

**Other Banking Services**

 

Weoffer safe deposit boxes, cashier’s checks, banking by mail, direct deposit ofpayroll and social security checks, U.S. Savings Bonds, and travelerschecks.  The bank is associated****with the InterceptSwitch, Pulse, MasterCard, Cirrus and Plus ATM networks that may be usedby the bank’s customers throughout the country. We believe that by being associatedwith a shared network of ATMs, we are better able to serve our customers andwill be able to attract customers who are accustomed to the convenience ofusing ATMs.  We also offer a debit card and credit card servicesthrough a correspondent bank as an agent for the bank.  We anticipate that the bank eventually mayoffer other bank services including, lines of credit, 24-hour telephonebanking, and online banking.  We do notexpect the bank to exercise trust powers during its initial years of operation.

 

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**Competition**

 

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

 

**Employees**

 

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

 

**SUPERVISION AND REGULATION**

 

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

 

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

 

**Congaree Bancshares, Inc.,**

 

Weown 100% of the outstanding capital stock of the bank, and therefore we areconsidered to be a bank holding company under the federal Bank Holding CompanyAct of 1956 (the “Bank Holding Company Act”). As a result, we are primarily subject to the supervision, examinationand reporting requirements of the Board of Governors of the Federal Reserve(the “Federal Reserve”) under the Bank Holding Company Act and its regulationspromulgated thereunder.  As a bank holdingcompany located in South Carolina, the South Carolina Board of FinancialInstitutions also regulates and monitors all significant aspects of ouroperations.

 

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

 

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Activities that the Federal Reserve has found to be soclosely related to banking as to be a proper incident to the business ofbanking include:

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

 

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

 

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

 

***Change inControl****. *In addition, andsubject to certain exceptions, the Bank Holding Company Act and the Change inBank Control Act, together with regulations promulgated thereunder, requireFederal Reserve approval prior to any person or company acquiring “control” ofa bank holding company.  Moreover, theSouth Carolina Board of Financial Institutions also must approve an acquisitionof a South Carolina bank holding company. Control is conclusively presumed to exist if an individual or companyacquires 25% or more of any class of voting securities of a bank holdingcompany.  Control is rebuttably presumedto exist if a person acquires 10% or more, but less than 25%, of any class ofvoting securities and either:

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

 

Ourcommon stock is registered under Section 12 of the Securities Exchange Actof 1934.  Any shareholder of 10% or more,but less than 25% of any class of our voting securities would be required toeither file as a controlling shareholder of the company or rebut thepresumption of control in accordance with Federal Reserve 

 

8

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regulations.  The regulations provide a procedure forrebutting control when ownership of any class of voting securities is below25%.

 

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

 

***Capital Requirements.***  TheFederal Reserve Board imposes certain capital requirements on the bank holdingcompany under the Bank Holding Company Act, including a minimum leverage ratioand a minimum ratio of “qualifying” capital to risk-weighted assets.  These requirements are essentially the sameas those that apply to the bank and are described below under “Congaree StateBank - Capital Regulations.”  Subject toour capital requirements and certain other restrictions, we are able to borrowmoney to make a capital contribution to the bank, 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 regulatory restrictionsas described below in “Congaree State Bank - Dividends.”  We are also able to raise capital forcontribution to the bank by issuing securities without having to receiveregulatory approval, subject to compliance with federal and state securitieslaws.

 

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

 

**CongareeState Bank**

 

The bank operates as a state bank incorporated underthe laws of the State of South Carolina and is subject to examination by theSouth Carolina Board of Financial Institutions.

 

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

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

 

9

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| · | issuances of securities;                                                              |
|--------|---------------------------------------------------------------------------------------|
|   |                                                                                  |
| · | payment of dividends;                                                                 |
|   |                                                                                  |
| · | interest rates payable on deposits;                                                   |
|   |                                                                                  |
| · | interest rates or fees chargeable on loans;                                           |
|   |                                                                                  |
| · | establishment of branches;                                                            |
|   |                                                                                  |
| · | corporate reorganizations;                                                            |
|   |                                                                                  |
| · | maintenance of books and records; and                                                 |
|   |                                                                                  |
| · | adequacy of staff training to carry on safe lending and deposit  gathering practices. |

 

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

 

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

 
| · | internal controls;                     |
|--------|----------------------------------------|
|   |                                   |
| · | information systems and audit systems; |
|   |                                   |
| · | loan documentation;                    |
|   |                                   |
| · | credit underwriting;                   |
|   |                                   |
| · | interest rate risk exposure; and       |
|   |                                   |
| · | asset quality.                         |

 

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

 

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

 

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

 

10

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

 

·                                          Significantly Undercapitalized - 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) havinga leverage capital ratio of less than 3%.

 

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

 

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

 

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

 

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

 

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

 

***Standards for Safety andSoundness.    *** The Federal Deposit Insurance Act also requires the federal bankingregulatory agencies to prescribe, by regulation or guideline, operational andmanagerial standards for all insured depository institutions relating to: (i) internalcontrols, information systems and internal audit systems; (ii) loandocumentation; (iii) credit underwriting; (iv) interest rate riskexposure; and (v) asset growth. The agencies also must prescribe standardsfor asset quality, earnings, and stock valuation, as well as standards forcompensation, fees and benefits.  Thefederal banking agencies have adopted regulations and Interagency GuidelinesPrescribing Standards for Safety and Soundness to implement these requiredstandards. These guidelines set forth the safety and soundness standards thatthe federal banking agencies use to identify and address problems at insureddepository institutions before capital becomes impaired.  Under the regulations, if the FDIC determinesthat the bank fails to meet any standards prescribed by the guidelines, theagency may require the bank to submit to the agency an acceptable plan toachieve compliance with the standard, as required by the FDIC.  The final regulations establish deadlines forthe submission and review of such safety and soundness compliance plans.

 

11

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***Deposit Insurance and Assessments.***  Deposits at the bank are insured by theDeposit Insurance Fund (the “DIF”) as administered by the FDIC, up to theapplicable limits established by law - generally $100,000 per accountholder and$250,000 for certain retirement accountholders.   In November 2006, the FDIC adoptedfinal regulations that set the deposit insurance assessment rates that tookeffect in 2007.  The FDIC uses arisk-based assessment system that assigns insured depository institutions toone of four risk categories based on three primary sources of information -supervisory risk ratings for all institutions, financial ratios for mostinstitutions, including the company, and long-term debt issuer ratings forlarge institutions that have such ratings. The new premium rate structure imposes a minimum assessment of from fiveto seven cents for every $100 of domestic deposits on institutions that areassigned to the lowest risk category. This category is expected to encompass substantially all insured institutions,including the bank.  A one timeassessment credit is available to offset up to 100% of the 2007assessment.  Any remaining credit can beused to offset up to 90% of subsequent annual assessments through 2010.  For institutions assigned to higher riskcategories, the premium that took effect in 2007 ranges from ten cents toforty-three cents per $100 of deposits.

 

TheFDIC also collects a deposit-based assessment from insured financialinstitutions on behalf of The Financing Corporation (FICO).  The funds from these assessments are used toservice debt issued by FICO in its capacity as a financial vehicle for theFederal Savings and Loan Insurance Corporation.  The FICO assessment rate is set quarterly andin 2006 ranged from 1.32 cents to 1.24 cents per $100 of assessabledeposits.  For the first quarter of 2007,the FICO assessment rate was 1.22 cents per $100 of assessable deposits.

 

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

 

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

 

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

 

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

 

12

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

 

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

 

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

 

***Consumer Protection Regulations.*** Activities of the bank are subject to avariety of statutes and regulations designed to protect consumers.  Interest and other charges collected orcontracted for by the bank are subject to state usury laws and federal 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 public and public officials  to determine whether a financial institution is fulfilling its 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 prohibited factors in extending credit;                                                                                                                                          |
|   |                                                                                                                                                                                                                                                                                |
| · | The Fair Credit Reporting Act of 1978, as amended by the Fair and  Accurate Credit Transactions Act, governing the use and provision of  information to credit reporting agencies, certain identity theft protections  and certain credit and other disclosures;                    |
|   |                                                                                                                                                                                                                                                                                |
| · | The Fair Debt Collection Act, governing the manner in which consumer  debts may be collected by collection agencies; and                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                |
| · | The Rules and regulations of the various federal agencies  charged with the responsibility of implementing these federal laws.                                                                                                                                                 |

 

The deposit operations of the bank also are subjectto:

 

·      the Rightto Financial Privacy Act, which imposes a duty to maintain confidentiality ofconsumer financial records and prescribes procedures for complying withadministrative subpoenas of financial records; and

 

13

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

 

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

 

***Anti-Money Laundering. ***Financial institutions must maintain anti-money laundering programsthat include established 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 of applications.  The regulatory authorities have been activein imposing “cease and desist” orders and money penalty sanctions againstinstitutions 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 topromote cooperation among financial institutions, regulators, and lawenforcement entities in identifying parties that may be involved in terrorismor money laundering; (iii) reports by nonfinancial trades and businessesfiled with the Treasury Department’s Financial Crimes Enforcement Network fortransactions exceeding $10,000; and (iv) filing suspicious activitiesreports by brokers and dealers if they believe a customer may be violating U.S.laws and regulations and requires enhanced due diligence requirements forfinancial institutions that administer, maintain, or manage private bankaccounts or correspondent accounts for non-U.S. persons.  Bank regulators routinely examineinstitutions for compliance with these obligations and are required to considercompliance in connection with the regulatory review of applications.

## ** **

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

 

14

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The Office of Foreign Assets Control (“OFAC”), which is a division ofthe U.S. Department of the Treasury, is responsible for helping to insure thatUnited States entities do not engage in transactions with “enemies” of the UnitedStates, as defined by various Executive Orders and Acts of Congress.  OFAC has sent, and will send, our bankingregulatory agencies lists of names of persons and organizations suspected ofaiding, harboring or engaging in terrorist acts.  If the bank finds a name on any transaction,account or wire transfer that is on an OFAC list, it must freeze such account,file a suspicious activity report and notify the FBI.  The bank has appointed an OFAC complianceofficer to oversee the inspection of its accounts and the filing of anynotifications.  The bank actively checkshigh-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.

 

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

 

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

 

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

 

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

 
| · | allowing  check truncation without making it mandatory;                                                                                                                                                                              |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                 |
| · | demanding  that every financial institution communicate to account holders in writing a  description of its substitute check processing program and their rights under  the law;                                                     |
|   |                                                                                                                                                                                                                                 |
| · | legalizing  substitutions for and replacements of paper checks without agreement from  consumers;                                                                                                                                    |
|   |                                                                                                                                                                                                                                 |
| · | retaining  in place the previously mandated electronic collection and return of checks  between financial institutions only when individual agreements are in place;                                                                 |
|   |                                                                                                                                                                                                                                 |
| · | requiring  that when accountholders request verification, financial institutions produce  the original check (or a copy that accurately represents the original) and  demonstrate that the account debit was accurate and valid; and |
|   |                                                                                                                                                                                                                                 |
| · | requiring  the re-crediting of funds to an individual’s account on the next business day  after a consumer proves that the financial institution has erred.                                                                     |

 

15

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

 

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

 

**Risk Factors**

 

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

 

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

 

In addition,although we have grown rapidly since opening in October 2006, we may not beable to sustain this rate of growth and may not even be able to grow ourbusiness at all.  Because of ourrelatively small size and short operating history, it will be difficult for usto generate similar asset growth rates as we continue to expand, andconsequently our historical results of operations are not necessarilyindicative of our future operations.  Ifwe experience a significant decrease in our rate of growth, our results ofoperations and financial condition may be adversely affected because a highpercentage of our operating costs are fixed expenses.

 

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

 

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

 

·      the duration of the credit;

·      credit risks of a particular customer;

·      changes in economic and industry conditions;and

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

 

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

 

·      an ongoing review of the quality, mix, and size of our overall loanportfolio;

·      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.

 

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

 

While we generally underwrite the loans in ourportfolio in accordance with our own internal underwriting guidelines andregulatory supervisory guidelines, in certain circumstances we have made loanswhich exceed either our internal underwriting guidelines, supervisoryguidelines, or both.  As of December 31,2007, approximately $1,137,180 of our loans, or 7.9% of our bank’s capital, hadloan-to-value ratios that exceeded regulatory supervisory guidelines.  In addition, supervisory limits on commercialloan to value exceptions are set at 30% of our bank’s capital.  At December 31, 2007, we had $241,773 incommercial loans that exceeded the supervisory loan to value ratio.  The number of loans in our portfolio withloan-to-value ratios in excess of supervisory guidelines, our internal guidelines,or both could increase the risk of delinquencies and defaults in our portfolio.

 

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

 

Thedeclines in home prices in many markets across the U.S., along with the reducedavailability of mortgage credit, have resulted in sharp increases indelinquencies and losses in our portfolios of broker-originated,out-of-footprint home equity lines and loans, nonprime mortgages, and loansrelated to residential real estate construction and development. Furtherdeclines in home prices coupled with an economic recession and associated risesin unemployment levels could drive losses beyond that which is provided for inthe allowance for loan losses. In that event, our earnings and capital could beadversely affected.

 

***Changes in prevailing interest ratesare likely to reduce our profitability.***

 

Our results of operations depend in large part uponthe level of our net interest income, which is the difference between interestincome from interest-earning assets, such as loans and mortgage-backedsecurities, and interest expense on interest-bearing liabilities, such asdeposits and other borrowings.  Dependingon the terms and maturities of our assets and liabilities, a significant changein interest rates could have a material adverse effect on ourprofitability.  Many factors causechanges in interest rates, including governmental monetary policies anddomestic and international economic and political conditions.  While we intend to manage the effects ofchanges in interest rates by adjusting the terms, maturities, and pricing ofour assets and liabilities, our efforts may not be effective and our financialcondition and results of operations could suffer.  The Federal Reserve rapidly reducedshort-term interest rates in the first quarter of 2008 by 200 basispoints.  We anticipate that thesereductions will continue in 2008.  Theserate cuts will adversely affect our profitability in 2008, as our assetsgenerally reprice sooner than our liabilities. In the long term, we could benefit from a low interest rate environment;however, no assurance can be given that the Federal Reserve will continue todecrease interest rates or whether it will increase rates, or what results suchchanges will have on our performance.

 

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

 

Our loanlosses could exceed our allowance for loan losses.  Our average loan size continues to increaseand reliance on our historic allowance for loan losses may not beadequate.  Approximately 28.3% of ourloan portfolio is composed of construction, commercial mortgage and commercialloans. Repayment of such loans is generally considered riskier than residentialmortgage loans.  Industry experienceshows that a portion of loans will become delinquent and a portion of loanswill require partial or entire charge-off. Regardless of the underwriting criteria used, losses may be experiencedas a result of various factors beyond our control, including among otherthings, changes in market conditions affecting the value of loan collateral andproblems affecting the credit of our borrowers.

 

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***Lack of seasoning of our loan portfoliomay 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.  If delinquenciesand defaults increase, we may be required to increase our provision for loanlosses, which would adversely affect our results of operations and financialcondition.

 

***An economic downturn, especially oneaffecting the Lexington and Richland County areas, could reduce our customerbase, our level of deposits, and demand for financial products such as loans.***

 

Our success significantly depends upon the growth inpopulation, income levels, deposits, and housing starts in our markets,especially in Lexington and Richland Counties. If the communities in which we operate do not grow, or if prevailingeconomic conditions locally or nationally are unfavorable, our business may notsucceed.  An economic downturn wouldlikely contribute to the deterioration of the quality of our loan portfolio andreduce our level of deposits, which in turn would hurt our business.  Interest received on loans represented 68.15%of our interest income for the year ended December 31, 2007.  If an economic downturn occurs in the economyas a whole, or especially in the Lexington or Richland County area, borrowersmay be less likely to repay their loans as scheduled.  Moreover, the value of real estate or othercollateral that may secure our loans could be adversely affected.  Unlike many larger institutions, we are notable to spread the risks of unfavorable local economic conditions across alarge number of diversified economies. An economic downturn could, therefore, result in losses that materiallyand adversely affect our business.

 

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

 

Wetarget the banking and financial services needs of small and medium-sizedbusiness.  These businesses generallyhave fewer financial resources in terms of capital borrowing capacity thanlarger entities.  If general economicconditions negatively impact these businesses in the markets in which weoperate, our business, financial condition and results of operations may beadversely affected.

 

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

 

A significant portion of our loan portfolio issecured by real estate.  As of December 31,2007, 83.42% of our loans had real estate as a primary or secondary componentof collateral.  The real estatecollateral in each case provides an alternate source of repayment in the eventof default by the borrower and may deteriorate in value during the time thecredit is extended.  A further weakeningof the real estate market in our primary market area could result in anincrease in the number of borrowers who default on their loans and a reductionin the value of the collateral securing their loans, which in turn could havean adverse effect on our profitability and asset quality.  If we are required to liquidate thecollateral securing a loan to satisfy the debt during a period of reduced realestate values, our earnings and capital 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 depend on the accuracy and completeness of information about clientsand counterparties and our financial condition could be adversely affected ifwe rely on misleading information.***

 

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

 

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

 

F. Harvin Ray, Jr., our chief executiveofficer, has extensive and long-standing ties within our primary service areasand provides us with an important medium through which to market our productsand services.  If we lose the services ofMr. Ray, he could be difficult to replace and our business and developmentcould 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.

 

***Efforts to comply with the Sarbanes-OxleyAct will involve significant expenditures, and non-compliance with theSarbanes-Oxley Act may adversely affect us.***

 

The Sarbanes-Oxley Act of 2002, and the related rules andregulations promulgated by the Securities and Exchange Commission that are nowapplicable to us, have increased the scope, complexity, and cost of corporategovernance, reporting, and disclosure practices.  We have experienced, and we expect tocontinue to experience, greater compliance costs, including costs related tointernal controls, as a result of the Sarbanes-Oxley Act.  For example, for the year ended December 31,2009 (assuming theone-year extension recently proposed by the SEC becomes effective), our independentregistered public accounting firm will be required to attest to our internalcontrol over financial reporting, in addition to our management’sassessment.   We expect these new rules andregulations to continue to increase our accounting, legal, and other costs, andto make some activities more difficult, time consuming, and costly.  In the event that we are unable to maintainor achieve compliance with the Sarbanes-Oxley Act and related rules, we may beadversely affected.

 

If we are unable to receive a positive attestation fromour independent registered public accounting firm for the year ending December 31,2009 (assuming theone-year extension recently proposed by the SEC becomes effective) then we could besubject to scrutiny by regulatory authorities, the trading price of our commonstock could decline and our ability to obtain any necessary equity or debtfinancing could suffer.

 

In addition, the new rules adopted as a result of the Sarbanes-OxleyAct could make it more difficult or more costly for us to obtain certain typesof insurance, including directors’ and officers’ liability insurance, whichcould make it more difficult for us to attract and retain qualified persons toserve on our board of directors or as executive officers.  Moreover, these necessary costs areproportionately higher for a company of our size and will affect ourprofitability more than that of some of our larger competitors.

 

***We are subject toextensive regulation that could limit or restrict our activities.***

 

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

 

The laws andregulations applicable to the banking industry could change at any time, and wecannot predict the effects of these changes on our business andprofitability.  Because governmentregulation greatly affects the business and financial results of all commercialbanks and bank holding companies, our cost of compliance could adversely affectour ability to operate profitably.

 

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

 

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TheSarbanes-Oxley Act of 2002, and the related rules and regulations promulgatedby the Securities and Exchange Commission that are applicable to us, willincrease the scope, complexity, and cost of corporate governance, reporting,and disclosure practices.  We have experienced,and we expect to continue to experience, significant compliance costs,including costs related to internal controls, as a result of the Sarbanes-OxleyAct.

 

***Our continued pace of growthmay require us to raise additional capital in the future, but that capital maynot be available when it is needed.***

*** ***

We arerequired by regulatory authorities to maintain adequate levels of capital tosupport our operations.  To support ourcontinued growth, we may need to raise additional capital.  Our ability to raise additional capital, ifneeded, will depend in part on conditions in the capital markets at that time,which are outside our control. Accordingly, we cannot assure you of our ability to raise additionalcapital, if needed, on terms acceptable to us. If we cannot raise additional capital when needed, our ability tofurther expand our operations through internal growth and acquisitions could bematerially impaired.  In addition, if wedecide to raise additional equity capital, your interest could be diluted.

 

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

 

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

 

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

 

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

 

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

 

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

 

·      the risk of loss of key employees andcustomers.

 

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

 

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

 

Thereis currently no established market for our common stock.  We do not expect to qualify for listing onNASDAQ or any other exchange for at least several years.  We would need a sponsoring broker-dealer tomatch buy and sell orders for our common stock in order to be listed on the OTCBulletin Board.  We currently do nothave, and we are uncertain when we will have, a sponsoring broker-dealer forour common stock.  Even if we secure abroker-dealer, the trading markets on the OTC Bulletin Board lack the depth,liquidity, and orderliness necessary to maintain a liquid market in our commonstock.  For these reasons, we do notexpect a liquid market for our common stock to develop for several years, if atall.

 

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**Item 2.   Description ofProperty.**

 

Our Sunset office, which opened in January, 2008 islocated at the intersection of Sunset Boulevard and Kim Streetapproximately one mile east of the Lexington Medical Center.  Our address is 2023 Sunset Boulevard, WestColumbia, South Carolina 29169. The building is approximately 4,100 square feet on a site that isapproximately 1.5 acres in size and is a full service banking facility with 3drive-thru lanes and a drive-thru ATM.  We also occupy another branch and administration office located at 1201Knox Abbot Drive, Cayce, South Carolina. This building is approximately 7,500 square feet in administration areaand approximately 2,100 square feet branch office with a drive in facility.  We also expect to open a third full servicebranch in our primary service area by the end of 2008.   We have not selected a location for thisoffice.

 

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

 

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

 

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

 

**Item 5.   Market forCommon Equity and Related Stockholder Matters****.**

 

There is noestablished market for our common stock. We do not expect to qualify forlisting on Nasdaq or any other exchange for at least several years.  We are currently considering whether to seeka sponsoring broker-dealer to match buy and sell orders for our common stock inorder to be quoted on the OTC Bulletin Board. Even if we become quoted, thetrading markets on the OTC Bulletin Board lack the depth, liquidity, andorderliness necessary to maintain a liquid market. The decision of whether toseek a sponsoring broker-dealer has not yet been made and remains wholly withinour discretion.

 

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

 

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

 

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

 

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**Item 6.   Management’sDiscussion and Analysis or Plan of Operation.**

 

**General**

 

Ourbank opened for business in October 2006. Accordingly, the year ended December 31,2006 included approximately three months of banking operations. The comparisonof the years ended December 31, 2007 and December 31, 2006 should beread in that context.  From January 1,2006 to October 15, 2006, we engaged in pre-opening activities, including,without limitation, the pursuit of regulatory approvals from the FDIC and theSouth Carolina Board of Financial Institutions to charter the bank and from theFederal Reserve to become a bank holding company.

 

Likemost community banks, we derive most of our income from interest we receive onour loans and investments. Our primary source of funds for making these loansand investments is our deposits, on which we pay interest. Consequently, one ofthe 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 asdeposits, also known as net interest margin. Another key measure is the spreadbetween the yield we earn on these interest-earning assets and the rate we payon our interest-bearing liabilities, which is referred to as net interestspread.

 

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

 

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

 

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.

 

**CRITICAL ACCOUNTING POLICIES**

 

Wehave adopted various accounting policies that govern the application ofaccounting principles generally accepted in the United States and with generalpractices within the banking industry in the preparation of our financialstatements. Our significant accounting policies are described in footnote 1 toour audited consolidated financial statements as of December 31, 2007,included herein.

 

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

 

**Allowance for Loan Losses**

 

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

 

Underdifferent conditions or using different assumptions, the actual amount ofcredit losses incurred by us may be different from management’s estimatesprovided in our consolidated financial statements. Refer to the 

 

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portionof this discussion that addresses our allowance for loan losses for a morecomplete discussion of our processes and methodology for determining ourallowance for loan losses.

 

**Income Taxes**

 

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

 

**Results of Operations**

 

*General*

 

Ournet loss was $2,091,123 and $672,761 for the years ended December 31, 2007and 2006, respectively. Net loss before income tax benefit was $3,073,751 forthe year ended December 31, 2007, an increase of $1,986,728, or 182.8%,compared to $1,087,023 for the year ended December 31, 2006.  The $1,986,728 increase in net loss beforeincome tax benefits resulted from a $3,071,773 increase in noninterest expense,partially offset by increases of $1,447,143 in net interest income and $90,502in other income.  Noninterest income increasedfrom $11,268 for the year ended December 31, 2006 to $101,770 for the yearended December 31, 2007.  We alsorecorded a provision for loan losses of $502,600 and $50,000 for the yearsended December 31, 2007 and 2006, respectively.

 

Weincurred $847,904 in pre-opening expenses during the period from our inceptionon November 2, 2005 through October 16, 2006, the date our bankopened for business, and only had approximately three months of bankingoperations in 2006.  Our organizationalcosts were expensed when incurred in accordance with FASB Statement of Position(SOP) 98-5, “Reporting on the Costs of Start-Up Activities.”

 

*Net Interest Income*

 

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

 

Netinterest income was $1,593,231 for the year ended December 31, 2007, anincrease of $1,447,143 or 990.5% over net interest income of $146,088 for theyear ended December 31, 2006. Interest income of $3,159,901 for the year ended December 31, 2007included $2,153,450 on loans, $565,520 on investment securities and $440,931 onfederal funds sold.  Loan interest andrelated fees improved $2,094,049 or 3,525.2% over 2006, due to continued growthin the loan portfolio volume. Total interest expense of $1,566,670 for the yearended December 31, 2007 included $1,500,322 related to deposit accountsand $66,348 on federal funds purchased and Federal Home Loan Bank borrowings.  Interest expense on deposits increased$1,467,529, or 4,475.1%, due to continued growth in deposits, primarilycertificates of deposit.

 

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

 

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

**For the Years Ended December 31,**

** **
| ** **                                          | ** ** | **2007**              | ** ** | **2006**                  | ** **    |
|-----------------------------------------------------|------------|-----------------------|------------|---------------------------|---------------|
| ** **                                          | ** ** | **Average   balance** | ** ** | **Income/  expense** | ** **    | **Yield  /rate** | ** ** | **Average   balance** | ** ** | **Income/  expense** | ** ** | **Yield/  rate** | ** ** |
| **Interest-earning assets:**                        | ** ** | ** **            | ** ** | ** **                | ** **    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Federal funds sold                                  |       | $                     | 8,557,961  |                      | $             | 440,931 |   | 5.15 | % | $ | 2,452,940 |   | $ | 143,779 |   | 5.86 | % |
| Investment securities and FHLB stock                |       | 10,412,377            |       | 565,520                   |          | 5.43 |   | 717,604 |   | 37,884 |   | 5.28 |   |
| Loans (1)                                           |       | 26,821,247            |       | 2,153,450                 |          | 8.03 |   | 377,122 |   | 59,401 |   | 15.75 |   |
| **Total interest-earning assets**                   |       | 45,791,585            |       | 3,159,901                 |          | 6.90 |   | 3,547,666 |   | 241,064 |   | 6.80 |   |
| Non-earning assets                                  |       | 2,978,508             |       |                      |          |   |   | 1,064,601 |   |   |   |   |   |
| Total assets                                        |       | $                     | 48,770,093 |                      |          |   |   |   | $ | 4,612,267 |   |   |   |   |   |
|                                                |       |                  |       |                      |          |   |   |   |   |   |   |   |   |
| **Interest-bearing liabilities:**                   | ** ** | ** **            | ** ** | ** **                | ** **    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest checking                                   |       | $                     | 1,969,755  |                      | $             | 30,079 |   | 1.53 | % | $ | 75,416 |   | $ | 1,586 |   | 2.10 | % |
| Savings and money market                            |       | 15,443,173            |       | 792,748                   |          | 4.75 |   | 102,984 |   | 4,512 |   | 4.38 |   |
| Time deposits                                       |       | 14,094,229            |       | 736,814                   |          | 5.23 |   | 463,502 |   | 26,696 |   | 5.76 |   |
| Federal funds purchased and repurchase  agreement   |       | 1,553,252             |       | 7,029                     |          | 4.27 |   | 860,700 |   | 62,183 |   | 7.22 |   |
| **Total interest-bearing liabilities**              |       | 33,060,409            |       | 1,566,670                 |          | 4.74 |   | 1,502,602 |   | 94,977 |   | 6.32 |   |
| Non-interest bearing liabilities                    |       | 3,848,730             |       |                      |          |   |   | 411,814 |   |   |   |   |   |
| Shareholders’ equity                           |       | 11,860,954            |       |                      |          |   |   | 2,697,851 |   |   |   |   |   |
| **Total liabilities and shareholders’ equity** |       | $                     | 48,770,093 |                      |          |   |   |   | $ | 4,612,267 |   |   |   |   |   |
| **Net interest spread**                             |       |                  |       |                      |          | 2.16 | % |   |   |   |   | 0.48 | % |
| **Net interest income/margin**                      | ** ** | ** **            |       | **$**                     | **1,593,231** | ** ** | 3.48 | % |   |   | **$** | **146,087** |   | 4.12 | % |

 

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(1) Loan fees, which are immaterial, are included in interest income.  There were no nonaccrual loans for eitherperiod.

 

Ourconsolidated net interest margin for the year ended December 31, 2007 was3.48%, a decrease of 64 basis points from the net interest margin of 4.12% forthe year ended December 31, 2006. The net interest margin is calculated by dividing net interest income byyear-to-date average earning assets. This decrease can be attributed to the costs of our fundingsources.  We relied on a higher volume ofmoney market deposits to fund the growth of our loan portfolio in 2007.  These deposits are priced higher than coredeposits. Additionally, for the first time in 2007, we utilized alternative fundingsources of federal funds purchased. Earning assets averaged $45,791,585 for theyear ended December 31, 2007, increasing from $3,547,666 for the yearended December 31, 2006. Our net interest spread was 2.16% for the yearended December 31, 2007. The net interest spread is the difference betweenthe yield we earn on our interest-earning assets and the rate we pay on ourinterest-bearing liabilities. In pricing deposits, we consider our liquidityneeds, the direction and levels of interest rates and local market conditions.As such, higher rates have been paid initially to attract deposits.

 

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*Rate/Volume Analysis*

 

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

* *
| ** **                                       | ** ** | **2007 Compared to 2006** | ** ** |
|--------------------------------------------------|------------|---------------------------|------------|
| ** **                                       | ** ** | **Total  Change**         | ** ** | **Change in  Volume** | ** ** | **Change in  Rate** | ** ** |
| **Interest-earning  assets:**                    | ** ** | ** **                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Federal funds sold                               |       | $                         | 297,152    |   | $ | (150,630 | ) | $ | 447,782 |   |
| Investment securities and FHLB stock             |       | 527,636                   |       | 398,315 |   | 129,321 |   |
| Loans                                            |       | 2,094,049                 |       | 2,032,720 |   | 61,329 |   |
| **Total interest income**                        |       | 2,918,837                 |       | 2,280,405 |   | 638,432 |   |
|                                             |       |                      |       |   |   |   |   |
| **Interest-bearing  liabilities:**               | ** ** | ** **                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest-bearing deposits                        |       | 1,467,529                 |       | 1,470,491 |   | (2,962 | ) |
| Federal funds purchased and Repurchase agreement |       | 4,165                     |       | 29,395 |   | (25,230 | ) |
| **Total interest expense**                       |       | 1,471,694                 |       | 1,499,886 |   | (28,192 | ) |
| **Net interest income**                          |       | $                         | 1,447,143  |   | $ | 780,520 |   | $ | 666,624 |   |

 

*Provision for Loan Losses*

 

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

 

Ourprovision for loan losses for the year ended December 31, 2007 was$502,600, an increase of $452,600 or 905.2% over our provision of $50,000 forthe year ended December 31, 2006. The allowance as a percentage of gross loans continues to be maintainedat approximately 1.00% due to management’s continued evaluation of the adequacyof the 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 lossallowance.

 

*Noninterest Income*

 

Noninterestincome for the year ended December 31, 2007 was $101,770 compared to$11,268 for the year ended December 31, 2006.  Service charges and other fees on depositaccounts were $23,087 for the year ended December 31, 2007 an improvementof $23,013 over the year ended December 31, 2006 due to an increase indeposit accounts.  For the year ended December 31,2007, mortgage loan origination fees were $53,580, an increase of $51,355, or2,308.1% from 2006, as we continued to increase the volume of mortgage loansoriginated.

 

26

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*Noninterest Expenses*

 

Thefollowing table sets forth information related to our noninterest expenses forthe year ended December 31, 2007 and 2006.

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

 

Noninterestexpense was $4,266,152 for the year ended December 31, 2007 compared to$1,194,379 for the year ended December 31, 2006.  The most significant component of noninterestexpense is compensation and benefits, which totaled $2,286,714 for the yearended December 31, 2007, compared to $593,216 for the year ended December 31,2006. The increase primarily related to staff additions associated with thebank’s growth, performance raises and increases in bank-paid employee healthcare and other insurance costs. Occupancy and equipment expense of $254,131 in 2007 increased from $155,151in 2006.  Occupancy and equipment costswere higher in 2007 due to amortization of leasehold improvements, and otheroccupancy expenses associated with a second full service branch that opened in2007. Data processing and related expense increased from $31,979 in 2006 to$276,151 in 2007, primarily due to an increase in our core processor chargesbecause of the increased volume of new accounts. Legal and audit fees increasedfrom $75,464 in 2006 to $202,532 in 2007, as a result of complying with theSarbanes-Oxley Act of 2002.  Other professionalfees increased from $80,000 in 2006 to $140,197 in 2007, primarily due to asearch firm fee paid in conjunction with the hiring of a senior lender duringthe first quarter of 2007, as well as additional third-party consultant costsincurred for compliance, loan and internal audit reviews. Supplies, postage andtelephone increased from $39,100 in 2006 to $111,803 in 2007 as a result ofopening a new branch and the move to the operations center.  Credit related expenses were $82,341 in 2007as a result of the bank’s loan growth. Regulatory fees and FDIC insurance were $38,373 in 2007 as we beganincurring FDIC assessments. These assessments are based on deposit levels.

 

*Income Tax Benefit*

 

TheCompany had no currently taxable income for the years ended December 31,2007 and 2006.  The Company has recordeda deferred tax benefit based on an effective rate of 34%.

 

***Balance Sheet Review***

 

*General*

 

AtDecember 31, 2007, total assets were $79,840,567 compared to $24,078,121at December 31, 2006, for an increase of $55,762,446, or 231.6%.  The increase in assets resulted from volumeincreases in our loan and investment portfolios and related increases in ourfunding sources of deposits and other borrowings.  Interest-earning assets comprisedapproximately 88.3% and 87.0% of total assets at December 31, 2007 and December 31,2006.  Gross loans totaled $55,288,904,an increase of $50,293,123, or 1,006.7% from $4,995,781 at December 31,2006.  Investment securities were$15,101,676, an increase of $10,887,170 or 258.3% from $4,214,506 at December 31,2006.  Investment in overnight federalfunds decreased $11,617,000 to $110,000 at December 31, 2007.  During 2007, we moved these funds into higheryielding securities available for sale and loans, and at December 31,2007, we were in a federal funds purchased (borrowing) position of$3,658,000.  We completed our permanentheadquarters on May 14, 2007 and the costs of $1,420,799 included in “buildingconstruction in progress” at December 31, 2006 were transferred to “propertyand equipment”, which totaled $1,633,383, at December 31, 2007.

 

27

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Depositstotaled $60,279,810 at December 31, 2007, a $52,271,244, or 652.7%increase from $8,008,566 at December 31, 2006. Federal funds purchasedwere $3,658,000 at December 31, 2007. No amounts were outstanding at December 31, 2006.  Shareholders’ equity was $14,332,678 and$16,057,221 at December 31, 2007 and December 31, 2006, respectively.

 

*Investments*

 

AtDecember 31, 2007, our available for sale investment securities portfoliowas $14,833,432 and represented approximately 18.58% of our total assets.Investments increased $10,618,926 from $4,214,506 at December 31,2006.  Our portfolio consisted of U.S.government sponsored agencies of $6,888,242 and mortgage-backed agencies of$7,945,190.

 

Contractualmaturities and yields on our investment securities available for sale at December 31,2007 are shown in the following table. Expected maturities may differ fromcontractual maturities because issuers may have the right to call or prepayobligations with or without call or prepayment penalties.

 
| ** **                          | ** ** | **Less  than** | ** ** | **One year  to** | ** ** | **Five  years**   | ** ** | ** **          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|----------------|------------|------------------|------------|-------------------|------------|---------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                          | ** ** | **one year**   | ** ** | **five  years**  | ** ** | **to ten  years** | ** ** | **Over ten  years** | ** ** | **Total**  | ** ** |
| **2007**                            | ** ** | **Amount**     | ** ** | **Yield**        | ** ** | **Amount**        | ** ** | **Yield**           | ** ** | **Amount** | ** ** | **Yield**  | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** |
| U.S. Government  sponsored agencies |       | —         |       | —           |       | $                 | 2,035,900  |                | 5.23       | %          | $          | 3,958,774  |       | 5.36       | %          | $ | 893,568 |   | 5.44 | % | $ | 6,888,242 |   | 5.33 | % |
| Mortgage-backed  agencies           |       | —         |       | —           |       | —            |       | —              |       | 1,493,268  |       | 5.44       |       | 6,451,922  |       | 5.45 |   | 7,945,190 |   | 5.45 |   |
| Total                               |       | —         |       | —           |       | $                 | 2,035,900  |                | 5.23       | %          | $          | 5,452,042  |       | 5.38       | %          | $ | 7,345,490 |   | 5.45 | % | $ | 14,833,432 |   | 5.40 | % |
|                                     |            |                |            |                  |            |                   |            |                     |            |            |            |            |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

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

 

Webelieve, based on industry analyst reports and credit ratings, thedeterioration in fair values of individual investment securities available forsale is attributed to changes in market interest rates and not in the creditquality of the issuer and therefore, these losses are not consideredother-than-temporary. We have the ability and intent to hold these securitiesuntil such time as the value recovers or the securities mature.

 

Investment securities with market values ofapproximately $4,247,344 and $4,195,988 at December 31, 2007 and 2006,respectively, were pledged to secure public deposits and securities sold underagreements to repurchase.

 

We had no sales of investment securities in 2007and 2006.

 

In 2007, we became a member of the Federal HomeLoan Bank, and at December 31, 2007, we held non-marketable equitysecurities, which consisted of Federal Home Loan Bank stock of $112,900 andSilverton Bank of $155,344.  Thisinvestment is carried at cost, which approximates fair market value.

 

28

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*Loans*

 

Sinceloans typically provide higher interest yields than other interest-earningassets, it is our goal to ensure that the highest percentage of our earningassets is invested in our loan portfolio. Gross loans outstanding at December 31,2007 were $55,288,904, or 78.4% of interest-earning and 69.2% of total assets,compared to $4,995,781, or 23.9% of interest-earning and 20.7% of total assetsat December 31, 2006.

 

Loanssecured by real estate mortgages comprised approximately 83.4% of loansoutstanding at December 31, 2007 and 87.3% at December 31, 2006. Mostof our real estate loans are secured by residential and commercial properties.We do not generally originate traditional long term residential mortgages, butwe do issue traditional second mortgage residential real estate loans and homeequity lines of credit. We obtain a security interest in real estate wheneverpossible, in addition to any other available collateral. This collateral istaken to increase the likelihood of the ultimate repayment of the loan.Generally, we limit the loan-to-value ratio on loans we make to 80%.

 

Commercialloans and lines of credit represented approximately 13.6% and 3.2% of our loanportfolio at December 31, 2007 and 2006, respectively.

 

Ourconstruction and development, and land loan portfolio increased in 2007, dueprimarily to the significant amount of construction activity in 2007.  These loans represented approximately 14.8%and 8.9% at December 31, 2007 and 2006, respectively.

 

Dueto the short time our portfolio has existed, the loan mix shown below may notbe indicative of the ongoing portfolio mix. We attempt to maintain a relativelydiversified loan portfolio to help reduce the risk inherent in concentration ofcertain types of collateral.

 

Thefollowing table summarizes the composition of our loan portfolio as of December 31,2007 and 2006.

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

 

*Maturities and Sensitivity of Loans to Changes in InterestRates*

 

Theinformation in the following tables is based on the contractual maturities ofindividual loans, including loans which may be subject to renewal at theircontractual maturity. Renewal of such loans is subject to review and creditapproval, as well as modification of terms upon maturity. Actual repayments ofloans may differ from the maturities reflected below because borrowers have theright to prepay obligations with or without prepayment penalties.

 

29

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Thefollowing table summarizes the loan maturity distribution by composition andinterest rate types at December 31, 2007.

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

 

*Provision and Allowance for Loan Losses*

 

Wehave established an allowance for loan losses through a provision for loanlosses charged to expense on our consolidated statement of operations. Theallowance for loan losses was $552,600 and $50,000 as of December 31, 2007and December 31, 2006, respectively, and represented 1.0% of outstandingloans at December 31, 2007 and December 31, 2006. The allowance forloan losses represents an amount which we believe will be adequate to absorbprobable losses on existing loans that may become uncollectible. Our judgmentas to the adequacy of the allowance for loan losses is based on a number ofassumptions about future events, which we believe to be reasonable, but whichmay or may not prove to be accurate. Our determination of the allowance forloan losses is based on evaluations of the collectibility of loans, includingconsideration of factors such as the balance of impaired loans, the quality,mix, and size of our overall loan portfolio, economic conditions that mayaffect the borrower’s ability to repay, the amount and quality of collateralsecuring the loans, our historical loan loss experience, and a review ofspecific problem loans. We also consider subjective issues such as changes inthe lending policies and procedures, changes in the local/national economy,changes in volume or type of credits, changes in volume/severity of problemloans, quality of loan review and board of director oversight, concentrationsof credit, and peer group comparisons. Due to our limited operating history, todate the provision for loan losses has been made primarily as a result of ourassessment of general loan loss risk compared to banks of similar size andmaturity.

 

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

 

Becauseof our short operating history and the lack of seasoning of our loan portfolio,we do not allocate the allowance for loan losses to specific categories ofloans. Instead, we evaluate the adequacy of the allowance for loan losses on anoverall portfolio basis utilizing our credit grading system which we apply toeach loan. We have retained an independent consultant to review the loan fileson a test basis to assess the grading of samples of loans.

 

30

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Therewere no charge-offs in 2007 and 2006. There were no nonaccrual or nonperforming loans at December 31,2007 or 2006, and no accruing loans which were contractually past due 90 daysor more as to principal or interest payments. Generally, a loan will be placedon nonaccrual status when it becomes 90 days past due as to principal orinterest, or when management believes, after considering economic and businessconditions and collection efforts, that the borrower’s financial condition issuch that collection of the loan is doubtful. A payment of interest on a loanthat is classified as nonaccrual will be recognized as income whenreceived.  At December 31, 2007, wewere not aware of any potential problem loans, nor any loans consideredimpaired.

 

The followingtable presents a summary of changes in the allowance for loan losses for thepast two years (dollar amounts are presented in thousands):

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

 

*Deposits*

 

Our primary source forour loans and investments is our deposits. Total deposits as of the years endedDecember 31, 2007 and 2006 were $60,279,810 and $8,008,566, respectively.The following table shows the balance outstanding and the average rates paid ondeposits during 2007 and 2006.

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

 

31

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

 

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

 
| Three months or less            |   | $         | 5,558,287  |   |
|---------------------------------|--------|-----------|------------|--------|
| Over three through six  months  |   | 2,737,150 |       |
| Over six through twelve  months |   | 5,090,603 |       |
| Over twelve months              |   | 300,776   |       |
| Total                           |   | $         | 13,626,816 |   |

 

*Borrowingsand lines of credit*

 

At December 31, 2007, the bank had short-termlines of credit with correspondent banks to purchase a maximum of $7,900,000 inunsecured federal funds on a one to fourteen day basis for general corporatepurposes. The interest rate on borrowings under these lines is the prevailingmarket rate for federal funds purchased. These accommodation lines of creditare renewable annually and may be terminated at any time at the correspondentbanks’ sole discretion.  The Bankutilized these lines of credit during the fourth quarter of 2007. The highestmonth-end amount outstanding was $3,658,000 at December 31, 2007, and theaverage interest rate paid on these borrowings during the fourth quarter was5.01%.  At December 31, 2007,$3,658,000 was outstanding at an interest rate of 4.60%.  No amounts were outstanding at December 31,2006, or during the year then ended.

 

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

 

**CapitalResources**

 

Total shareholders’equity was $14,332,678 at December 31, 2007 a decrease of $1,724,543 from$16,057,221 at December 31, 2006. Capital surplus increased due to stockcompensation expense of $279,514 in 2007. Shareholders’ equity was reduced byour net loss of $2,091,123 for the year ended December 31, 2007.Unrealized gains on investment securities available for sale increasedshareholders’ equity by $87,066 during 2007.

 

The Federal Reserve andbank regulatory agencies require bank holding companies and financialinstitutions to maintain capital at adequate levels based on a percentage ofassets and off-balance sheet exposures, adjusted for risk weights ranging from0% to 100%.  The Federal Reserveguidelines contain an exemption from the capital requirements for “small bankholding companies”, which in 2006 were amended to cover most bank holdingcompanies with less than $500 million in total assets that do not have amaterial amount of debt or equity securities outstanding registered with theSEC.  Although we file periodic reportswith the SEC, we believe that because our stock is not registered under Section 12of the Securities Exchange Act and is not listed on any exchange or otherwiseactively traded, the Federal Reserve Board will interpret its new guidelines tomean that we qualify as a small bank holding company.  Nevertheless, our Bank remains subject tothese capital requirements.  Failure tomeet minimum capital requirements can initiate certain mandatory and possiblyadditional discretionary actions by regulators that, if undertaken, could havea direct material effect on the Bank’s financial statements.  Under capital adequacy guidelines and theregulatory framework for prompt corrective action, the Bank must meet specificcapital guidelines that involve quantitative measures of the Bank’s assets,liabilities and certain off-balance sheet items as 

 

32

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calculated underregulatory accounting practices.  TheBank’s capital amounts and classifications are also subject to qualitativejudgments by the regulators about components, risk weightings, and otherfactors.  Regardless, our Bank is “wellcapitalized” under these minimum capital requirements as set per bankregulatory agencies.

 

Under the capitaladequacy guidelines, regulatory capital is classified into two tiers. Theseguidelines require an institution to maintain a certain level of Tier 1 andTier 2 capital to risk-weighted assets. Tier 1 capital consists of commonshareholders’ equity, excluding the unrealized gain or loss on securitiesavailable for sale, minus certain intangible assets. In determining the amountof risk-weighted assets, all assets, including certain off-balance sheetassets, are multiplied by a risk-weight factor of 0% to 100% based on the risksbelieved to be inherent in the type of asset. Tier 2 capital consists of Tier 1capital plus the general reserve for loan losses, subject to certainlimitations. We are also required to maintain capital at a minimum level basedon total average assets, which is known as the Tier 1 leverage ratio.

 

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

 

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

 
| ** **                | ** ** | **2007**   | ** ** | **2006** | ** ** |
|---------------------------|------------|------------|------------|----------|------------|
| ** **                | ** ** | ** ** | ** ** | **Bank** | ** ** | ** ** | ** ** | **Bank** | ** ** |
|                      |       |       |       |     |       |   |   |   |   |
| Total risk-based capital  |       |       |       | 17.69    | %          |   |   | 135.70 | % |
| Tier 1 risk-based capital |       |       |       | 16.84    | %          |   |   | 131.25 | % |
| Leverage capital          |       |       |       | 15.99    | %          |   |   | 65.79 | % |

 

We believe that ourcapital is sufficient to fund the activities of the bank in its initial stagesof operation and that the rate of asset growth will not negatively impact thecapital base. We have no plans for significant capital expenditures in2008.  All outstanding commitments at December 31,2006 and associated with the construction of our headquarters building werepaid in 2007.

 

33

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**Returnon Equity and Assets**

 

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

 
| ** **               | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|
| Return on average assets |       | (4.29    | )%         | (14.59   | )%         |
|                     |       |     |       |     |       |
| Return on average equity |       | (17.63   | )          | (24.94   | )%         |
|                     |       |     |       |     |       |
| Equity to assets ratio   |       | 24.32    | %          | 58.49    | %          |

** **

**Effectof Inflation and Changing Prices**

 

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

 

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

 

**Off-BalanceSheet Risk**

 

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

 

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 onhistorical experience, we anticipate that a portion of these lines of creditwill not be funded.

 

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

 

34

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**Liquidity**

 

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

 

At December 31,2007, our liquid assets, consisting of cash and due from banks and federalfunds sold, amounted to $4,122,721, or approximately 5.16% of total assets. Ourinvestment securities available for sale at December 31, 2007 amounted to$14,833,432 or approximately 18.58% of total assets. Unpledged investmentsecurities traditionally provide a secondary source of liquidity since they canbe converted into cash in a timely manner. At December 31, 2007,$4,247,344 of our investment securities were pledged to secure public entitydeposits and as collateral for securities sold under agreement to repurchase.

 

Our ability to maintainand expand our deposit base and borrowing capabilities serves as our primarysource of liquidity. We plan to meet our future cash needs through theliquidation of temporary investments and the generation of deposits. Inaddition, we will receive cash upon the maturities and sales of loans andmaturities, calls and prepayments on investment securities. We maintain federalfunds purchased lines of credit with correspondent banks totaling $7,900,000.Availability on these lines of credit was $4,242,000 at December 31, 2007.We are a member of the Federal Home Loan Bank (“FHLB”), from which applicationsfor borrowings can be made.  The FHLBrequires that investment securities or qualifying mortgage loans be pledged tosecure advances from them. We are also required to purchase FHLB stock in apercentage of each advance.  We have notmade application for borrowings from the FHLB at December 31, 2007. Webelieve that our existing stable base of core deposits along with continuedgrowth in this deposit base will enable us to successfully meet our long termliquidity needs.

 

**MarketRisk**

 

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

 

We actively monitor andmanage our interest rate risk exposure principally by measuring our interestsensitivity “gap,” which is the positive or negative dollar difference betweenassets and liabilities that are subject to interest rate repricing within agiven period of time. Interest rate sensitivity can be managed by repricingassets or liabilities, selling securities available for sale, replacing anasset or liability at maturity, or adjusting the interest rate during the lifeof an asset or liability. Managing the amount of assets and liabilitiesrepricing in this same time interval helps to hedge the risk and minimize theimpact on net interest income of rising or falling interest rates. We generallywould benefit from increasing market rates of interest when we have anasset-sensitive gap position and generally would benefit from decreasing marketrates of interest when we are liability-sensitive.  The analysis presents only a static view ofthe timing of maturities and repricing opportunities, without taking intoconsideration that changes in interest rates do not affect all assets and liabilitiesequally. For example, rates paid on a substantial portion of core deposits maychange contractually within a relatively short time frame, but those rates areviewed by us as significantly less interest-sensitive than market-based ratessuch as those paid on noncore deposits. Net interest income may be affected byother significant factors in a given interest rate environment, includingchanges in the volume and mix of interest-earning assets and interest-bearingliabilities.

 

35

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**InterestRate Sensitivity**

 

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

 

The following table setsforth information regarding our rate sensitivity, as of December 31, 2007at each of the time intervals. The information in the table may not beindicative of our rate sensitivity position at other points in time. Inaddition, the repricing distribution indicated in the table differs from thecontractual maturities of certain interest-earning assets and interest-bearingliabilities presented due to consideration of prepayment speeds under variousinterest rate change scenarios in the application of the interest rate sensitivitymethods described above.

 
| ** **                                               | ** ** | ** **              | ** ** | **After three**               | ** ** | **After one but**      | ** ** | ** **             | ** ** | ** ** | ** ** |
|----------------------------------------------------------|------------|-------------------------|------------|-------------------------------|------------|------------------------|------------|------------------------|------------|------------|------------|
| **December 31, 2007**                               | ** ** | **Within three months** | ** ** | **But within  twelve months** | ** ** | **within five  years** | ** ** | **After five   years** | ** ** | **Total**  | ** ** |
|                                                     |       |                    |       |                          |       |                   |       |                   |       |       |       |
| Interest-earning assets:(in thousands)                   |       |                    |       |                          |       |                   |       |                   |       |       |       |
| Federal funds sold                                       |       | $                       | 110        |                          | $          | —                 |       | $                      | —     |       | $          | — |   | $ | 110 |   |
| Investment securities                                    |       | 1,030                   |       | 1,542                         |       | 7,714                  |       | 4,816                  |       | 15,102     |       |
| Loans                                                    |       | 33,835                  |       | 3,915                         |       | 16,845                 |       | 694                    |       | 55,289     |       |
| Total interest-earning  assets                           |       | $                       | 34,975     |                          | $          | 5,457                  |       | $                      | 24,559     |       | $          | 5,510 |   | $ | 70,501 |   |
|                                                     |       |                    |       |                          |       |                   |       |                   |       |       |       |
| Interest-bearing liabilities:(in thousands)              |       |                    |       |                          |       |                   |       |                   |       |       |       |
| Interest-bearing checking                                |       | $                       | 5,670      |                          | $          | —                 |       | $                      | —     |       | $          | — |   | $ | 5,670 |   |
| Money market and savings                                 |       | 24,481                  |       | —                        |       | —                 |       | —                 |       | 24,481     |       |
| Time deposits                                            |       | 8,357                   |       | 14,942                        |       | 1,918                  |       | —                 |       | 25,217     |       |
| Federal funds purchased                                  |       | 3,658                   |       | —                        |       | —                 |       | —                 |       | 3,658      |       |
| Repurchase agreement                                     |       | 1,395                   |       | —                        |       | —                 |       | —                 |       | 1,395      |       |
| Total interest-bearing                                   |       |                    |       |                          |       |                   |       |                   |       |       |       |
| Liabilities                                              |       | $                       | 43,561     |                          | $          | 14,942                 |       | $                      | 1,918      |       | $          | — |   | $ | 60,421 |   |
|                                                     |       |                    |       |                          |       |                   |       |                   |       |       |       |
| Period gap                                               |       | $                       | (8,586     | )                             | $          | (9,485                 | )          | $                      | 22,641     |       | $          | 5,510 |   | $ | 10,080 |   |
| Cumulative gap                                           |       | $                       | (8,586     | )                             | $          | (18,071                | )          | $                      | 4,570      |       | $          | 10,080 |   | $ | 10,080 |   |
| Ratio of cumulative gap to total interest-earning assets |       | (12.18                  | )%         | (256.29                       | )%         | 6.06                   | %          | 14.30                  | %          | 14.30      | %          |

 

36

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**Item 7.  FinancialStatements.**

 

**CONGAREEBANCSHARES, INC. AND SUBSIDIARY**

 

#### **Table of Contents**

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

 

37

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## **REPORT OF INDEPENDENT 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, 2007 and 2006, and the related consolidatedstatements of operations, changes in shareholders’ equity and comprehensiveincome (loss), and cash flows for the years then ended.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these consolidatedfinancial 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 statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Congaree Bancshares, Inc. andSubsidiary, as of December 31, 2007 and 2006, and the results of theiroperations and cash flows for the years then ended in conformity withaccounting principles generally accepted in the United States of America.

 

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

 

 

/s/ Elliott Davis, LLC

Columbia, South Carolina

March 27, 2008

 

38

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# ** **

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

# **ConsolidatedBalance Sheets**

 
| ** **                                                                                                                                             | ** ** | **December 31,** | ** **     |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|----------------|
| ** **                                                                                                                                             | ** ** | **2007**              | ** **     | **2006** |   |
| **Assets:**                                                                                                                                            |       |                  |           |   |   |
| Cash and cash  equivalents:                                                                                                                            |       |                  |           |   |   |
| Cash and due  from banks                                                                                                                               |       | $                     | 4,012,721      |   | $ | 448,239 |   |
| Federal funds  sold                                                                                                                                    |       | 110,000               |           | 11,727,000 |   |
|                                                                                                                                                   |       |                  |           |   |   |
| Total cash and  cash equivalents                                                                                                                       |       | 4,122,721             |           | 12,175,239 |   |
|                                                                                                                                                   |       |                  |           |   |   |
| Securities  available for sale                                                                                                                         |       | 14,833,432            |           | 4,214,506 |   |
| Nonmarketable  equity securities                                                                                                                       |       | 268,244               |           | — |   |
| Loans receivable                                                                                                                                       |       | 55,288,904            |           | 4,995,781 |   |
| Less allowance  for loan losses                                                                                                                        |       | 552,600               |           | 50,000 |   |
|                                                                                                                                                   |       |                  |           |   |   |
| Loans, net                                                                                                                                             |       | 54,736,304            |           | 4,945,781 |   |
|                                                                                                                                                   |       |                  |           |   |   |
| Premises,  furniture and equipment, net                                                                                                                |       | 3,960,573             |           | 2,150,983 |   |
| Accrued interest  receivable                                                                                                                           |       | 338,183               |           | 78,878 |   |
| Deferred tax  asset                                                                                                                                    |       | 1,352,119             |           | 414,346 |   |
| Other assets                                                                                                                                           |       | 228,991               |           | 98,388 |   |
|                                                                                                                                                   |       |                  |           |   |   |
| Total assets                                                                                                                                           |       | **$**                 | **79,840,567** | ** ** | **$** | **24,078,121** | ** ** |
|                                                                                                                                                   |       | ** **            | ** **     | ** ** | ** ** |
| **Liabilities:**                                                                                                                                       |       |                  |           |   |   |
| Deposits:                                                                                                                                              |       |                  |           |   |   |
| Noninterest-bearing  transaction accounts                                                                                                              |       | $                     | 4,911,717      |   | $ | 723,074 |   |
| Interest-bearing  transaction accounts                                                                                                                 |       | 5,670,104             |           | 686,750 |   |
| Savings and  money market                                                                                                                              |       | 24,481,389            |           | 1,103,901 |   |
| Time deposits  $100,000 and over                                                                                                                       |       | 13,686,816            |           | 2,716,340 |   |
| Other time  deposits                                                                                                                                   |       | 11,529,784            |           | 2,778,501 |   |
|                                                                                                                                                   |       |                  |           |   |   |
| Total deposits                                                                                                                                         |       | 60,279,810            |           | 8,008,566 |   |
|                                                                                                                                                   |       |                  |           |   |   |
| Federal funds  purchased                                                                                                                               |       | 3,658,000             |           | — |   |
| Securities sold  under agreements to repurchase                                                                                                        |       | 1,395,326             |           | — |   |
| Accrued interest  payable                                                                                                                              |       | 65,019                |           | 12,334 |   |
| Other  liabilities                                                                                                                                     |       | 109,734               |           | — |   |
|                                                                                                                                                   |       |                  |           |   |   |
| Total  liabilities                                                                                                                                     |       | 65,507,889            |           | 8,020,900 |   |
|                                                                                                                                                   |       |                  |           |   |   |
| Commitments and  contingencies (Notes 14 and 19)                                                                                                       |       |                  |           |   |   |
|                                                                                                                                                   |       |                  |           |   |   |
| **Shareholders’  equity:**                                                                                                                        |       |                  |           |   |   |
| Preferred stock,  $.01 par value, 10,000,000 shares authorized; no shares issued and  outstanding                                                      |       | —                |           | — |   |
| Common stock,  $.01 par value, 10,000,000 shares authorized; 1,764,439 shares issued and outstanding  at December 31, 2007 and 2006, respectively |       | 17,644                |           | 17,644 |   |
| Capital surplus                                                                                                                                        |       | 17,141,232            |           | 16,861,718 |   |
| Retained deficit                                                                                                                                       |       | (2,913,102            | )              | (821,979 | ) |
| Accumulated other  comprehensive income (loss)                                                                                                         |       | 86,904                |           | (162 | ) |
|                                                                                                                                                   |       |                  |           |   |   |
| Total  shareholders’ equity                                                                                                                       |       | 14,332,678            |           | 16,057,221 |   |
|                                                                                                                                                   |       |                  |           |   |   |
| Total  liabilities and shareholders’ equity                                                                                                       |       | **$**                 | **79,840,567** | ** ** | **$** | **24,078,121** | ** ** |

 

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

 

39

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

**Consolidated Statements of Operations**

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

 
| ** **                                               | ** ** | **2007**      | ** **     | **2006**    | ** ** |
|----------------------------------------------------------|------------|---------------|----------------|-------------|------------|
| **Interest  income:**                                    |       |          |           |        |       |
| Loans, including  fees                                   |       | $             | 2,153,450      |        | $          | 59,401 |   |
| Securities  available for sale, taxable                  |       | 565,520       |           | 37,884      |       |
| Federal funds  sold                                      |       | 440,931       |           | 143,779     |       |
|                                                     |       |          |           |        |       |
| Total                                                    |       | 3,159,901     |           | 241,064     |       |
|                                                     |       |          |           |        |       |
| **Interest  expense:**                                   |       |          |           |        |       |
| Time deposits  $100,000 and over                         |       | 337,699       |           | 13,813      |       |
| Other deposits                                           |       | 1,162,623     |           | 18,980      |       |
| Other borrowings                                         |       | 66,348        |           | 62,183      |       |
|                                                     |       |          |           |        |       |
| Total                                                    |       | 1,566,670     |           | 94,976      |       |
|                                                     |       |          |           |        |       |
| **Net  interest income**                                 |       | 1,593,231     |           | 146,088     |       |
|                                                     |       |          |           |        |       |
| Provision for  loan losses                               |       | 502,600       |           | 50,000      |       |
|                                                     |       |          |           |        |       |
| **Net  interest income after provision for loan losses** |       | 1,090,631     |           | 96,088      |       |
|                                                     |       |          |           |        |       |
| **Noninterest  income:**                                 |       |          |           |        |       |
| Service charges  on deposit accounts                     |       | 23,087        |           | 74          |       |
| Residential  mortgage origination fees                   |       | 53,580        |           | 2,225       |       |
| Other                                                    |       | 25,103        |           | 8,969       |       |
|                                                     |       |          |           |        |       |
| Total  noninterest income                                |       | 101,770       |           | 11,268      |       |
|                                                     |       |          |           |        |       |
| **Noninterest  expenses:**                               |       |          |           |        |       |
| Salaries and  employee benefits                          |       | 2,286,714     |           | 593,216     |       |
| Net occupancy                                            |       | 254,131       |           | 50,381      |       |
| Furniture and  equipment                                 |       | 359,877       |           | 104,770     |       |
| Other operating                                          |       | 1,365,430     |           | 446,012     |       |
|                                                     |       |          |           |        |       |
| Total  noninterest expense                               |       | 4,266,152     |           | 1,194,379   |       |
|                                                     |       |          |           |        |       |
| **Loss  before income taxes**                            |       | (3,073,751    | )              | (1,087,023  | )          |
|                                                     |       |          |           |        |       |
| Income tax  benefit                                      |       | 982,628       |           | 414,262     |       |
|                                                     |       |          |           |        |       |
| **Net  loss**                                            | ** ** | **$**         | **(2,091,123** | **)**       | **$**      | **(672,761** | **)** |
|                                                     |       |          |           |        |       |
| **Loss  per share**                                      |       |          |           |        |       |
| Basic loss per  share                                    | ** ** | **$**         | **(1.19**      | **)**       | **$**      | **(1.50** | **)** |
|                                                     |       |          |           |        |       |
| Average shares  outstanding                              | ** ** | **1,764,439** | ** **     | **449,577** |       |

 

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

 

40

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

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

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

 
| ** **                                         | ** ** | ** **        |       |        |       |         |       | ** **     |       | **Accumulated**   |           |       |   |
|----------------------------------------------------|------------|-------------------|------------|-------------|------------|--------------|------------|----------------|------------|-------------------|----------------|------------|--------|
|                                               | ** ** | ** **        |       |        |       |         |       | ** **     |       | **other**         |           |       |   |
|                                               | ** ** | ** **        |       |        |       |         |       | ** **     |       | **comprehensive** |           |       |   |
|                                               |       | **Common  Stock** |       | **Capital** | ** ** | **Retained** |       | **income**     |       |              |           |
|                                               | ** ** | **Shares**        | ** ** | **Amount**  | ** ** | **surplus**  | ** ** | **deficit**    | ** ** | **(loss)**        | ** **     | **Total**  |   |
|                                               |       |              |       |        |       |         |       |           |       |              |           |       |   |
| **Balance,  December 31, 2005**               |       | 10                |       | $           | 1          |         | $          | 99             |       | $                 | (149,218       | )          | $      | — |   | $ | (149,118 | ) |
|                                               |       |              |       |        |       |         |       |           |       |              |           |       |   |
| Proceeds from  sale of stock                       |       | 1,764,429         |       | 17,643      |       | 17,626,647   |       |           |       |              |           | 17,644,290 |   |
|                                               |       |              |       |        |       |         |       |           |       |              |           |       |   |
| Costs of stock  issuance                           |       |              |       |        |       | (790,252     | )          |           |       |              |           | (790,252   | )      |
|                                               |       |              |       |        |       |         |       |           |       |              |           |       |   |
| Net loss                                           |       |              |       |        |       |         |       | (672,761       | )          |              |           | (672,761   |   |
|                                               |       |              |       |        |       |         |       |           |       |              |           |       |   |
| Other  comprehensive loss, net of taxes of $83     |       |              |       |        |       |         |       |           |       | (162              | )              | (162       | )      |
|                                               |       |              |       |        |       |         |       |           |       |              |           |       |   |
| Comprehensive  loss                                |       |              |       |        |       |         |       |           |       |              |           | (672,923   | )      |
|                                               |       |              |       |        |       |         |       |           |       |              |           |       |   |
| Stock and  warrant compensation expense            |       |              |       |        |       | 25,224       |       |           |       |              |           | 25,224     |   |
|                                               |       |              |       |        |       |         |       |           |       |              |           |       |   |
| **Balance,  December 31, 2006**               |       | 1,764,439         |       | 17,644      |       | 16,861,718   |       | (821,979       | )          | (162              | )              | 16,057,221 |   |
|                                               |       |              |       |        |       |         |       |           |       |              |           |       |   |
| Net loss                                           |       |              |       |        |       |         |       | (2,091,123     | )          |              |           | (2,091,123 | )      |
|                                               |       |              |       |        |       |         |       |           |       |              |           |       |   |
| Other  comprehensive gain, net of taxes of $44,934 |       |              |       |        |       |         |       |           |       | 87,066            |           | 87,066     |   |
|                                               |       |              |       |        |       |         |       |           |       |              |           |       |   |
| Comprehensive  loss                                |       |              |       |        |       |         |       |           |       |              |           | (2,004,057 | )      |
|                                               |       |              |       |        |       |         |       |           |       |              |           |       |   |
| Stock and  warrant compensation expense            |       |              |       |        |       | 279,514      |       |           |       |              |           | 279,514    |   |
|                                               |       |              |       |        |       |         |       |           |       |              |           |       |   |
| **Balance,  December 31, 2007**               |       | **1,764,439**     | ** ** | **$**       | **17,644** | ** **   | **$**      | **17,141,232** | ** ** | **$**             | **(2,913,102** | **)**      | **$**  | **86,904** | ** ** | **$** | **14,332,678** |   |

 

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

 

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

**Consolidated Statements of Cash Flows**

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

 
| ** **                                                                   | ** ** | **2007**    | ** **    | **2006**    | ** ** |
|------------------------------------------------------------------------------|------------|-------------|---------------|-------------|------------|
| **Cash  flows from operating activities:**                                   |       |        |          |        |       |
| Net loss                                                                     |       | $           | (2,091,123    | )           | $          | (672,761 | ) |
| Adjustments to  reconcile net loss to net cash used by operating activities: |
| Provision for  loan losses                                                   |       | 502,600     |          | 50,000      |       |
| Depreciation and  amortization expense                                       |       | 180,726     |          | 18,387      |       |
| Discount  accretion and premium amortization                                 |       | (53,655     | )             | (37,884     | )          |
| Deferred income  tax benefit                                                 |       | (982,542    | )             | (414,346    | )          |
| Stock and  warrant compensation expense                                      |       | 279,514     |          | 25,224      |       |
| Increase in  accrued interest receivable                                     |       | (259,305    | )             | (78,878     | )          |
| Increase in  accrued interest payable                                        |       | 52,685      |          | 12,334      |       |
| Decrease  (increase) in other assets                                         |       | (142,089    | )             | (21,035     | )          |
| Increase  (decrease) in other liabilities                                    |       | 109,734     |          | (52,031     | )          |
|                                                                         |       |        |          |        |       |
| Net cash used by  operating activities                                       |       | (2,403,455  | )             | (1,170,990  | )          |
|                                                                         |       |        |          |        |       |
| **Cash  flows from investing activities:**                                   |       |        |          |        |       |
| Purchase of  nonmarketable equity securities                                 |       | (268,244    | )             | —      |       |
| Proceeds from  maturities/calls of securities available-for-sale             |       | 4,205,535   |          | —      |       |
| Purchases of  securities available-for-sale                                  |       | (14,638,971 | )             | (4,176,784  | )          |
| Net increase in  loans receivable                                            |       | (50,293,123 | )             | (4,995,781  | )          |
| Purchase of  premises, furniture and equipment                               |       | (1,978,830  | )             | (1,799,646  | )          |
|                                                                         |       |        |          |        |       |
| Net cash used by  investing activities                                       |       | (62,973,633 | )             | (10,972,211 | )          |
|                                                                         |       |        |          |        |       |
| **Cash  flows from financing activities:**                                   |       |        |          |        |       |
| Increase in  noninterest-bearing deposits                                    |       | 4,188,643   |          | 723,074     |       |
| Increase in  interest bearing deposits                                       |       | 48,082,601  |          | 7,285,492   |       |
| Increase in  federal funds purchased                                         |       | 3,658,000   |          | —      |       |
| Increase in  securities sold under agreements to repurchase                  |       | 1,395,326   |          | —      |       |
| Payments on note  payable                                                    |       | —      |          | (565,000    | )          |
| Issuance of  common stock, net                                               |       | —      |          | 16,854,038  |       |
|                                                                         |       |        |          |        |       |
| Net cash  provided by financing activities                                   |       | 57,324,570  |          | 24,297,604  |       |
|                                                                         |       |        |          |        |       |
| **Net  increase (decrease) in cash and cash equivalents**                    |       | (8,052,518  | )             | 12,154,403  |       |
| ** **                                                                   |       |        |          |        |       |
| **Cash  and cash equivalents, beginning of period**                          |       | 12,175,239  |          | 20,836      |       |
| ** **                                                                   |       |        |          |        |       |
| **Cash  and cash equivalents, end of period**                                | ** ** | **$**       | **4,122,721** |        | **$**      | **12,175,239** |   |

 

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

 

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**CONGAREEBANCSHARES, INC. AND SUBSIDIARY**

### ** **

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

 

**Organization** -Congaree Bancshares, Inc. and Subsidiary (the Company) was incorporated toserve as a bank holding company for its subsidiary, Congaree State Bank (theBank).  Congaree State Bank commencedbusiness on October 16, 2006.  Theprincipal business activity of the Bank is to provide banking services todomestic markets, principally in West Columbia and Cayce, South Carolina.  The Bank is a state-chartered commercialbank, and its deposits are insured by the Federal Deposit InsuranceCorporation.  The consolidated financialstatements include the accounts of the parent company and its wholly-ownedsubsidiary after elimination of all significant intercompany balances andtransactions.

 

**Management’s Estimates**- 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 that are particularly susceptible to significantchange relate to the determination of the allowance for losses on loans,including valuation allowances for impaired loans, and the valuation of realestate acquired in connection with foreclosures or in satisfaction ofloans.  In connection with thedetermination of the allowances for losses on loans and foreclosed real estate,management obtains independent appraisals for significant properties.  Management must also make estimates indetermining the estimated useful lives and methods for depreciating premisesand equipment.

 

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

 

**Concentrations of Credit Risk**- 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 loans to individuals and small businesses for variouspersonal and commercial purposes primarily in the Lexington County region ofSouth Carolina.  The Company’s loanportfolio is not concentrated in loans to any single borrower or a relativelysmall number of borrowers.  Additionally,Management is not aware of any concentrations of loans to classes of borrowersor industries that would be similarly affected by economic conditions.

 

In addition to monitoring potential concentrations of loans toparticular borrowers or groups of borrowers, industries and geographic regions,Management monitors exposure to credit risk from concentrations of lendingproducts and practices such as loans that subject borrowers to substantialpayment increases (e.g. principal deferral periods, loans with initialinterest-only periods, etc.), and loans with high loan-to-value ratios.  Management has determined that there is noconcentration of credit risk associated with its lending policies orpractices.  Additionally, there areindustry practices that could subject the Company to increased credit riskshould economic conditions change over the course of a loan’s life. Forexample, the Company makes variable rate loans and fixed rateprincipal-amortizing loans with maturities prior to the loan being fully paid(i.e. balloon payment loans).  Theseloans are underwritten and monitored to manage the associated risks.  Therefore, management believes that theseparticular practices do not subject the Company to unusual credit risk.

 

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

 

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**CONGAREE BANCSHARES, INC. AND SUBSIDIARY**

 

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

 

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

 

**Nonmarketable Equity Securities** -Nonmarketable equity securities include the cost of the Company’s investment inthe stock of the Federal Home Loan Bank and Silverton Bank.  These stocks have no quoted market value andno ready market exists.  The Bank’sinvestment in nonmarketable equity securities was $268,244 as of December 31,2007.  The Company did not invest innonmarketable equity securities as of December 31, 2006.

 

**Loans Receivable**- 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 exists as to the collectibility of a loan or when aloan becomes contractually 90 days past due as to principal or interest,interest income is generally discontinued unless the estimated net realizablevalue of collateral exceeds the principal balance and accrued interest.  When interest accruals are discontinued,income earned but not collected is reversed.

 

Loan origination and commitment fees and certain direct loanorigination costs (principally salaries and employee benefits) are deferred andamortized to income over the contractual life of the related loans orcommitments, adjusted for prepayments, using the straight-line method.

 

The Company identifies impaired loans through its normal internal loanreview process.  Loans on the Company’sproblem loan watch list are considered potentially impaired loans.  These loans are evaluated in determiningwhether all outstanding principal and interest are expected to becollected.  Loans are not consideredimpaired if a minimal payment delay occurs and all amounts due, includingaccrued interest at the contractual interest rate for the period of delay, areexpected to be collected.  At December 31,2007, management has determined that no impairment of loans existed.

 

**Allowance for Loan Losses**- The provision for loan losses charged to operating expenses reflects theamount deemed appropriate by management to establish an adequate reserve to meetthe probable loan losses incurred in the current portfolio.  Management’s judgment is based on periodicand regular evaluation of individual loans, the overall risk characteristics ofthe various portfolio segments, and prevailing economic conditions.  Loans that are determined to be uncollectibleare charged against the allowance. Provisions for loan losses and recoveries on loans previously chargedoff are added to the allowance.

 

While management uses the best information available to make evaluations,future adjustments may be necessary if economic conditions differ substantiallyfrom the assumptions used in making the evaluation.  The allowance for loan losses is subject toperiodic evaluation by various regulatory authorities and may be subject toadjustment upon examination.

 

**Premises, Furniture and Equipment**- Premises, furniture and equipment are stated at cost, less accumulateddepreciation.  The provision fordepreciation is computed by the straight-line method, based on the estimateduseful lives for buildings and improvements of 40 years, furniture andequipment of 5 to 10 years and software of 5 years.  The cost of assets sold or otherwise disposedof and the related allowance for depreciation are eliminated from the accountsand the resulting gains or losses are reflected in the income statement whenincurred.  Maintenance and repairs arecharged to current expense. The costs of major renewals and improvements arecapitalized.

 

44

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**CONGAREE BANCSHARES, INC. AND SUBSIDIARY**

 

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

 

**Income Taxes** -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.

 

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

 

**Advertising Expense** - Advertising andpublic relations costs are generally expensed as incurred.  External costs incurred in producing mediaadvertising are expensed the first time the advertising takes place.  External costs relating to direct mailingcosts are expended in the period in which the direct mailings are sent.

 

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

 

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

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

 

**Loss Per Share** -Basic loss 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 only potential common share equivalents are thoserelated to stock options and warrants. Stock options and warrants which are anti-dilutive are excluded from thecalculation of diluted net income per share.

 

**Stock-Based Compensation**- The Company accounts for stock options and warrants under the fair valuerecognition provisions of Financial Accounting Standards Board (“FASB”)Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-BasedPayment.”  Compensation expense isrecognized as salaries and benefits in the consolidated statement ofoperations.

 

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### ** **

**CONGAREE BANCSHARES, INC. AND SUBSIDIARY**

 

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

 

**Comprehensive Income** - Accountingprinciples generally require that recognized income, expenses, gains, andlosses be included in net income. Although certain changes in assets and liabilities, such as unrealizedgains and losses on available-for-sale securities, are reported as a separatecomponent of the equity section of the balance sheet, such items, along withnet income, are components of comprehensive income.

 

The components of other comprehensive income and related tax effectsare as follows for the years ended December 31, 2007 and 2006:

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

** **

**Statement of 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 deposits and other borrowings totaled $1,513,985 and$22,537 for the years ended December 31, 2007 and 2006, respectively.

 

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

 

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

 

**Recent Accounting Pronouncements**- The following is a summary of recent authoritative pronouncements that mayaffect accounting, reporting, and disclosure of financial information by theCompany:

 

InSeptember 2006, the FASB issued SFAS No. 157, “Fair ValueMeasurements” (“SFAS 157”). SFAS 157 defines fair value, establishes aframework for measuring fair value in generally accepted accounting principles,and expands disclosures about fair value measurements.  This standard eliminates inconsistenciesfound in various prior pronouncements but does not require any new fair valuemeasurements.  SFAS 157 is effective forthe Company on January 1, 2008 and will not impact the Company’saccounting measurements but it is expected to result in additional disclosures.

 

InSeptember 2006, The FASB ratified the consensuses reached by the FASB’sEmerging Issues Task Force (“EITF”) relating to EITF 06-4, “Accounting for theDeferred Compensation and Postretirement Benefit Aspects of EndorsementSplit-Dollar Life Insurance Arrangements” (“EITF 06-4”).  Entities purchase life insurance for variousreasons including protection against loss of key employees and to fundpostretirement benefits.  The two mostcommon types of life insurance arrangements are endorsement split dollar lifeand collateral assignment split dollar life. EITF 06-4 covers the former and EITF 06-10 (discussed below) covers thelatter.  EITF 06-4 states that entitieswith endorsement split-dollar life insurance arrangements that provide abenefit to an employee that extends to postretirement periods should recognizea liability for future benefits in accordance with SFAS No. 106, “Employers’ Accounting for PostretirementBenefits Other Than Pensions,” (if, in substance, a postretirement benefit planexists)**or Accounting PrinciplesBoard (“APB”) Opinion No. 12, “OmnibusOpinion - 1967” (if the arrangement is, in substance, an individual deferredcompensation contract).* *Entities should recognizethe effects of applying this Issue through either (a) a change inaccounting principle through a cumulative-effect adjustment to retainedearnings or to other components of equity or net assets in the statement offinancial position as of the beginning of the year of adoption or (b) achange in accounting principle through retrospective application to all priorperiods.  EITF 06-4 is effective for theCompany on January 1, 2008.  TheCompany does not believe the adoption of EITF 06-4 will have a material impacton its financial position, results of operations or cash flows.

 

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**CONGAREE BANCSHARES, INC. AND SUBSIDIARY**

 

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

 

**Recently Issued AccountingStandards** (*continued)* - InSeptember 2006, the FASB ratified the consensus reached on EITF 06-5, “Accountingfor Purchases of Life Insurance - Determining the Amount That Could Be Realizedin Accordance with FASB Technical Bulletin No. 85-4, Accounting forPurchases of Life Insurance” (“EITF 06-5”).  EITF 06-5 states that apolicyholder should consider any additional amounts included in the contractualterms of the insurance policy other than the cash surrender value indetermining the amount that could be realized under the insurancecontract.  EITF 06-5 also states that a policyholder should determine theamount that could be realized under the life insurance contract assuming thesurrender of an individual-life by individual-life policy (or certificate bycertificate in a group policy).  EITF 06-5is effective for the Company on January 1, 2008.  The Company doesnot believe the adoption of EITF 06-5 will have a material impact on itsfinancial position, results of operations or cash flows.

 

InMarch 2007, the FASB ratified the consensus reached on EITF 06-10, “Accountingfor Collateral Assignment Split-Dollar Life Insurance Arrangements” (“EITF06-10”).  The postretirement aspect ofthis EITF is substantially similar to EITF 06-4 discussed above and requiresthat an employer recognize a liability for the postretirement benefit relatedto a collateral assignment split-dollar life insurance arrangement inaccordance with either FASB Statement No. 106 or APB Opinion No. 12,as appropriate, if the employer has agreed to maintain a life insurance policyduring the employee’s retirement or provide the employee with a death benefitbased on the substantive agreement with the employee.  In addition, a consensus was reached that anemployer should recognize and measure an asset based on the nature and substanceof the collateral assignment split-dollar life insurance arrangement.  EITF 06-10 is effective for the Company on January 1,2008.  The Company does not believe theadoption of EITF 06-10 will have a material impact on its financial position,results of operations or cash flows.

 

InFebruary 2007, the FASB issued SFAS No. 159, “The Fair Value Optionfor Financial Assets and Financial Liabilities - Including an amendment of FASBStatement No. 115” (“SFAS 159”). This statement permits, but does not require, entities to measure manyfinancial instruments at fair value.  Theobjective is to provide entities with an opportunity to mitigate volatility inreported earnings caused by measuring related assets and liabilitiesdifferently without having to apply complex hedge accounting provisions.  Entities electing this option will apply itwhen the entity first recognizes an eligible instrument and will reportunrealized gains and losses on such instruments in current earnings.  This statement 1) applies to all entities, 2)specifies certain election dates, 3) can be applied on aninstrument-by-instrument basis with some exceptions, 4) is irrevocable and 5)applies only to entire instruments.  Oneexception is demand deposit liabilities which are explicitly excluded asqualifying for fair value.  With respectto SFAS 115, available-for-sale and held-to-maturity securities at theeffective date are eligible for the fair value option at that date.  If the fair value option is elected for thosesecurities at the effective date, cumulative unrealized gains and losses atthat date shall be included in the cumulative-effect adjustment and thereafter,such securities will be accounted for as trading securities.  SFAS 159 is effective for the Company on January 1,2008.  The Company is currently analyzingthe fair value option that is permitted, but not required, under SFAS 159.

 

InNovember 2007, the Securities and Exchange Commission (“SEC”) issued StaffAccounting Bulletin No. 109, “Written Loan Commitments Recorded at FairValue Through Earnings” (“SAB 109”).  SAB109 expresses the current view of the SEC staff that the expected net futurecash flows related to the associated servicing of the loan should be includedin the measurement of all written loan commitments that are accounted for atfair value through earnings.   SECregistrants are expected to apply this guidance on a prospective basis toderivative loan commitments issued or modified in the first quarter of 2008 andthereafter. The Company is currently analyzing the impact of this guidance,which relates to the Company’s mortgage loans held for sale.

 

InDecember 2007, the FASB issued SFAS No. 141(R), “BusinessCombinations,” (“SFAS 141(R)”) which replaces SFAS 141.  SFAS 141(R) establishes principles andrequirements for how an acquirer in a business combination recognizes andmeasures in its financial statements the identifiable assets acquired, theliabilities assumed, and any controlling interest; recognizes and measuresgoodwill acquired in the business combination or a gain from a bargain purchase;and determines what information to disclose to enable users of the financialstatements to evaluate the nature and financial effects of the businesscombination.  SFAS 141(R) iseffective for acquisitions by the Company taking place on or after January 1,2009.  Early adoption is prohibited.  Accordingly, a calendar year-end company isrequired to record and disclose business combinations following existingaccounting guidance until January 1, 2009. The Company will assess the impact of SFAS 141(R) if and when afuture acquisition occurs.

 

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**CONGAREE BANCSHARES, INC. AND SUBSIDIARY**

 

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

 

**Recently Issued AccountingStandards** (*continued)* - InDecember 2007, the FASB issued SFAS No. 160, “NoncontrollingInterests in Consolidated Financial Statements - an amendment of ARB No. 51”(“SFAS 160”).  SFAS 160 establishes newaccounting and reporting standards for the noncontrolling interest in asubsidiary and for the deconsolidation of a subsidiary.  Before this statement, limited guidanceexisted for reporting noncontrolling interests (minority interest).  As a result, diversity in practice exists. Insome cases minority interest is reported as a liability and in others it isreported in the mezzanine section between liabilities and equity.  Specifically, SFAS 160 requires therecognition of a noncontrolling interest (minority interest) as equity in theconsolidated financials statements and separate from the parent’s equity.  The amount of net income attributable to thenoncontrolling interest will be included in consolidated net income on the faceof the income statement.  SFAS 160clarifies that changes in a parent’s ownership interest in a subsidiary that donot result in deconsolidation are equity transactions if the parent retains itscontrolling financial interest.  Inaddition, this statement requires that a parent recognize gain or loss in netincome when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of thenoncontrolling equity investment on the deconsolidation date.  SFAS 160 also includes expanded disclosurerequirements regarding the interests of the parent and its noncontrollinginterests. SFAS 160 is effective for the Company on January 1, 2009.  Earlier adoption is prohibited. The Companyis currently evaluating the impact, if any, the adoption of SFAS 160 will haveon its consolidated financial statements.

 

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

 

**Risks and Uncertainties** - In the normalcourse of its business, the Company encounters two significant types of risks:economic and regulatory.  There are threemain components of economic risk: interest rate risk, credit risk and market risk.  The Company is subject to interest rate riskto the degree that its interest-bearing liabilities mature or reprice atdifferent speeds, or on different basis, than its interest-earning assets.  Credit risk is the risk of default on theCompany’s loan portfolio that results from borrower’s inability 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 to the regulations of various governmentalagencies.  These regulations can and dochange significantly from period to period. The Company also undergoes periodic examinations by the regulatoryagencies, which may subject it to further changes with respect to assetvaluations, amounts of required loss allowances and operating restrictions fromthe regulators’ judgments based on information available to them at the time oftheir examination.

 

**Reclassifications** - Certain captions andamounts in the 2006 consolidated financial statements were reclassified toconform with the 2007 presentation.

 

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

 

The Company is required to maintain cash balances with itscorrespondent banks to cover all cash letter transactions.  At December 31, 2007 and 2006, therequirement was met by the cash balance in the vault.

 

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**CONGAREE BANCSHARES, INC. AND SUBSIDIARY**

** **

**NOTE 3 - INVESTMENT SECURITIES**

 

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

 
| ** **                        | ** ** | ** ** | ** **     | **Gross Unrealized** | ** ** | **Estimated** | ** ** |
|-----------------------------------|------------|------------|----------------|----------------------|------------|---------------|------------|
| ** **                        | ** ** | **Costs**  | ** **     | **Gains**            | ** ** | **Losses**    | ** ** | **Fair Value** | ** ** |
| **December 31,  2007**       |       |       |           |                 |       |          |       |   |   |
| Government  sponsored enterprises |       | $          | 6,788,421      |                 | $          | 99,821        |       | $ | — |   | $ | 6,888,242 |   |
| Mortgage-backed  securities       |       | 7,913,338  |           | 40,813               |       | 8,961         |       | 7,945,190 |   |
|                              |       |       |           |                 |       |          |       |   |   |
|                              | ** ** | **$**      | **14,701,759** | ** **           | **$**      | **140,634**   | ** ** | **$** | **8,961** | ** ** | **$** | **14,833,432** | ** ** |
| **December 31,  2006**       |       |       |           |                 |       |          |       |   |   |
| Government  sponsored enterprises |       | $          | 1,517,670      |                 | $          | 1,134         |       | $ | 1,131 |   | $ | 1,517,673 |   |
| U.S.  government agencies         |       | 2,697,081  |           | 4,804                |       | 5,052         |       | 2,696,833 |   |
|                              |       |       |           |                 |       |          |       |   |   |
|                              | ** ** | **$**      | **4,214,751**  | ** **           | **$**      | **5,938**     | ** ** | **$** | **6,183** | ** ** | **$** | **4,214,506** | ** ** |

 

The amortized costs and fair values of investment securities at December 31,2007, by contractual maturity, are shown in the following chart.  Expected maturities may differ fromcontractual maturities because borrowers may have the right to call or prepayobligations with or without call or prepayment penalties.

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

 

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

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

 
| The following table shows gross unrealized losses and fair value,  aggregated by investment category, and length of time that individual  securities have been in a continuous realized loss position, at  December 31, 2006. |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

 

Securities classified as available-for-sale are recorded at fair marketvalue.  There were no securities in acontinuous loss position for more than twelve months at December 31, 2007or 2006.

 

49

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**CONGAREE BANCSHARES, INC. AND SUBSIDIARY**

 

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

 

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

 

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

 

At December 31, 2007, securities with an amortized cost of$4,247,344 and an estimated fair value of $4,195,988 were pledged to securepublic deposits and securities sold under agreements to repurchase.

 

**NOTE 4 - LOANS RECEIVABLE**

 

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

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

 

Transactions in the allowance for loan losses during 2007 and 2006 aresummarized below:

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

 

At December 31, 2007 and 2006, the Bank had no loans in nonaccrualstatus.  There were no loans past dueninety days or more and still accruing interest at December 31, 2007 or 2006.

 

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

 

Premises, furniture and equipment consisted of the following:

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

 

Construction in progress relates to certainleasehold improvements, signs and furniture and fixtures for the West Columbia,South Carolina branch.  The branch openedin January 2008.

 

50

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### ** **

**CONGAREE BANCSHARES, INC. AND SUBSIDIARY**

 

### **NOTE 6 - DEPOSITS**

 

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

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

 

**NOTE 7 - NOTES PAYABLE**

 

The Company had established an $875,000 line of credit with a bank tofund operating expenses during the development stage as of December 31,2005.  The Company increased the line ofcredit to $1,300,000 on July 28, 2006. The line was uncollateralized andhad a limited guaranty by the thirteen organizers.  The line bore a variable rate of interest atthe prime rate (8.25 percent) minus 0.5 percent and matured on November 30,2006.  Interest was due on a monthlybasis and the unpaid principal balance was due at maturity.  As of December 31, 2006, the line wasrepaid with proceeds from the stock offering.

 

**NOTE 8 - SECURITIES SOLD UNDER AGREEMENT TOREPURCHASE**

 

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

 

**NOTE 9 - STOCK COMPENSATION PLAN**

 

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

 

The Company also established the 2007 Stock Incentive Plan (the Plan)which provides for the granting of options to employees of the Company.  The Company granted 46,872 options during2007.  These options vest over fiveyears.  The options have an exerciseprice of $10.00 per share and terminate ten years after the grant date.

 

The Company recognized $153,389 of stock-based employee compensationexpense during 2007 associated with its stock option grants.  The Company is recognizing the compensation expensefor stock option grants with graded vesting schedules on a straight-line basisover the requisite service period of the award as permitted by SFAS No. 123(R).  As of December 31, 2007, there was$623,798 of unrecognized compensation cost related to stock option grants.  The cost is expected to be recognized over aweighted average period of 2.35 years.

 

The weighted average grant-date fair value of each option grantedduring 2007 was $3.34.  The fair valuefor each option is estimated on the date of grant using the Black-ScholesModel.  The following weighted averageassumptions were used for grants in 2007:

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

 

51

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**CONGAREE BANCSHARES, INC. AND SUBSIDIARY**

 

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

 

A summary of the activity under the stock option plan for the yearended December 31, 2007 follows:

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

 

The weighted average contractual life of the options outstanding as of December 31,2007 is 8.91 years.  There was noaggregate intrinsic value of options outstanding or exercisable at December 31,2007.

 

A summary of the status of the Company’s nonvested shares as of December 31,2007 is presented below:

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

 

**NOTE 10 - STOCK WARRANTS**

 

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

 

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

 

In calculating the expense for warrants, the fair value of warrants isestimated as of the grant date using the Black-Scholes option pricing modelwith the following weighted-average assumptions: dividend yield of 0 percentbased on the Company’s expectation of dividend payouts; expected volatility of9.77 percent based on peer group data; risk-free interest rate of 4.76 percentbased on the grant date and expected term of the options and expected life of 3years based on factors such as the vesting period and the option’s contractualterm.  Total compensation expense relatedto warrants was $126,125 and $25,224 for the years ended December 31, 2007and 2006, respectively.

 

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** **

**CONGAREEBANCSHARES, INC. AND SUBSIDIARY**

** **

**NOTE 11 -INCOME TAXES**

 

Income tax expense is summarized as follows:

 
| ** **             | ** ** | **Years ended December 31,** | ** **   |
|------------------------|------------|---------------------------------------------|--------------|
| ** **             | ** ** | **2007**                                    | ** **   | **2006** | ** ** |
| Current portion        |       |                                        |         |   |   |
| Federal                |       | $                                           | —       |   | $ | — |   |
| State                  |       | —                                      |         | 469 |   |
|                   |       |                                        |         |   |   |
| Total current          |       | —                                      |         | 469 |   |
|                   |       |                                        |         |   |   |
| Deferred income  taxes |       | (982,628                                    | )            | (414,731 | ) |
|                   |       |                                        |         |   |   |
| Income tax  benefit    | ** ** | **$**                                       | **(982,628** | **)** | **$** | **(414,262** | **)** |

 

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

 
| ** **                                        | ** ** | **Years ended December 31,** | ** **    |
|---------------------------------------------------|------------|---------------------------------------------|---------------|
| ** **                                        | ** ** | **2007**                                    | ** **    | **2006** | ** ** |
| Deferred tax assets:                              |       |                                        |          |   |   |
| Allowance for  loan losses                        |       | $                                           | 119,873       |   | $ | 10,124 |   |
| Net operating  loss carryforward                  |       | 1,081,789                                   |          | 133,771 |   |
| Organization and  start-up costs                  |       | 271,794                                     |          | 283,006 |   |
| Unrealized loss  on securities available for sale |       | —                                      |          | 83 |   |
| Other                                             |       | 35,503                                      |          | 540 |   |
|                                              |       |                                        |          |   |   |
| Deferred tax  assets                              |       | 1,508,959                                   |          | 427,524 |   |
|                                              |       |                                        |          |   |   |
| Deferred tax  liabilities:                        |       |                                        |          |   |   |
| Unrealized gain  on securities available for sale |       | 44,851                                      |          | — |   |
| Accumulated  depreciation                         |       | 24,695                                      |          | 498 |   |
| Prepaid expenses                                  |       | 38,611                                      |          | 12,212 |   |
| Organization costs                                |       | 48,683                                      |          | — |   |
|                                              |       |                                        |          |   |   |
| Total deferred  tax liabilities                   |       | 156,840                                     |          | 12,710 |   |
|                                              |       |                                        |          |   |   |
| Net deferred tax  asset                           | ** ** | **$**                                       | **1,352,119** | ** ** | **$** | **414,814** | ** ** |

 

Deferred tax assetsrepresent the future tax benefit of deductible differences and, if it is morelikely than not that a tax asset will not be realized, a valuation allowance isrequired to reduce the recorded deferred tax assets to net realizablevalue.  Net deferred tax assets arerecorded as a separate line on the Company’s consolidated balance sheet.

 

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

 

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

 
| ** **                               | ** ** | **2007** | ** **   | **2006** | ** ** |
|------------------------------------------|------------|----------|--------------|----------|------------|
| Tax expense  (benefit) at statutory rate |       | $        | (1,045,075   | )        | $          | (361,012 | ) |
| Other                                    |       | 62,447   |         | (53,250  | )          |
|                                     |       |     |         |     |       |
| Income tax  benefit                      | ** ** | **$**    | **(982,628** | **)**    | **$**      | **(414,262** | **)** |

 

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

 

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### ** **

**CONGAREEBANCSHARES, INC. AND SUBSIDIARY**

 

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

### ** **

Certain parties(principally certain directors and executive officers of the Company, theirimmediate families and business interests) were loan customers of and had othertransactions in the normal course of business with the Company.  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’srelated party loan activity for the year ended December 31, 2007:

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

 

There were norelated party loans as of December 31, 2006.

 

Deposits by directors,including their affiliates and executive officers, at December 31, 2007 and2006 were approximately $5,124,428 and $460,627, respectively.

 

### **NOTE 13 - LEASES**

### ** **

The Company has entered into an agreement to lease an office facilityunder a noncancellable operating lease agreement expiring in 2023.  The Company may, at its option, extend thelease of its office facility at 2023 Sunset Boulevard in West Columbia, SouthCarolina, for two additional five year periods. The Company also entered into a lease agreement for an office located onDevine Street for a thirty-six month period. Minimum rental commitments as of December 31, 2007 are as follows:

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

 

The leases havevarious renewal options and require increased rentals under cost of livingescalation clauses.  Rental expensescharged to occupancy and equipment expense in 2007 and 2006 were $55,938 and$6,000, respectively.

 

**NOTE 14 - COMMITMENTS AND CONTINGENCIES**

 

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

 

54

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**CONGAREEBANCSHARES, INC. AND SUBSIDIARY**

 

**NOTE 15 - LOSS PER SHARE**

 

Basic loss pershare is computed by dividing net income (loss) by the weighted-average numberof common shares outstanding.  Dilutedloss per share is computed by dividing net income (loss) by theweighted-average number of common shares outstanding and dilutive common shareequivalents using the treasury stock method. There were no dilutive common share equivalents outstanding during 2007 and2006 due to the net loss; therefore, basic loss per share and diluted earningsper share were the same.

 
| ** **                                   | ** ** | **2007** | ** **     | **2006**   | ** **  |
|----------------------------------------------|------------|----------|----------------|------------|-------------|
| **Net loss  per share - basic computation:** |       |     |           |       |        |
|                                         |       |     |           |       |        |
| Net loss to  common shareholders             | ** ** | **$**    | **(2,091,123** | **)**      | **$**       | **(672,761** | **)** |
|                                         |       |     |           |       |        |
| Average common  shares outstanding - basic   | ** ** | **$**    | **1,764,439**  | ** ** | **449,577** | ** ** |
|                                         |       |     |           |       |        |
| Basic loss per  share                        | ** ** | **$**    | **(1.19**      | **)**      | **$**       | **(1.50** | **)** |

### ** **

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

### ** **

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

 

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

 

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

 

As of December 31,2007, management believes it is categorized as well-capitalized under theregulatory framework for prompt corrective action.  There are no conditions or events thatmanagement believes have changed the Bank’s category.

 

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

 
| ** **                                | ** ** | **Actual** | ** ** | **For Capital  Adequacy Purposes** | ** ** | **To Be Well-  Capitalized Under  Prompt Corrective  Action Provisions** | ** ** |
|-------------------------------------------|------------|------------|------------|----------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|
| **(Dollars in thousands)**      | ** ** | **Amount** | ** ** | **Ratio**                                    | ** ** | **Amount**                                                                                        | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
|                                      |       |       |       |                                         |       |                                                                                              |       |   |   |   |   |   |   |
| **December 31,  2007**               |       |       |       |                                         |       |                                                                                              |       |   |   |   |   |   |   |
| Total capital  (to risk-weighted assets)  |       | $          | 11,027     |                                         | 17.69      | %                                                                                                 | $          | 5,198 |   | 8.00 | % | $ | 6,497 |   | 10.00 | % |
| Tier 1 capital  (to risk-weighted assets) |       | 10,940     |       | 16.84                                        | %          | 2,599                                                                                             |       | 4.00 | % | 3,898 |   | 6.00 | % |
| Tier 1 capital  (to average assets)       |       | 10,940     |       | 15.99                                        | %          | 2,737                                                                                             |       | 4.00 | % | 3,421 |   | 5.00 | % |
|                                      |       |       |       |                                         |       |                                                                                              |       |   |   |   |   |   |   |
| **December 31,  2006**               |       |       |       |                                         |       |                                                                                              |       |   |   |   |   |   |   |
| Total capital  (to risk-weighted assets)  |       | $          | 12,575     |                                         | 135.70     | %                                                                                                 | $          | 741 |   | 8.00 | % | $ | 927 |   | 10.00 | % |
| Tier 1 capital  (to risk-weighted assets) |       | 12,161     |       | 131.25                                       | %          | 371                                                                                               |       | 4.00 | % | 556 |   | 6.00 | % |
| Tier 1 capital  (to average assets)       |       | 12,161     |       | 65.79                                        | %          | 739                                                                                               |       | 4.00 | % | 924 |   | 5.00 | % |

 

55

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**CONGAREEBANCSHARES, INC. AND SUBSIDIARY**

 

**NOTE 17 -UNUSED LINES OF CREDIT**

 

As of December 31, 2007, the Company had unused lines of credit topurchase federal funds from unrelated banks totaling $7,900,000.  These lines of credit are available on a oneto fourteen day basis for general corporate purposes.  As of December 31, 2007, the Company hadborrowed $3,658,000 on these lines.

 

**NOTE18 - RESTRICTIONS ON DIVIDENDS, LOANS, OR ADVANCES**

 

The ability of the Company to pay cash dividends to stockholders isdependent upon receiving cash in the form of dividends from its bankingsubsidiary.  However, certainrestrictions exist regarding the ability of the subsidiary to transfer funds inthe form of cash dividends to the Company. State chartered banks are authorized to pay cash dividends up to 100% ofnet income in any calendar year without obtaining the prior approval of theState Board of Financial Institutions or the Commissioner of Banking providedthat the Bank received a composite rating of one or two at the last examinationconducted by the State or Federal regulatory authority.  Otherwise, the Bank must file an income andexpense report and obtain the specific approval of the State Board.

 

Under Federal Reserve Board regulations, the amount of loans oradvances from the banking subsidiary to the parent company are also restricted.

 

**NOTE 19 - FINANCIAL INSTRUMENTS WITH OFF-BALANCESHEET RISK**

 

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

 

Commitments to extend credit are agreements to lend to a customer aslong as there is no violation of any condition established in thecontract.  Commitments generally havefixed expiration dates or other termination clauses and may require payment ofa fee.  Since many of the commitments areexpected to expire without being drawn upon, the total commitment amounts donot necessarily represent future cash requirements.  The amount of collateral obtained if deemednecessary by the Company upon extension of credit is based on management’scredit evaluation of the borrower. Collateral held varies, but may includeaccounts receivable, negotiable instruments, inventory, property, plant andequipment, and real estate.  Commitmentsto extend credit, including unused lines of credit, amounted to $20,034,340 and$1,442,198 at December 31, 2007 and 2006, respectively.

 

Standby letters of credit represent an obligation of the Company to athird party contingent upon the failure of the Company’s customer to performunder the terms of an underlying contract with the third party or obligates theCompany to guarantee or stand as surety for the benefit of the thirdparty.  The underlying contract mayentail either financial or nonfinancial obligations and may involve such thingsas the shipment of goods, performance of a contract, or repayment of anobligation.  Under the terms of a standbyletter, generally drafts will be drawn only when the underlying event fails tooccur as intended.  The Company can seekrecovery of the amounts paid from the borrower. The majority of these standby letters of credit are unsecured.  Commitments under standby letters of creditare usually for one year or less.  At December 31,2007 and 2006, the Company has recorded no liability for the current carryingamount of the obligation to perform as a guarantor; as such amounts are notconsidered material.  The Company had nostandby letters of credit outstanding at December 31, 2007 and 2006.

 

The Company originates certain fixed rate residential loans and commitsthese loans for sale.  The commitments tooriginate fixed rate residential loans and the sales commitments arefreestanding derivative instruments.  Thefair value of these commitments was not significant at December 31, 2007and 2006.

 

56

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**CONGAREEBANCSHARES, INC. AND SUBSIDIARY**

 

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

 

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

 

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

 

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

 

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

 

***Investment Securities***- The fair values of securities available-for-sale equal the carrying amounts,which are the quoted market prices.  Ifquoted market prices are not available, fair values are based on quoted marketprices of comparable securities.  Thecarrying value of nonmarketable equity securities approximates the fair valuesince no ready market exists for the stocks.

 

***Loans Receivable***-For certain 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.

 

***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.

 

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

 

***Securities Sold Under Agreementsto Repurchase*** - These repurchase agreements have variablerates that reprice on a continuous basis. Due to the minor change in interest rates, management estimates thecarrying value to be a reasonable estimate of fair value.

 

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

 

***Accrued Interest Receivable andPayable*** - The carrying value of these instruments is areasonable estimate of fair value.

 

***Off-Balance-Sheet FinancialInstruments*** - In the ordinary course of business, theCompany enters into off-balance-sheet financial instruments consisting ofcommitments to extend credit and letters of credit.  These financial instruments are recorded inthe financial statements when they become payable by the customer.

 

57

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**CONGAREEBANCSHARES, INC. AND SUBSIDIARY**

 

 

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

 

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

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

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

 

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

 

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

 

**CondensedBalance Sheets**

 
| ** **                                       | ** ** | **December 31,** | ** **     |
|--------------------------------------------------|------------|-----------------------|----------------|
| ** **                                       | ** ** | **2007**              | ** **     | **2006** | ** ** |
| **Assets:**                                      |       |                  |           |   |   |
| Cash                                             |       | $                     | 531,154        |   | $ | 1,645,199 |   |
| Premise and  equipment                           |       | 2,710,101             |           | 1,837,167 |   |
| Due from  investors                              |       | 18,440                |           | — |   |
| Deferred tax  asset                              |       | 128,164               |           | — |   |
| Investment in  banking subsidiary                |       | 10,974,604            |           | 12,574,855 |   |
|                                             |       |                  |           |   |   |
| Total assets                                     | ** ** | **$**                 | **14,362,463** | ** ** | **$** | **16,057,221** | ** ** |
|                                             |       |                  |           |   |   |
| **Liabilities  and shareholders’ equity:**  |       |                  |           |   |   |
| Other  liabilities                               |       | $                     | 29,785         |   | $ | — |   |
|                                             |       |                  |           |   |   |
| Total  liabilities                               |       | 29,785                |           | — |   |
|                                             |       |                  |           |   |   |
| Shareholders’  equity                       |       | 14,332,678            |           | 16,057,221 |   |
|                                             |       |                  |           |   |   |
| Total  liabilities and shareholders’ equity | ** ** | **$**                 | **14,362,463** | ** ** | **$** | **16,057,221** | ** ** |

 

58

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**CONGAREEBANCSHARES, INC. AND SUBSIDIARY**

 

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

 

**Condensed Statements of Operations**

 
| ** **                                                                                         | ** ** | **Years ended December 31,** | ** **     |
|----------------------------------------------------------------------------------------------------|------------|---------------------------------------------|----------------|
| ** **                                                                                         | ** ** | **2007**                                    | ** **     | **2006** | ** ** |
| **Income  (including reimbursement from Bank):**                                                   |       | $                                           | 5,950          |   | $ | 648,285 |   |
| **Expenses:**                                                                                      |       |                                        |           |   |   |
| Stock based  compensation expense                                                                  |       | (279,514                                    | )              | — |   |
| Other expenses                                                                                     |       | (258,406                                    | )              | (696,065 | ) |
| **Income  (loss) before income taxes and equity in undistributed earnings of banking  subsidiary** | ** ** | (531,970                                    | )              | (47,780 | ) |
| ** **                                                                                         |       |                                        |           |   |   |
| Income tax  benefit                                                                                |       | 128,164                                     |           | — |   |
|                                                                                               |       |                                        |           |   |   |
| Equity in  undistributed losses of banking subsidiary                                              |       | (1,687,317                                  | )              | (624,981 | ) |
|                                                                                               |       |                                        |           |   |   |
| **Net  loss**                                                                                      | ** ** | **$**                                       | **(2,091,123** | **)** | **$** | **(672,761** | **)** |

 

**CondensedStatements of Cash Flows**

 
| ** **                                                                   | ** ** | **Years ended December 31,** | ** **  |
|------------------------------------------------------------------------------|------------|---------------------------------------------|-------------|
| ** **                                                                   | ** ** | **2007**                                    | ** **  | **2006** | ** ** |
| **Cash  flows from operating activities:**                                   | ** ** | ** **                                  | ** **  | ** ** | ** ** |
| Net loss                                                                     |       | $                                           | (2,091,123  | ) | $ | (672,761 | ) |
| Adjustments to  reconcile net loss to net cash used by operating activities: |       |                                        |        |   |   |
| Depreciation  expense                                                        |       | 40,923                                      |        | — |   |
| Equity in  undistributed net loss of banking subsidiary                      |       | 1,687,317                                   |        | 624,981 |   |
| Reimbursement  from Bank                                                     |       | —                                      |        | (625,142 | ) |
| Deferred income  tax benefit                                                 |       | (128,164                                    | )           | — |   |
| Decrease  (increase) in other assets                                         |       | (18,440                                     | )           | 29,937 |   |
| Increase  (decrease) in other liabilities                                    |       | 29,788                                      |        | (52,031 | ) |
| Stock and  warrant compensation expense                                      |       | 279,514                                     |        | 25,224 |   |
|                                                                         |       |                                        |        |   |   |
| Net cash used by  operating activities                                       |       | (200,185                                    | )           | (669,792 | ) |
| ** **                                                                   | ** ** | ** **                                  | ** **  | ** ** | ** ** |
| **Cash  flows from investing activities:**                                   | ** ** | ** **                                  | ** **  | ** ** | ** ** |
| Purchase of bank  stock                                                      |       | —                                      |        | (12,574,856 | ) |
| Purchase of  premises and equipment                                          |       | (913,860                                    | )           | (1,420,027 | ) |
|                                                                         |       |                                        |        |   |   |
| Net cash used by  investing activities                                       |       | (913,860                                    | )           | (13,994,883 | ) |
|                                                                         |       |                                        |        |   |   |
| **Cash  flows from financing activities:**                                   | ** ** | ** **                                  | ** **  | ** ** | ** ** |
| Decrease in  borrowings                                                      |       | —                                      |        | (565,000 | ) |
| Issuance of  common stock, net                                               |       | —                                      |        | 16,854,038 |   |
|                                                                         |       |                                        |        |   |   |
| Net cash  provided by financing activities                                   |       | —                                      |        | 16,289,038 |   |
|                                                                         |       |                                        |        |   |   |
| **Net  increase (decrease) in cash and cash equivalents**                    |       | (1,114,045                                  | )           | 1,624,363 |   |
| ** **                                                                   |       |                                        |        |   |   |
| **Cash  and cash equivalents, beginning of period**                          |       | 1,645,199                                   |        | 20,836 |   |
| ** **                                                                   |       |                                        |        |   |   |
| **Cash  and cash equivalents, end of period**                                | ** ** | **$**                                       | **531,154** | ** ** | **$** | **1,645,199** | ** ** |

 

59

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**Item 8.  Changesin and Disagreements with Accountants on Accounting and Financial Disclosure.**

 

 None.

 

**Item8A.  Controls and Procedures.**

 

As of the end of the periodcovered by this report, we carried out an evaluation, under the supervision andwith the participation of our management, including our Chief Executive Officerand Chief Financial Officer, of the effectiveness of our disclosure controlsand 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, 2007.  There have been no significant changes in ourinternal controls over financial reporting during the fourth fiscal quarterended December 31, 2007 that have materially affected, or are reasonablylikely to materially affect, our internal controls over financial reporting.

 

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

 

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

 

Managementof Congaree Bancshares, Inc. and its subsidiary Congaree State Bank isresponsible for establishing and maintaining adequate internal control overfinancial reporting.  The Company’sinternal control system was designed to provide reasonable assurance tomanagement and the Board of Directors regarding the preparation and fairpresentation of published financial statements.

 

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements.  Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

 

TheCompany’s management assessed the effectiveness of the Company’s internalcontrol over financial reporting as of December 31, 2007.  Based on this assessment management believesthat as of December 31, 2007, the Company’s internal control overfinancial reporting was effective.

 

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

 

**ITEM 8B. Other Information.**

 

Not applicable.

 

60

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** PART III**

 

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

 

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

 

**Item10.  Executive Compensation.**

 

Information required by Item 10 is hereby incorporated by referencefrom our proxy statement for our 2008 annual meeting of shareholders to be heldon May 14, 2008.

 

**Item11.  Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters.**

 

The following table sets forth equitycompensation plan information at December 31, 2007.

 

 
| ** **                                                     | ** ** | **Equity Compensation Plan Information**                                                                                                   | ** ** | **Number of securities  remaining available for**                                            | ** ** |
|----------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|
| **Plan Category**                                         | ** ** | **Number of securities  to be issued  upon exercise of  outstanding options,  warrants and rights (a)** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights  (b)** | ** ** | **future issuance under  equity compensation  plans (c)  (excluding securities  reflected in column(a))** | ** ** |
|                                                           |       |                                                                                                                                                      |       |                                                                                                             |       |   |   |   |
| Equity compensation plans approved by  security holders (1)    |       | 231,636                                                                                                                                                   |       | $                                                                                                                | 10.00      |   | 85,963 |   |
|                                                           |       |                                                                                                                                                      |       |                                                                                                             |       |   |   |
| Equity compensation plans not approved by  security holders(2) |       | 130,000                                                                                                                                                   |       | $                                                                                                                | 10.00      |   | 130,000 |   |
| Total                                                          |       | 361,636                                                                                                                                                   |       | $                                                                                                                | 10.00      |   | 215,963 |   |

 

----

(1)                                   At our annual meeting in 2007, we adopted theCongaree 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 vest 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.

 

61

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Additional information requiredby Item 11 is hereby incorporated by reference from our proxy statement for our2008 annual meeting of shareholders to be held on May 14, 2008.

 

**Item12.  Certain Relationships and RelatedTransactions.**

 

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

 

**Item 13.  Exhibits.**

 
| 3.1.   |   | Articles of Incorporation (incorporated by reference to  Exhibit 3.1 of the Company’s Form SB-2, File No. 333-131931)                                                                                                                                                   |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                        |
| 3.2    |   | Articles of Amendment to Articles of Incorporation (incorporated by  reference to Exhibit 3.2 of the Company’s Form SB-2, File  No. 333-131931).                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                        |
| 3.3    |   | Bylaws (incorporated by reference to Exhibit 3.3 of the  Company’s Form SB-2, File No. 333-131931).                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                        |
| 4.1.   |   | See Exhibits 3.1 and 3.2 for provisions in Congaree  Bancshares, Inc.’s Articles of Incorporation and Bylaws defining the  rights of holders of the common stock (incorporated by reference to  Exhibit 4.1 of the Company’s Form SB-2, File No. 333-131931). |
|   |   |                                                                                                                                                                                                                                                                                        |
| 4.2.   |   | Form of certificate of common stock (incorporated by reference  to Exhibit 4.2 of the Company’s Form SB-2, File No. 333-131931).                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                        |
| 10.1   |   | Employment Agreement between Congaree Bancshares, Inc. and F.  Harvin Ray, Jr., dated February 15, 2006 (incorporated by reference  to Exhibit 10.1 of the Company’s Form SB-2, File  No. 333-131931).*                                                  |
|   |   |                                                                                                                                                                                                                                                                                        |
| 10.2   |   | Employment  Agreement between Congaree Bancshares, Inc. and Charlie T. Lovering  dated September 14, 2006 (incorporated by reference to Exhibit 10.1  of the Company’s Form 8-K filed September 14, 2006).*                                                   |
|   |   |                                                                                                                                                                                                                                                                                        |
| 10.3   |   | Employment Agreement between Congaree Bancshares, Inc. and  Stephen P. Nivens dated February 15, 2006 (incorporated by reference to  Exhibit 10.2 of the Company’s Form SB-2, File  No. 333-131931).*                                                         |
|   |   |                                                                                                                                                                                                                                                                                        |
| 10.4   |   | Form of Stock Warrant Agreement (incorporated by reference to  Exhibit 10.5 of the Company’s Form SB-2, File No. 333-131931).*                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                        |
| 10.5   |   | Congaree Bancshares, Inc. 2007 Stock Incentive Plan.*                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                        |
| 21.1   |   | Subsidiaries of the Company.                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                        |
| 24.1   |   | Power of Attorney (filed as part of the signature  page herewith).                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                        |
| 31.1   |   | Rule 13a-14(a) Certification of the Principal Executive  Officer.                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                        |
| 31.2   |   | Rule 13a-14(a) Certification of the Principal Financial  Officer.                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                        |
| 32     |   | Section 1350 Certifications.                                                                                                                                                                                                                                                           |

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

 

62

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**Item14.  Principal Accountant and Fees.**

 

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

 

63

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**SIGNATURES**

 

Inaccordance with Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

 
|   | **CONGAREE  BANCSHARES, INC.**         |
|--------|----------------------------------------|
|   |                                   |
| Dated: | March 31,  2008                   |   | By: | /s/  F. Harvin Ray, Jr |
|   | F. Harvin Ray, Jr.                |
|   | President  and Chief Executive Officer |
|        |                                        |  |  |  |

 

KNOWALL MEN BY THESE PRESENTS, that each person whose signature appears belowconstitutes and appoints F. Harvin Ray, Jr., his true and lawfulattorney-in-fact and agent, with full power of substitution and resubstitution,for him and in his name, place and stead, in any and all capacities, to signany and all amendments to this Annual Report on Form 10-KSB, and to filethe same, with all exhibits thereto, and other documents in connectiontherewith, with the Securities and Exchange Commission, granting untoattorney-in-fact and agent full power and authority to do and perform each andevery act and thing requisite or necessary to be done in and about thepremises, as fully to all intents and purposes as he might or could do inperson, hereby ratifying and confirming all that attorney-in-fact and agent, orhis substitute or substitutes, may lawfully do or cause to be done by virtuehereof.

 

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

 
| **Signature**                 | ** ** | **Title**                        | ** ** | **Date**       | ** ** |
|-------------------------------|------------|----------------------------------|------------|----------------|------------|
|                          |       |                             |       |           |       |
| /s/ Thomas Hal Derrick        |       | Director                         |       | March 28, 2008 |       |
| Thomas Hal Derrick            |       |                             |       |           |       |
|                          |       |                             |       |           |       |
| /s/ Stephen P. Nivens         |       | Senior Vice President,  Director |       | March 28, 2008 |       |
| Stephen P. Nivens             |       |                             |       |           |       |
|                          |       |                             |       |           |       |
| /s/ David S. Murray, Jr. |       | Director                         |       | March 28, 2008 |       |
| David S. Murray, Jr.     |       |                             |       |           |       |
|                          |       |                             |       |           |       |
| /s/ Victoria Samuels, M.D.    |       | Director                         |       | March 28, 2008 |       |
| Victoria Samuels, M.D.        |       |                             |       |           |       |
|                          |       |                             |       |           |       |
| /s/ E. Daniel Scott           |       | Director                         |       | March 28, 2008 |       |
| E. Daniel Scott               |       |                             |       |           |       |
|                          |       |                             |       |           |       |
| /s/ Nitin C. Shah             |       | Director                         |       | March 28, 2008 |       |
| Nitin C. Shah                 |       |                             |       |           |       |
|                          |       |                             |       |           |       |
| /s/ J. Larry Stroud           |       | Director                         |       | March 28, 2008 |       |
| J. Larry Stroud               |       |                             |       |           |       |
|                          |       |                             |       |           |       |
| /s/ Donald E. Taylor          |       | Director                         |       | March 28, 2008 |       |
| Donald E. Taylor              |       |                             |       |           |       |
|                          |       |                             |       |           |       |
| /s/ John D. Thompson          |       | Director                         |       | March 28, 2008 |       |
| John D. Thompson              |       |                             |       |           |       |

 

64

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| /s/ Charlie T. Lovering     |   | Chief Financial Officer,  Director                                                                  |   | March 28, 2008 |   |
|-----------------------------|--------|-----------------------------------------------------------------------------------------------------|--------|----------------|--------|
| Charlie T. Lovering         |   |                                                                                                |   |           |   |
|                        |   |                                                                                                |   |           |   |
| /s/ F. Harvin Ray, Jr. |   | Chief Executive Officer,  Director,                                                                 |   | March 28, 2008 |   |
| F. Harvin Ray, Jr.     |   | President, Principal  Executive  Officer, Principal Financial Officer,  Principal Accounting Office |   |           |   |
|                        |   |                                                                                                |   |           |   |
| /s/ Harry Michael White     |   | Director                                                                                            |   | March 28, 2008 |   |
| Harry Michael White         |   |                                                                                                |   |           |   |
|                        |   |                                                                                                |   |           |   |
| /s/ Samuel M. Corley        |   | Director                                                                                            |   | March 28, 2008 |   |
| Samuel M. Corley            |   |                                                                                                |   |           |   |
|                        |   |                                                                                                |   |           |   |
| /s/ J. Kevin Reeley         |   | Director                                                                                            |   | March 28, 2008 |   |
| J. Kevin Reeley             |   |                                                                                                |   |           |   |

 

65

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**EXHIBIT INDEX**

 
| **Exhibit** | ** ** | **Description**                                                                                                                                                                                                                                                                             |
|-------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                                                                                                                                                                        |
| 3.1.        |       | Articles of Incorporation (incorporated by reference to  Exhibit 3.1 of the Company’s Form SB-2, File No. 333-131931)                                                                                                                                                   |
|        |       |                                                                                                                                                                                                                                                                                        |
| 3.2         |       | Articles  of Amendment to Articles of Incorporation (incorporated by reference to  Exhibit 3.2 of the Company’s   Form SB-2, File No. 333-131931).                                                                                                                      |
|        |       |                                                                                                                                                                                                                                                                                        |
| 3.3         |       | Bylaws (incorporated by reference to Exhibit 3.3 of the  Company’s Form SB-2, File No. 333-131931).                                                                                                                                                                     |
|        |       |                                                                                                                                                                                                                                                                                        |
| 4.1.        |       | See Exhibits 3.1 and 3.2 for provisions in Congaree  Bancshares, Inc.’s Articles of Incorporation and Bylaws defining the  rights of holders of the common stock (incorporated by reference to  Exhibit 4.1 of the Company’s Form SB-2, File No. 333-131931). |
|        |       |                                                                                                                                                                                                                                                                                        |
| 4.2.        |       | Form of certificate of common stock (incorporated by reference  to Exhibit 4.2 of the Company’s Form SB-2, File No. 333-131931).                                                                                                                                        |
|        |       |                                                                                                                                                                                                                                                                                        |
| 10.1        |       | Employment Agreement between Congaree Bancshares, Inc. and F.  Ray Harvin Jr., dated February 15, 2006(incorporated by reference to  Exhibit 10.1 of the Company’s Form SB-2, File  No. 333-131931).*                                                         |
|        |       |                                                                                                                                                                                                                                                                                        |
| 10.2        |       | Employment  Agreement between Congaree Bancshares, Inc. and Charlie T. Lovering  dated September 14, 2006 (incorporated by reference to Exhibit 10.1  of the Company’s Form 8-K filed September 14, 2006).*                                                   |
|        |       |                                                                                                                                                                                                                                                                                        |
| 10.3        |       | Employment Agreement between Congaree Bancshares, Inc. and  Stephen P. Nivens dated February 15, 2006 (incorporated by reference to  Exhibit 10.2 of the Company’s Form SB-2, File  No. 333-121485).*                                                         |
|        |       |                                                                                                                                                                                                                                                                                        |
| 10.4        |       | Form of Stock Warrant Agreement (incorporated by reference to  Exhibit 10.5 of the Company’s Form SB-2, File No.  333-131931).*                                                                                                                                              |
|        |       |                                                                                                                                                                                                                                                                                        |
| 10.5        |       | Congaree Bancshares, Inc. 2007 Stock Incentive Plan.*                                                                                                                                                                                                                                  |
|        |       |                                                                                                                                                                                                                                                                                        |
| 21.1        |       | Subsidiaries of the Company.                                                                                                                                                                                                                                                                |
|        |       |                                                                                                                                                                                                                                                                                        |
| 24.1        |       | Power of Attorney (filed as part of the signature  page herewith).                                                                                                                                                                                                                     |
|        |       |                                                                                                                                                                                                                                                                                        |
| 31.1        |       | Rule 13a-14(a) Certification of the Principal Executive  Officer.                                                                                                                                                                                                                 |
|        |       |                                                                                                                                                                                                                                                                                        |
| 31.2        |       | Rule 13a-14(a) Certification of the Principal Financial  Officer.                                                                                                                                                                                                                 |
|        |       |                                                                                                                                                                                                                                                                                        |
| 32          |       | Section 1350 Certifications.                                                                                                                                                                                                                                                           |

 

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