10-K 1 a12-28377_110k.htm 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2012

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

For the transition period from to

Commission file number 000-52592

Congaree Bancshares, Inc.

(Exact name of registrant as specified in its charter)

South Carolina		20-1734180
(State of Incorporation)		(I.R.S. Employer Identification No.)

1201 Knox Abbott Drive, Cayce, SC		29033
(Address of principal executive offices)		(Zip Code)

(803) 794-2265

(Issuer’s Telephone Number)

Securities registered pursuant to Section 12(b) of the Exchange Act: None

Securities registered under Section 12(g) of the Exchange Act:

Title of each class: Common Stock, $0.01 par value per share

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

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

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

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

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

The aggregate market value of the voting and nonvoting common equity held by non-affiliates of the registrant (computed by reference to the price at which the stock was most recently sold) was $4,763,985 as of the last business day of the registrant’s most recently completed second fiscal quarter.

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

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o

(Do not check if a smaller reporting company)

Smaller reporting company x

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

Class		Outstanding at March 27, 2013
Common Stock, $.01 par value per share		1,764,439 shares

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Proxy Statement relating to the registrant’s Annual Meeting of Shareholders, to be held on May 23, 2013, are incorporated by reference into Part III of this Annual Report on Form 10-K where indicated.

Part I

Item 1. Business

This report contains statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may relate to our financial condition, results of operation, plans, objectives, or future performance. These statements are based on many assumptions and estimates and are not guarantees of future performance. Our actual results may differ materially from those anticipated in any forward-looking statements, as they will depend on many factors about which we are unsure, including many factors which are beyond our control. The words “may,” “would,” “could,” “will,” “expect,” “anticipate,” “believe,” “intend,” “plan,” and “estimate,” as well as similar expressions, are meant to identify such forward-looking statements. Potential risks and uncertainties include, but are not limited to, those described below under “Risk Factors” and the following:

· credit losses as a result of, among other potential factors, declining real estate values, increasing interest rates, increasing unemployment, or changes in payment behavior or other factors;

· restrictions or conditions imposed by our regulators on our operations;

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

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

· changes in deposit flows;

· 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, changes in federal and/or state tax laws or interpretations thereof by taxing authorities, changes in laws, rules or regulations applicable to companies that have participated in governmental initiatives affecting the financial services industry;

· general economic conditions resulting in, among other things, a deterioration in credit quality;

· changes occurring in business conditions and inflation;

· changes in access to funding or increased regulatory requirements with regard to funding;

· increased cybersecurity risk, including potential business disruptions or financial losses;

· changes in technology;

· changes in monetary and tax policies;

· the adequacy of the level of our allowance for loan losses and the amount of loan loss provisions required in future periods;

· the rate of delinquencies and amounts of loan charge-offs;

· the rates of loan growth;

· the amount of our loan portfolio collateralized by real estate, and the weakness in the real estate market;

· our reliance on available secondary funding sources such as Federal Home Loan Bank advances, Federal Reserve Discount Window borrowings, sales of securities and loans, and federal funds lines of credit from correspondent banks to meet our liquidity needs;

· our ability to maintain effective internal control over financial reporting;

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

· changes in monetary and tax policies;

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

· changes in the securities markets; and

· other risks and uncertainties detailed in Part I, Item 1A of this Annual Report on Form 10-K and from time to time in our filings with the Securities and Exchange Commission (“SEC”).

These risks are exacerbated by the recent developments in national and international financial markets, and we are unable to predict what impact these uncertain market conditions will have on us. For more than three years, the capital and credit markets have experienced extended volatility and disruption. There can be no assurance that these unprecedented developments will not continue to materially and adversely impact our business, financial condition, and results of operations, as well as our ability to raise capital or other funding for liquidity and business purposes. For additional information with respect to factors that could cause actual results to differ from the expectations stated in the forward-looking statements, see “Risk Factors” under Part I, Item 1A of this Annual Report on Form 10-K.

We have based our forward-looking statements on our current expectations about future events. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee that these expectations will be achieved. We undertake no obligation to publicly update or otherwise revise any forward-looking statements whether as a result of new information, future events, or otherwise.

General

Congaree Bancshares, Inc. (the “Company”) is a South Carolina corporation organized in November 2005 to operate as a bank holding company pursuant to the Federal Bank Holding Company Act of 1956 and the South Carolina Bank Holding Company Act, and to own and control all of the capital stock of Congaree State Bank (the “Bank”). The Bank opened for business on October 16, 2006. The Bank currently maintains a main office at 1201 Knox Abbott Drive, Cayce, South Carolina. We opened a second office located at 2023 Sunset Boulevard, West Columbia, South Carolina in 2009.

Our assets consist primarily of our investment in the Bank and liquid investments. Our primary activities are conducted through the Bank. As of December 31, 2012, our consolidated total assets were $113,453,610, our consolidated total loans were $80,701,245, our consolidated total deposits were $94,803,120, and our consolidated total shareholders’ equity was approximately $12,449,095.

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

Our operations are significantly affected by prevailing economic conditions, competition, and the monetary, fiscal, and regulatory policies of governmental agencies. Lending activities are influenced by a number of factors, including the general credit needs of individuals and small and medium-sized businesses in our market areas, competition among lenders, the level of interest rates, and the availability of funds. Deposit flows and costs of funds are influenced by prevailing market rates of interest, primarily the rates paid on competing investments, account maturities, and the levels of personal income and savings in our market areas.

Marketing Focus

The Bank is a locally-owned and operated bank organized to serve consumers and small- to medium-sized businesses and professional concerns. A primary reason for operating the Bank lies in our belief that a community-based bank, with a personal focus, can better identify and serve local relationship banking needs than can a branch or subsidiary of larger outside banking organizations. We believe that we can be successful by offering a higher level of customer service and a management team more focused on the needs of the community than most of our competitors. We believe that this approach is enthusiastically supported by the community. Our foundation is to remain true to our values.

Banking Services

The Bank is primarily engaged in the business of accepting demand and time deposits and providing commercial, consumer and mortgage loans to the general public. Deposits in the Bank are insured by the Federal Deposit Insurance Corporation (the “FDIC”) up to the maximum amount allowed by law (currently, $250,000, subject to aggregation rules). Other services which the Bank offers include online banking, commercial cash management, remote deposit capture, safe deposit boxes, bank official checks, traveler’s checks, and wire transfer capabilities.

Location and Service Area

Our primary service area consists of Lexington and Richland Counties, South Carolina, with a primary focus on an area within a 15 mile radius of our main office in West Columbia, South Carolina. Our Sunset office is located in West Columbia on a major artery that connects Columbia with Lexington. We opened the Sunset office

in January 2009. The site is located approximately one mile east of the Lexington Medical Center and provides excellent visibility for the Bank.

Due to its central location in the state and convenient access to I-20, I-26, and I-77, our primary service area is considered one of the fastest growing areas in South Carolina. Home to the state capital, the University of South Carolina, and a variety of service-based and light manufacturing companies, this area provides a growing and diverse economy. Lexington Medical Center, Lexington County’s largest employer, has approximately 3,800 employees and continues to expand. The other top employers in Lexington County include Amazon, SCE&G, Michelin Tire Corporation, Allied-Signal Corporation, and United Parcel Service. The amenities and opportunities that our primary service area offers are wide-ranging from housing, education, healthcare, shopping, recreation, and culture. We believe these factors make the quality of life in the area attractive.

Our primary service area has also experienced solid population growth. From 2000 to 2010, Lexington County’s population increased by 21.5% (an increase of 46,377 people), for a ranking of sixth among the 46 counties in South Carolina in terms of population growth over the last decade. Based on a 2010 estimate, Lexington County ranks sixth as far as the largest counties, amongst the top ten in the State. In 2010, Lexington County had a total of 262,391 residents. According to the most recent data published by the FDIC, as of June 30, 2012, the Bank maintained a 2.96% deposit market share in Lexington County. As of June 30, 2012, our market share in Cayce, South Carolina is 14.08% and our market share in West Columbia, South Carolina is 9.14%.

Despite being in what we believe is one of the best markets in South Carolina, we face the risk of being particularly sensitive to changes in the state and local economies. South Carolina has not been immune to the economic challenges of the past several years. Unemployment has been rising in our markets and property values have declined. Continued higher levels of unemployment will continue to impact credit quality. As a result, we are spending significant time on credit solutions for our customers and managing and disposing of real estate acquired in settlement of loans as effectively as possible. The weakening in the state and local economies has impacted our loan demand and, to a lesser extent, available deposits.

See Item 1A. Risk Factors for a discussion regarding the material risks and uncertainties that may impact our market.

Lending Activities

We emphasize a range of lending services, including real estate, commercial, and equity-line and consumer loans to individuals, small- to medium-sized businesses, and professional concerns that are located in or conduct a substantial portion of their business in our Bank’s primary service area. We compete for these loans with competitors who are well established in our service area and have greater resources and lending limits. As a result, we may have to charge lower interest rates to attract borrowers. At December 31, 2012, we had net loans of $79,406,192, representing 70.0% of our total assets.

Loan Approval and Review. Certain credit risks are inherent in making loans. These include prepayment risks, risks resulting from uncertainties in the future value of collateral, risks resulting from changes in economic and industry conditions, and risks inherent in dealing with individual borrowers. We attempt to mitigate repayment risks by adhering to internal credit policies and procedures. The Bank’s loan approval policies provide for various levels of officer lending authority. When the amount of aggregate loans to a single borrower exceeds any individual officer’s lending authority, the loan request is considered and approved by an officer with a higher lending limit or the board of directors’ loan committee. The Bank’s lending staff and credit administration meets on a regular basis to help identify and discuss potential problem loans. The Bank does not make any loans to any related person unless the loan is approved by the board of directors of the Bank and is made on terms not more favorable to the person than would be available to a person not affiliated with the Bank. The Bank currently adheres to Federal National Mortgage Association and Federal Home Loan Mortgage Corporation guidelines in its mortgage loan review process, but may choose to alter this policy in the future. The Bank sells residential mortgage loans that it originates in the secondary market.

Allowance for Loan Losses. We maintain an allowance for loan losses, which we establish through a provision for loan losses charged against income. We charge loans against this allowance when we believe that the collectibility of the principal is unlikely. The allowance is an estimated amount that we believe is adequate to absorb losses inherent in the loan portfolio based on evaluations of its collectibility. As of December 31, 2011, our

allowance for loan losses was approximately 1.54% of the average outstanding balance of our loans, based on our consideration of several factors, including regulatory guidelines, mix of our loan portfolio, and evaluations of local economic conditions as well as peer data. Over time, we will periodically determine the amount of the allowance based on our consideration of 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.

Lending Limits. The Bank’s lending activities are subject to a variety of lending limits imposed by federal law. In general, the Bank is subject to a legal limit on loans to a single borrower equal to 15% of the Bank’s capital and unimpaired surplus. Different limits may apply based on the type of loan or the nature of the borrower, including the borrower’s relationship to the Bank. These limits will increase or decrease as the Bank’s capital increases or decreases. Unless the Bank is able to sell participations in its loans to other financial institutions, the Bank will not be able to meet all of the lending needs of loan customers requiring aggregate extensions of credit above these limits.

Credit Risk. The principal credit risk associated with each category of loans is the creditworthiness of the borrower. Borrower creditworthiness is affected by general economic conditions and the strength of the manufacturing, services, and retail market segments. General economic 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, and employees.

Real Estate Loans. One of the primary components of our loan portfolio is loans secured by first or second mortgages on real estate. As of December 31, 2012, loans secured by first or second mortgages on real estate made up approximately $71,180,476, or 88% of our loan portfolio. These loans will generally fall into one of two categories: commercial real estate and residential home equity lines of credit. These categories are discussed in more detail below, including their specific risks. Interest rates for all categories may be fixed or adjustable, and will more likely be fixed for shorter-term loans. The Bank will generally charge an origination fee for each loan.

Real estate loans are subject to the same general risks as other loans. Real estate loans are also sensitive to fluctuations in the value of the real estate securing the loan. On first and second mortgage loans we typically do not advance more than regulatory limits. Loans originated which exceed supervisory guidelines are typically limited to borrowers that exhibit a capacity for repayment that exceeds bank policy. While the bank can advance funds in excess of supervisory guidelines, there are regulatory limits on those advances. The aggregate amount of all loans in excess of the supervisory loan-to-value limits should not exceed 100 percent of total capital. Within the aggregate limit, total loans for all commercial, agricultural, multifamily or other non-1-to-4 family residential properties should not exceed 30 percent of total capital. An institution will come under increased supervisory scrutiny as the total of such loans approaches these levels. As of December 31, 2012 non-1-to-4 family residential loans equaled 25% of total capital and all loans in excess of supervisory guidelines equaled 40% of total capital. We will require a valid mortgage lien on all real property loans along with a title lien policy which insures the validity and priority of the lien. We will also require borrowers to obtain hazard insurance policies and flood insurance, if applicable. Additionally, certain types of real estate loans have specific risk characteristics that vary according to the collateral type securing the loan and the terms and repayment sources for the loan.

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

· Real Estate - Mortgage. Loans secured by real estate mortgages are the principal component of our loan portfolio. These loans generally fall into one of three categories: residential real estate loans, residential home equity lines of credit, and commercial real estate loans.

· Residential Real Estate Loans. At December 31, 2012, our individual residential real estate loans

ranged in size from $785 to $1,102,177, with an average loan size of approximately $118,533. These loans generally have longer terms of up to 20 years. We offer fixed and adjustable rate mortgages, and we intend to sell most, if not all, of the residential real estate loans that we generate in the secondary market soon after we originate them. We do not intend to retain servicing rights for these loans. Inherent in residential real estate loans’ credit risk is the risk that the primary source of repayment, the residential borrower, will be unable to service the debt. If a real estate loan is in default, we also run the risk that the value of a residential real estate loan’s secured real estate will decrease, and thereby be insufficient to satisfy the loan. To mitigate these risks, we will evaluate each borrower on an individual basis and attempt to determine their credit profile. By selling these loans in the secondary market, we can significantly reduce our exposure to credit risk because the loans will be underwritten through a third party agent without any recourse against the Bank. At December 31, 2012, residential real estate loans (other than construction loans) totaled $12,327,482, or 15% of our loan portfolio.

· Residential Home Equity Lines of Credit. At December 31, 2012, our individual residential home equity lines of credit ranged in principal balances from $0 to $979,864, with an average principal balance of approximately $74,384. These loans generally have longer terms of up to 20 years. We offer fixed and adjustable rate home equity lines of credit. These loans are generally secured by a first or second mortgage on the borrower’s primary residence. Inherent in residential real estate loans’ credit risk is the risk that the primary source of repayment, the residential borrower, will be unable to service the debt. If a real estate loan is in default, we also run the risk that the value of a residential real estate loan’s secured real estate will decrease, and thereby be insufficient to satisfy the loan. To mitigate these risks, we will evaluate each borrower on an individual basis and attempt to determine their credit profile. The Bank has obtained private mortgage insurance on second mortgage loans that exceeded supervisory guidelines at the inception of the loan. At December 31, 2012, the principal balance of residential home equity lines of credit totaled $21,273,793, or 26% of our loan portfolio.

· Commercial Real Estate Loans. At December 31, 2012, our individual commercial real estate loans ranged in size from $7,594 to $1,422,023, with an average loan size of approximately $256,603. Commercial real estate loans generally have terms of five years or less, although payments may be structured on a longer amortization basis. Inherent in commercial real estate loans’ credit risk is the risk that the primary source of repayment, the operating commercial real estate company, will be insufficient to service the debt. If a real estate loan is in default, we also run the risk that the value of a commercial real estate loan’s secured real estate will decrease and thereby be unable to satisfy the loan. To mitigate these risks, we evaluate each borrower on an individual basis and attempt to determine its business risks and credit profile. We attempt to reduce credit risk in the commercial real estate portfolio by emphasizing loans on owner-occupied office and retail buildings where the loan-to-value ratio is established by independent appraisals. We typically review the personal financial statements of the principal owners and require their personal guarantees. These reviews often reveal secondary sources of payment and liquidity to support a loan request. At December 31, 2012, commercial real estate loans (other than construction loans) totaled $30,022,579, or 37% of our loan portfolio.

· Real Estate — Construction, Land Development & Other Land. We offer adjustable and fixed rate land acquisition loans to consumers and commercial borrowers who wish to obtain land for their own use. We also offer adjustable and fixed rate residential and commercial construction loans to builders and developers and to consumers who wish to build their own home. The term of construction 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 in full upon the sale of the property. Construction and development loans generally carry a higher degree of risk than long term financing of existing properties. Repayment usually depends on the ultimate completion of the project within cost estimates and on the sale of the property. 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 personal guarantees where possible, and by keeping the loan-to-value ratio of the completed project below specified percentages. We may also reduce risk by selling participations in larger loans to other institutions when possible. At December 31, 2012, total construction, land development, and other land loans amounted to $7,556,622, or 10% of our loan portfolio.

Commercial Loans. The Bank makes loans for commercial purposes in various lines of businesses. We focus our efforts on commercial loans of less than $1,000,000. Equipment loans will typically be made for a term of five years or less at fixed or variable rates, with the loan fully amortized over the term and secured by the financed equipment. Working capital loans typically have terms not 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 or inventory, principal is typically repaid as the assets securing the loan are converted into cash, and in other cases principal is typically due at maturity. Trade letters of credit, standby letters of credit, and foreign exchange are handled through a correspondent bank as agent for the Bank. Commercial loans primarily have risk that the primary source of repayment, the borrowing business, will be unable to service the debt. Often this occurs as the result of changes in local economic conditions or in the industry in which the borrower operates which impact cash flow or collateral value.

We also offer small business loans utilizing government enhancements such as the Small Business Administration’s 7(a) and SBA’s 504 programs. These loans are typically partially guaranteed by the government which may help to reduce the Bank’s risk. Government guarantees of SBA loans will not exceed 90% of the loan value, and will generally be less. At December 31, 2012, commercial loans amounted to $8,192,486, or 10% of our loan portfolio.

Consumer Loans. The Bank makes a variety of loans to individuals for personal and household purposes, including secured and unsecured installment loans and revolving lines of credit such as credit cards. Installment loans typically carry balances of less than $50,000 and are amortized over periods up to 60 or more months. Consumer loans may be offered on a single maturity basis where a specific source of repayment is available. Revolving loan products typically require monthly payments of interest and a portion of the principal.

Consumer loans are generally considered to have greater risk than first or second mortgages on real estate because the value of the secured property may depreciate rapidly, they are often dependent on the borrower’s employment status as the sole source of repayment, and some of them are unsecured. To mitigate these risks, we analyze selective underwriting criteria for each prospective borrower, which may include the borrower’s employment history, income history, credit bureau reports, and 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 rapid depreciation 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 reduce our loss exposure to these types of loans by limiting their sizes relative to other types of loans. Consumer loans which are not secured by real estate amounted to $1,328,283 or 2% of our loan portfolio.

Relative Risks of Loans. Each category of loan has a different level of credit risk. Real estate loans are generally safer than loans secured by other assets because the value of the underlying security, real estate, is generally ascertainable and does not fluctuate as much as some other assets. However, certain real estate loans are less risky than others. Residential real estate loans are generally the least risky type of real estate loan, followed by commercial real estate loans and construction and development loans. Commercial loans, which can be secured by real estate or other assets, or which can be unsecured, are generally more risky than real estate loans, but less risky than consumer loans. Finally, consumer loans, which can also be secured by real estate or other assets, or which can also be unsecured, are generally considered to be the most risky of these categories of loans. Any type of loan which is unsecured is generally more risky than secured loans. These levels of risk are general in nature, and many factors including the creditworthiness of the borrower or the particular nature of the secured asset may cause any type of loan to be more or less risky than another. Additionally, these levels of risk are limited to an analysis of credit risk, and they do not take into account other risk factors associated with making loans such as the interest rate risk inherent in long-term, fixed-rate loans.

Deposit Services

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

Other Banking Services

We offer safe deposit boxes, cashier’s checks, banking by mail, direct deposit of payroll and social security checks, U.S. Savings Bonds, and traveler’s checks. The Bank is associated with the Intercept Switch, Pulse, Maestro, MasterCard, Cirrus and Plus ATM networks that may be used by the Bank’s customers throughout the country. We believe that, by being associated with a shared network of ATMs, we are better able to serve our customers and will be able to attract customers who are accustomed to the convenience of using ATMs. We also offer a debit card and credit card services through a correspondent bank as an agent for the Bank. We do not expect the Bank to exercise trust powers during its next few years of operation.

Competition

The Columbia/West Columbia/Lexington market is highly competitive, with all of the largest banks in the state, as well as super regional banks, represented. The competition among the various financial institutions is based upon a variety of factors, including interest rates offered on deposit accounts, interest rates charged on loans, credit and service charges, the quality of services rendered, the convenience of banking facilities and, in the case of loans to large commercial borrowers, relative lending limits. In addition to banks and savings associations, we compete with other financial institutions including securities firms, insurance companies, credit unions, leasing companies and finance companies. Many of our non-bank competitors are not subject to the same extensive federal regulations that govern bank holding companies and federally insured banks. Size gives larger banks certain advantages in competing for business from large corporations. These advantages include higher lending limits and the ability to offer services in other areas of South Carolina. As a result, we do not generally attempt to compete for the banking relationships of large corporations, but concentrate our efforts on small- to medium-sized businesses and individuals. We believe we will compete effectively in this market by offering quality and personal service.

Employees

As of December 31, 2012, we had 24 full-time employees and one part-time employee. We believe that our relations with our employees are good.

Supervision and Regulation

Both Congaree Bancshares, Inc. and Congaree State Bank are subject to extensive state and federal banking regulations that impose restrictions on and provide for general regulatory oversight of their operations. These laws generally are intended to protect depositors and not shareholders. The following summary is qualified by reference to the statutory and regulatory provisions discussed and is not intended to be a complete list of all the activities regulated by the banking laws or of the impact of such laws and regulations on our operations. It is intended only to briefly summarize some material provisions.

Recent Legislative and Regulatory Initiatives to Address Financial and Economic Crisis

The U.S. Congress, the Treasury and the federal banking regulators, including the FDIC, have taken broad actions since early September 2008 to address the volatility and disruption in the U.S. banking system. Several regulatory and governmental actions have been announced including:

· In October 2008, the Emergency Economic Stabilization Act of 2008 (“EESA”) was enacted. The EESA authorized Treasury to purchase from financial institutions and their holding companies up to $700 billion in mortgage loans, mortgage-related securities and certain other financial

instruments, including debt and equity securities issued by financial institutions and their holding companies in the Troubled Asset Relief Program (“TARP”). The Treasury also allocated $250 billion towards the TARP Capital Purchase Program (“CPP”), pursuant to which Treasury purchased debt or equity securities from participating institutions. Participants in the CPP are subject to executive compensation limits and are encouraged to expand their lending and mortgage loan modifications. The EESA also temporarily increased FDIC deposit insurance on most accounts from $100,000 to $250,000.

On January 9, 2009, as part of the CPP, we entered into a CPP Purchase Agreement with the Treasury, pursuant to which we sold (i) 3,285 shares of our Fixed Rate Cumulative Perpetual Preferred Stock, Series A, and (ii) a warrant to purchase 164 shares of our Fixed Rate Cumulative Perpetual Preferred Stock, Series B for an aggregate purchase price of $3,285,000 in cash. The CPP warrant was immediately exercised.

On October 31, 2012, the Treasury sold its Series A and Series B Preferred Stock (collectively, the “Preferred Stock”) of the Company through a private offering structured as a modified Dutch auction. The Company bid on a portion of the Series A Preferred Stock in the auction after receiving approval from its regulators to do so. The clearing price per share for the Series A Preferred Stock was $825.26 (compared to a stated value of $1,000 per share) and the clearing price per share for the Series B Preferred Stock was $801.00 (compared to a stated value of $1,000 per share). The Company was successful in repurchasing 1,156 shares of the 3,285 shares of Series A Preferred Stock outstanding through the auction process. The remaining 2,129 shares of Series A Preferred Stock and 164 shares of Series B Preferred Stock of the Company held by Treasury were sold to unrelated third-parties through the auction process. The net balance sheet impact was a reduction to shareholders’ equity of $954,000 which is comprised of a decrease in preferred stock of $1,135,000 and a $181,000 increase to retained earnings related to the discount on the shares repurchased. The redemption of the 1,156 shares of Series A Preferred Stock will save the Company $57,800 annually in dividend expenses.

Following the sale of the Preferred Stock on October 31, 2012, the Treasury has completely eliminated its equity stake in the Company through the CPP. As a result, the executive compensation and corporate governance standards that were applicable to the Company while the Treasury held shares of the Preferred Stock are no longer applicable to our Company, and we have the option to increase the compensation for our executive officers and other senior employees on a going forward basis.

· On February 17, 2009, the American Recovery and Reinvestment Act (the “Recovery Act”) was signed into law in an effort to, among other things, create jobs and stimulate growth in the United States economy. The Recovery Act specifies appropriations of approximately $787 billion for a wide range of Federal programs and will increase or extend certain benefits payable under the Medicaid, unemployment compensation, and nutrition assistance programs. The Recovery Act also reduces individual and corporate income tax collections and makes a variety of other changes to tax laws. The Recovery Act also imposes certain limitations on compensation paid by participants in TARP.

· On November 12, 2009, the FDIC issued a final rule to require banks to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012 and to increase assessment rates effective on January 1, 2011.

· On July 21, 2010, the US President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Dodd-Frank Act created a fundamental restructuring of federal banking regulation. Among other things, the Dodd-Frank Act created a new Financial Stability Oversight Council to identify systemic risks in the financial system and gave federal regulators new authority to take control of and liquidate financial firms. The Dodd-Frank Act also created a new independent federal regulator to administer federal consumer protection laws. Many of the provisions of the Dodd-Frank Act have delayed effective dates and the legislation requires various federal agencies to promulgate numerous and extensive implementing regulations over the next several years. Although the substance and scope of these

regulations cannot be completely determined at this time, it is expected that the legislation and implementing regulations will increase the Company’s operating and compliance costs. The following discussion summarizes certain significant aspects of the Dodd-Frank Act:

· The Dodd-Frank Act required the Federal Reserve to apply consolidated capital requirements to depository institution holding companies that are no less stringent than those currently applied to depository institutions. Under these standards, trust preferred securities will be excluded from Tier 1 capital unless such securities were issued prior to May 19, 2010 by a bank holding company with less than $15 billion in assets, such as the Company. The Dodd-Frank Act also stipulated capital requirements to be countercyclical so that the required amount of capital increases in times of economic expansion and decreases in times of economic contraction, consistent with safety and soundness practices.

· The Dodd-Frank Act permanently increased the maximum deposit insurance amount for financial institutions to $250,000 per depositor, and extended unlimited deposit insurance to noninterest bearing transaction accounts through December 31, 2012. The Dodd-Frank Act also broadened the base for FDIC insurance assessments, which are now based on a financial institution’s average consolidated total assets less tangible equity capital. The Dodd-Frank Act required the FDIC to increase the reserve ratio of the Deposit Insurance Fund from 1.15% to 1.35% of insured deposits by 2020 and eliminated the requirement that the FDIC pay dividends to insured depository institutions when the reserve ratio exceeds certain thresholds. Effective July 21, 2011, the Dodd-Frank Act eliminated the federal statutory prohibition against the payment of interest on business checking accounts.

· The Dodd-Frank Act directed the federal banking regulators to promulgate rules prohibiting excessive compensation paid to executives of depository institutions and their holding companies with assets in excess of $1.0 billion, regardless of whether the institution is publicly traded or not.

· Effective July 21, 2011, the Dodd-Frank Act prohibited a depository institution from converting from a state to federal charter or vice versa while it is the subject of a cease and desist order or other formal enforcement action or a memorandum of understanding with respect to a significant supervisory matter unless the appropriate federal banking agency gives notice of the conversion to the federal or state authority that issued the enforcement action and that agency does not object within 30 days. The notice must include a plan to address the significant supervisory matter. The converting institution must also file a copy of the conversion application with its current federal regulator which must notify the resulting federal regulator of any ongoing supervisory or investigative proceedings that are likely to result in an enforcement action and provide access to all supervisory and investigative information relating hereto.

· The Dodd-Frank Act authorized national and state banks to establish branches in other states to the same extent as a bank chartered by that state would be permitted to branch. Previously, banks could only establish branches in other states if the host state expressly permitted out-of-state banks to establish branches in that state. Accordingly, banks are able to enter new markets more freely.

· Effective July 21, 2012, the Dodd-Frank Act expanded the definition of affiliate for purposes of quantitative and qualitative limitations of Section 23A of the Federal Reserve Act to include mutual funds advised by a depository institution or its affiliates. The Dodd-Frank Act now applies Section 23A and Section 22(h) of the Federal Reserve Act (governing transactions with insiders) to derivative transactions, repurchase agreements and securities lending and borrowing transaction that create credit exposure to an affiliate or an insider. Any such transactions with affiliates must be fully secured. Historically, an exception has existed that exempts covered transactions between depository institutions and their financial subsidiaries from the 10% capital and surplus limitation set

forth in Section 23A. However, the Dodd-Frank Act eliminated this exception for covered transactions entered into after July 21, 2012. Effective July 21, 2012, the Dodd-Frank Act also prohibited an insured depository institution from purchasing an asset from or selling an asset to an insider unless the transaction is on market terms and, if representing more than 10% of capital, is approved in advance by the disinterested directors.

· The Dodd-Frank Act required that the amount of any interchange fee charged by a debit card issuer with respect to a debit card transaction must be reasonable and proportional to the cost incurred by the issuer. Effective October 1, 2011, the Federal Reserve set new caps on interchange fees at $0.21 per transaction, plus an additional five basis-point charge per transaction to help cover fraud losses. An additional $0.01 per transaction is allowed if certain fraud-monitoring controls are in place. While the restrictions on interchange fees do not apply to banks that, together with their affiliates, have assets of less than $10 billion, such as the Bank, the restrictions could negatively impact bankcard income for smaller banks if the reductions that are required of larger banks cause industry-wide reduction of swipe fees.

· The Dodd-Frank Act created a new, independent federal agency called the Consumer Financial Protection Bureau (“CFPB”), which granted broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws, including the Equal Credit Opportunity Act, Truth in Lending Act, Real Estate Settlement Procedures Act, Fair Credit Reporting Act, Fair Debt Collection Act, the Consumer Financial Privacy provisions of the Gramm-Leach-Bliley Act and certain other statutes. The CFPB has examination and primary enforcement authority with respect to depository institutions with $10 billion or more in assets. Depository institutions with less than $10 billion in assets, such as the Bank, are subject to rules promulgated by the CFPB but will continue to be examined and supervised by federal banking regulators for consumer compliance purposes.

· In December 2010, the Basel Committee on Banking Supervision (the “Basel Committee”), an international forum for cooperation on banking supervisory matters, announced the “Basel III” capital rules, which set new capital requirements for banking organizations. On June 7, 2012, the Federal Reserve, the OCC, and the FDIC issued a joint notice of proposed rulemaking that would implement sections of the Dodd-Frank Act that encompass certain aspects of Basel III with respect to capital and liquidity. On November 9, 2012, following a public comment period, the US federal banking agencies announced that the originally proposed January 1, 2013 effective date for the proposed rules was being delayed so that the agencies could consider operations and transitional issued identified in the large volume of public comments received. The proposed rules, if adopted, would lead to significantly higher capital requirements and more restrictive leverage and liquidity ratios than those currently in place. The ultimate impact of the US implementation of the new capital and liquidity standards on the Company and the Bank is currently being reviewed and is dependent on the terms of the final regulations, which may differ from the proposed regulations. At this point the Company cannot determine the ultimate effect that any final regulations, if enacted, would have on its earnings or financial position. In addition, important questions remain as to how the numerous capital and liquidity mandates of the Dodd-Frank Act will be integrated with the requirements of Basel III.

Although it is likely that further regulatory actions may arise as the federal government continues to attempt to address the economic situation, we cannot predict the effect that fiscal or monetary policies, economic control, or new federal or state legislation may have on our business and earnings in the future.

Congaree Bancshares, Inc.

We own 100% of the outstanding capital stock of the Bank, and therefore we are considered to be a bank holding company under the federal Bank Holding Company Act of 1956 (the “Bank Holding Company Act”). As a result, we are primarily subject to the supervision, examination and reporting requirements of the Federal Reserve under the Bank Holding Company Act and its regulations promulgated thereunder. Moreover, as a bank holding

company of a bank located in South Carolina, we also are subject to the South Carolina Banking and Branching Efficiency Act.

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

· banking or managing or controlling banks;

· 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.

Activities that the Federal Reserve has found to be so closely related to banking as to be a proper incident to the business of banking include:

· factoring accounts receivable;

· making, acquiring, brokering or servicing loans and usual related activities;

· leasing personal or real property;

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

· trust company functions;

· financial and investment advisory activities;

· conducting discount securities brokerage activities;

· underwriting and dealing in government obligations and money market instruments;

· providing specified management consulting and counseling activities;

· performing selected data processing services and support services;

· acting as agent or broker in selling credit life insurance and other types of insurance in connection with credit transactions; and

· performing selected insurance underwriting activities.

As a bank holding company, we also can elect to be treated as a “financial holding company,” which would allow us to engage in a broader array of activities. In sum, a financial holding company can engage in activities that are financial in nature or incidental or complementary to financial activities, including insurance underwriting, sales and brokerage activities, providing financial and investment advisory services, securities underwriting and dealing and making merchant banking investments in commercial and financial companies. We have not sought financial holding company status, but may elect such status in the future as our business matures. If we were to elect in writing for financial holding company status, each insured depository institution we control would have to be well capitalized, well managed and have at least a satisfactory rating under the Community Reinvestment Act (discussed below).

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

Change in Control. In addition, and subject to certain exceptions, the Bank Holding Company Act and the Change in Bank Control Act, together with regulations promulgated thereunder, require Federal Reserve approval prior to any person or company acquiring “control” of a bank holding company. Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of a bank holding company. Following the relaxing of these restrictions by the Federal Reserve in September 2008, control will be rebuttably presumed to exist if a person acquires more than 33% of the total equity of a bank or bank holding company, of which it may own, control or have the power to vote not more than 15% of any class of voting securities.

Source of Strength. There are a number of obligations and restrictions imposed by law and regulatory policy on bank holding companies with regard to their depository institution subsidiaries that are designed to minimize potential loss to depositors and to the FDIC insurance funds in the event that the depository institution becomes in danger of defaulting under its obligations to repay deposits. Under a policy of the Federal Reserve, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so absent such policy. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDIC Improvement Act”), to avoid receivership of its insured depository institution subsidiary, a bank holding company is required to guarantee the compliance of any insured depository institution subsidiary that may become “undercapitalized” within the terms of any capital restoration plan filed by such subsidiary with its appropriate federal banking agency up to the lesser of (i) an amount equal to 5% of the institution’s total assets at the time the institution became undercapitalized, or (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all applicable capital standards as of the time the institution fails to comply with such capital restoration plan.

The Federal Reserve also has the authority under the Bank Holding Company Act to require a bank holding company to terminate any activity or relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal Reserve’s determination that such activity or control constitutes a serious risk to the financial soundness or stability of any subsidiary depository institution of the bank holding company. Further, federal law grants federal bank regulatory authorities additional discretion to require a bank holding company to divest itself of any bank or nonbank subsidiary if the agency determines that divestiture may aid the depository institution’s financial condition.

In addition, the “cross guarantee” provisions of the Federal Deposit Insurance Act require insured depository institutions under common control to reimburse the FDIC for any loss suffered or reasonably anticipated by the FDIC as a result of the default of a commonly controlled insured depository institution or for any assistance provided by the FDIC to a commonly controlled insured depository institution in danger of default. The FDIC’s claim for damages is superior to claims of shareholders of the insured depository institution or its holding company, but is subordinate to claims of depositors, secured creditors and holders of subordinated debt (other than affiliates) of the commonly controlled insured depository institutions.

The FDIA also provides that amounts received from the liquidation or other resolution of any insured depository institution by any receiver must be distributed (after payment of secured claims) to pay the deposit liabilities of the institution prior to payment of any other general or unsecured senior liability, subordinated liability, general creditor or shareholder. This provision would give depositors a preference over general and subordinated creditors and shareholders in the event a receiver is appointed to distribute the assets of our bank.

Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment.

Capital Requirements. The Federal Reserve imposes certain capital requirements on the bank holding company under the Bank Holding Company Act, including a minimum leverage ratio and a minimum ratio of “qualifying” capital to risk-weighted assets. These requirements are essentially the same as those that apply to the Bank and are described below under “Congaree State Bank—Prompt Corrective Action.” Subject to our capital requirements and certain other restrictions, we are able to borrow money to make a capital contribution to the Bank, and these loans may be repaid from dividends paid from the Bank to the Company. Our ability to pay dividends depends on the Bank’s ability to pay dividends to us, which is subject to regulatory restrictions as described below in

“Congaree State Bank—Dividends.” We are also able to raise capital for contribution to the Bank by issuing securities without having to receive regulatory approval, subject to compliance with federal and state securities laws. Currently, the Company also has to obtain the prior written approval of the Federal Reserve Bank of Richmond before declaring or paying any dividends.

Dividends. Since the Company is a bank holding company, its ability to declare and pay dividends is dependent on certain federal and state regulatory considerations, including the guidelines of the Federal Reserve. The Federal Reserve has issued a policy statement regarding the payment of dividends by bank holding companies. In general, the Federal Reserve’s policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the bank holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. The Federal Reserve’s policies also require that a bank holding company serve as a source of financial strength to its subsidiary banks by standing ready to use available resources to provide adequate capital funds to those banks during periods of financial stress or adversity and by maintaining the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks where necessary. In addition, under the prompt corrective action regulations, the ability of a bank holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. These regulatory policies could affect the ability of the Company to pay dividends or otherwise engage in capital distributions.

South Carolina State Regulation. As a South Carolina bank holding company under the South Carolina Banking and Branching Efficiency Act, we are subject to limitations on sale or merger and to regulation by the South Carolina Board of Financial Institutions. We are not required to obtain the approval of the South Carolina Board of Financial Institutions prior to acquiring the capital stock of a national bank, but we must notify them at least 15 days prior to doing so. We must receive the Board’s approval prior to engaging in the acquisition of a South Carolina state chartered bank or another South Carolina bank holding company.

Congaree State Bank

The Bank operates as a state chartered bank incorporated under the laws of the State of South Carolina and is subject to examination by the South Carolina Board of Financial Institutions. Deposits in the Bank are insured by the FDIC up to a maximum amount, which is currently $250,000.

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

· security devices and procedures;

· adequacy of capitalization and loss reserves;

· loans;

· investments;

· borrowings;

· deposits;

· mergers;

· issuances of securities;

· payment of dividends;

· interest rates payable on deposits;

· interest rates or fees chargeable on loans;

· establishment and closure 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 Institutions requires the Bank to maintain specified capital ratios and imposes limitations on the Bank’s aggregate investment in real estate, bank premises, and furniture and fixtures. The South Carolina Board of Financial Institutions also requires the Bank to prepare quarterly reports on the Bank’s financial condition in compliance with its minimum standards and procedures.

All insured institutions must undergo regular on site examinations by their appropriate banking agency. The cost of examinations of insured depository institutions and any affiliates may be assessed by the appropriate agency against each institution or affiliate as it deems necessary or appropriate. Insured institutions are required 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 to provide supplemental disclosure of the estimated fair market value of assets and liabilities, to the extent feasible and practicable, in any balance sheet, financial statement, report of condition or any other report of any insured depository institution. The FDIC Improvement Act also requires the federal banking regulatory agencies to prescribe, by regulation, standards for all insured depository institutions and depository institution holding companies relating, among other things, to the following:

· internal controls;

· information systems and audit systems;

· loan documentation;

· credit underwriting;

· interest rate risk exposure; and

· asset quality.

Prompt Corrective Action. As an insured depository institution, the Bank is required to comply with the capital requirements promulgated under the Federal Deposit Insurance Act and the regulations thereunder, which set forth five capital categories, each with specific regulatory consequences. Under these regulations, the categories are:

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

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

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

· Significantly Undercapitalized - The institution is significantly below the required minimum level for any relevant capital measure. A significantly undercapitalized institution is one (i) having a

total capital ratio of less than 6% or (ii) having a tier 1 capital ratio of less than 3% or (iii) having a leverage capital ratio of less than 3%.

· Critically Undercapitalized - The institution fails to meet a critical capital level set by the appropriate federal banking agency. A critically undercapitalized institution is one having a ratio of tangible equity to total assets that is equal to or less than 2%.

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

If the Bank is not well capitalized, it cannot accept brokered deposits without prior FDIC approval. Even if approved, rate restrictions apply governing the rate the bank may be permitted to pay on the brokered deposits. In addition, a bank that is undercapitalized cannot offer an effective yield in excess of 75 basis points over the “national rate” paid on deposits (including brokered deposits, if approval is granted for the bank to accept them) of comparable size and maturity. The “national rate” is defined as a simple average of rates paid by insured depository institutions and branches for which data are available and is published weekly by the FDIC. Institutions subject to the restrictions that believe they are operating in an area where the rates paid on deposits are higher than the “national rate” can use the local market to determine the prevailing rate if they seek and receive a determination from the FDIC that it is operating in a high-rate area. Regardless of the determination, institutions must use the national rate to determine conformance for all deposits outside their market area.

Moreover, if the Bank becomes less than adequately capitalized, it must adopt a capital restoration 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 an undercapitalized institution also must provide a limited guarantee that the institution will comply with its capital restoration plan. Except under limited circumstances consistent with an accepted capital restoration plan, an undercapitalized institution may not grow. An undercapitalized institution may not acquire another institution, establish additional branch offices or engage in any new line of business unless determined by the appropriate Federal banking agency to be consistent with an accepted capital restoration plan, or unless the FDIC determines that the proposed action will further the purpose of prompt corrective action. The appropriate federal banking agency may take any action authorized for a significantly undercapitalized institution if an undercapitalized institution fails to submit an acceptable capital restoration plan or fails in any material respect to implement a plan accepted by the agency. A critically undercapitalized institution is subject to having a receiver or conservator appointed to manage its affairs and for loss of its charter to conduct banking activities.

An insured depository institution may not pay a management fee to a bank holding company controlling that institution or any other person having control of the institution if, after making the payment, the institution, would be undercapitalized. In addition, an institution cannot make a capital distribution, such as a dividend or other distribution that is in substance a distribution of capital to the owners of the institution if following such a distribution the institution would be undercapitalized. Thus, if payment of such a management fee or the making of such would cause the Bank to become undercapitalized, it could not pay a management fee or dividend to us.

As of December 31, 2012, the Bank’s ratios were sufficient for the Bank to be considered “well-capitalized” under the regulatory framework for prompt corrective action. As further described below, the Bank entered into a Consent Order (the “Consent Order”), effective May 14, 2010, with the FDIC and the South Carolina Board of Financial Institutions (the “Supervisory Authorities”) which, among other things, required the Bank to achieve Tier 1 capital at least equal to 8% of total assets and Total Risk-Based capital at least equal to 10% of total risk-weighted assets within 150 days from the effective date of the Consent Order. Subsequently, on April 8, 2011, the Consent Order was terminated by the Supervisory Authorities but the Bank was required to maintain these higher capital ratios. As of December 31, 2012, the Bank is in compliance with these higher capital ratios.

As noted above, in December 2010, the Basel Committee adopted the Basel III capital rules, which intended to establish new capital requirements for certain banking organizations. On November 9, 2012, the US federal banking agencies announced that the originally proposed January 1, 2013 effective date for their proposed capital rules for US banking institutions was being delayed so that the agencies could consider operational and transitional issues identified in the large volume of public comments received. At this point, the Bank cannot

determine the ultimate effect that any final regulations, if enacted, would have on its earnings or financial position. In addition, important questions remain as to how the numerous capital and liquidity mandates of the Dodd-Frank Act will be integrated with the requirements of Basel III.

Regulatory Matters - Following the FDIC’s safety and soundness examination of the Bank in the fourth quarter of 2009, the Bank entered into the Consent Order with the Supervisory Authorities on May 11, 2010. The Consent Order required specific actions needed to address certain findings from the FDIC’s then most recent report of examination and to address the Bank’s financial condition, primarily related to policy and planning issues, oversight, loan concentrations and classifications, non-performing loans, liquidity/funds management, and capital planning. The Board of Directors and management of the Bank aggressively worked to improve these practices and procedures and, as of April 8, 2011, the Consent Order was terminated. However, the Supervisory Authorities have instituted certain ongoing requirements for the Bank, including the following:

· The Bank shall prepare and submit a comprehensive budget and earnings forecast for the Bank by January 1 of each year. In addition, quarterly progress reports regarding the Bank’s actual performance compared to the budget plan shall be submitted concurrently with other reporting requirements.

· The Bank shall develop specific plans and proposals for the reduction and improvement of assets which are subject to adverse classification and past due loans.

· The Bank shall not extend, directly or indirectly, any additional credit to or for the benefit of any borrower who is obligated in any manner to the Bank or any extension of credit or portion thereof that has been charged off by the Bank or classified Loss or Doubtful in any report of examination, so long as such credit remains uncollected. In addition, the Bank shall make no additional advances to any borrower whose loan or line of credit has been adversely classified Substandard in a report of examination without the prior approval of a majority of the Bank’s Board of Directors.

· Unless otherwise approved in writing by the Supervisory Authorities, the Bank shall charge off within 30 days of receipt of any official report of examination by either South Carolina Board of Financial Institutions or FDIC examiners, the remaining balance of any assets classified as Loss, and make an appropriate impairment provision to the reserve for loan losses for those classified as Doubtful.

· The Bank shall maintain an adequate reserve for loan losses and such reserve shall be established by charges to current operating earnings. The Bank shall review the adequacy of the reserve prior to the end of each calendar quarter and make appropriate provisions to the reserve. The review shall consider the results of the Bank’s loan review, loan loss experience, trends of delinquent and nonaccrual loans, estimate of potential loss exposure of significant credits, concentrations of credit, and present and prospective economic conditions. The results of the review shall be recorded in the minutes of the Board meeting at which the review was undertaken.

· The Bank shall maintain a minimum tier 1 leverage capital ratio of 8% and a total risk-based capital ratio of at least 10% and maintain a “well-capitalized” designation. In the event that the Bank’s capital falls below these minimums, the Bank shall notify the Supervisory Authorities and shall increase capital in an amount sufficient to meet the minimum ratio required by this provision within 90 days. The Bank shall not pay dividends without prior written consent of the Supervisory Authorities.

· The Bank shall eliminate and/or correct all violations of law and regulation and contraventions of policy listed in the report of examination issued by the Supervisory Authorities. In addition, the Bank shall take all necessary steps to ensure future compliance with all applicable laws and regulations and policy statements.

The Board of Directors and management of the Bank will continue to diligently work to comply with the requirements set above by the Supervising Authorities.

Standards for Safety and Soundness. The Federal Deposit Insurance Act also requires the federal banking regulatory agencies to prescribe, by regulation or guideline, operational and managerial standards for all insured depository institutions relating to: (i) internal controls, information systems and internal audit systems;

(ii) loan documentation; (iii) credit underwriting; (iv) interest rate risk exposure; and (v) asset growth. The agencies also must prescribe standards for asset quality, earnings, and stock valuation, as well as standards for compensation, fees and benefits. The federal banking agencies have adopted regulations and Interagency Guidelines Prescribing Standards for Safety and Soundness to implement these required standards. These guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. Under the regulations, if the FDIC determines that the Bank fails to meet any standards prescribed by the guidelines, the agency may require the Bank to submit to the agency an acceptable plan to achieve compliance with the standard, as required by the FDIC. The final regulations establish deadlines for the submission and review of such safety and soundness compliance plans.

Insurance of Accounts and Regulation by the FDIC. The Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund of the FDIC. The Deposit Insurance Fund is the successor to the Bank Insurance Fund and the Savings Association Insurance Fund, which were merged effective March 31, 2006. As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of and to require reporting by FDIC insured institutions. It also may prohibit any FDIC insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the insurance fund. The FDIC also has the authority to initiate enforcement actions against savings institutions, after giving the Office of Thrift Supervision an opportunity to take such action, and may terminate the deposit insurance if it determines that the institution has engaged in unsafe or unsound practices or is in an unsafe or unsound condition.

Due to the large number of recent bank failures, and the FDIC’s new Temporary Liquidity Guarantee Program, the FDIC adopted a revised risk-based deposit insurance assessment schedule in February 2009, which raised deposit insurance premiums. The FDIC also implemented a five basis point special assessment of each insured depository institution’s assets minus Tier 1 capital as of June 30, 2009, which special assessment amount was capped at 10 basis points times the institution’s assessment base for the second quarter of 2009. In addition, in November 2009, the FDIC issued a rule that required all insured depository institutions, with limited exceptions, to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012 to re-capitalize the Deposit Insurance Fund. The FDIC also adopted a uniform three-basis point increase in assessment rates effective on January 1, 2011. The FDIC may exercise its discretion as supervisor and insurer to exempt an institution from the prepayment requirement if the FDIC determines that the prepayment would adversely affect the safety and soundness of the institution. We requested exemption from the prepayment requirement and received such exemption from the FDIC.

In February 2011, the FDIC approved two rules that amended the deposit insurance assessment regulations. The first rule changed the assessment base from one based on domestic deposits to one based on assets. The assessment base changed from adjusted domestic deposits to average consolidated total assets minus average tangible equity. The second rule changed the deposit insurance assessment system for large institutions in conjunction with the guidance given in the Dodd-Frank Act. Since the new base would be much larger than the current base, the FDIC lowered assessment rates which achieved the FDIC’s goal of not significantly altering the total amount of revenue collected from the industry. Risk categories and debt ratings were eliminated from the assessment calculation for large banks which now use scorecards. The scorecards will include financial measures that are predictive of long-term performance. A large financial institution is defined as an insured depository institution with at least $10 billion in assets. Both changes in the assessment system became effective as of April 1, 2011. During 2012, we paid $156,254 in deposit insurance.

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

Transactions with Affiliates and Insiders. The Company is a legal entity separate and distinct from the Bank and its other subsidiaries. Various legal limitations restrict the Bank from lending or otherwise supplying funds to the Company or its non-bank subsidiaries. The Company and the Bank are subject to Sections 23A and 23B of the Federal Reserve Act and Federal Reserve Regulation W.

Section 23A of the Federal Reserve Act places limits on the amount of loans or extensions of credit to, or investments in, or certain other transactions with, affiliates and on the amount of advances to third parties collateralized by the securities or obligations of affiliates. The aggregate of all covered transactions is limited in amount, as to any one affiliate, to 10% of the Bank’s capital and surplus and, as to all affiliates combined, to 20% of the Bank’s capital and surplus. Furthermore, within the foregoing limitations as to amount, each covered transaction must meet specified collateral requirements. The Bank is forbidden to purchase low quality assets from an affiliate.

As noted above, the Dodd-Frank Act expanded the definition of affiliate for purposes of quantitative and qualitative limitations of Section 23A of the Federal Reserve Act to include mutual funds advised by a depository institution or its affiliates. The Dodd-Frank Act prohibits an insured depository institution from purchasing an asset from or selling an asset to an insider unless the transaction is on market terms and, if representing more than 10% of capital, is approved in advance by the disinterested directors.

Section 23B of the Federal Reserve Act, among other things, prohibits an institution from engaging in certain transactions with certain affiliates unless the transactions are on terms substantially the same, or at least as favorable to such institution or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies. The Bank is also subject to certain restrictions on extensions of credit to executive officers, directors, certain principal shareholders, and their related interests. Such extensions of credit (i) must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with third parties and (ii) must not involve more than the normal risk of repayment or present other unfavorable features.

Regulation W generally excludes all non-bank and non-savings association subsidiaries of banks from treatment as affiliates, except to the extent that the Federal Reserve decides to treat these subsidiaries as affiliates. The regulation also limits the amount of loans that can be purchased by a bank from an affiliate to not more than 100% of the bank’s capital and surplus.

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

Branching. Under current South Carolina law, the Bank may open branch offices throughout South Carolina with the prior approval of the South Carolina Board of Financial Institutions. In addition, with prior regulatory approval, the Bank is able to acquire existing banking operations in South Carolina. Furthermore, federal legislation permits interstate branching, including out-of-state acquisitions by bank holding companies, interstate branching by banks, and interstate merging by banks. The Dodd-Frank Act removes previous state law restrictions on de novo interstate branching in states such as South Carolina. This change permits out-of-state banks to open de novo branches in states where the laws of the state where the de novo branch to be opened would permit a bank chartered by that state to open a de novo branch.

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

Community Reinvestment Act. The Community Reinvestment Act requires that, in connection with examinations of financial institutions within their respective jurisdictions, a financial institution’s primary regulator, which is the FDIC for the bank, shall evaluate the record of each financial institution in meeting the credit needs of its local community, including low and moderate income neighborhoods. These factors are also considered in

evaluating mergers, acquisitions, and applications to open a branch or facility. Failure to adequately meet these criteria could impose additional requirements and limitations on our Bank. Additionally, we must publicly disclose the terms of various Community Reinvestment Act-related agreements.

The Gramm-Leach-Bliley Act (the “GLBA”) made various changes to the Community Reinvestment Act. Among other changes, Community Reinvestment Act agreements with private parties must be disclosed and annual Community Reinvestment Act reports must be made available to a bank’s primary federal regulator. A bank holding company will not be permitted to become a financial holding company and no new activities authorized under the GLBA may be commenced by a holding company or by a bank financial subsidiary if any of its bank subsidiaries received less than a satisfactory Community Reinvestment Act rating in its latest Community Reinvestment Act examination.

Finance Subsidiaries. Under the GLBA, subject to certain conditions imposed by their respective banking regulators, national and state-chartered banks are permitted to form “financial subsidiaries” that may conduct financial or incidental activities, thereby permitting bank subsidiaries to engage in certain activities that previously were impermissible. The GLBA imposes several safeguards and restrictions on financial subsidiaries, including that the parent bank’s equity investment in the financial subsidiary be deducted from the bank’s assets and tangible equity for purposes of calculating the bank’s capital adequacy. In addition, the GLBA imposes new restrictions on transactions between a bank and its financial subsidiaries similar to restrictions applicable to transactions between banks and non-bank affiliates.

Consumer Protection Regulations. Activities of the Bank are subject to a variety of statutes and regulations designed to protect consumers. Interest and other charges collected or contracted for by the Bank are subject to state usury laws and federal laws concerning interest rates. The Bank’s loan operations are also subject to federal laws applicable to credit transactions, 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 subject to:

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

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

Anti-Money Laundering. Financial institutions must maintain anti-money laundering programs that include established internal policies, procedures, and controls; a designated compliance officer; an ongoing

employee training program; and testing of the program by an independent audit function. The Company and the Bank are also prohibited from entering into specified financial transactions and account relationships and must meet enhanced standards for due diligence and “knowing your customer” in their dealings with foreign financial institutions and foreign customers. Financial institutions must take reasonable steps to conduct enhanced scrutiny of account relationships to guard against money laundering and to report any suspicious transactions, and recent laws provide law enforcement authorities with increased access to financial information maintained by banks. Anti-money laundering obligations have been substantially strengthened as a result of the USA Patriot Act, enacted in 2001 and renewed in 2006. Bank regulators routinely examine institutions for compliance with these obligations and are required to consider compliance in connection with the regulatory review of applications. The regulatory authorities have been active in imposing “cease and desist” orders and money penalty sanctions against institutions found to be violating these obligations.

USA PATRIOT Act. The USA PATRIOT Act became effective on October 26, 2001, amended, in part, the Bank Secrecy Act, and provides, in part, for the facilitation of information sharing among governmental entities and financial institutions for the purpose of combating terrorism and money laundering by enhancing anti-money laundering and financial transparency laws, as well as enhanced information collection tools and enforcement mechanics for the U.S. government, including: (i) requiring standards for verifying customer identification at account opening; (ii) rules to promote cooperation among financial institutions, regulators, and law enforcement entities in identifying parties that may be involved in terrorism or money laundering; (iii) reports by nonfinancial trades and businesses filed with the Treasury Department’s Financial Crimes Enforcement Network for transactions exceeding $10,000; and (iv) filing suspicious activities reports by brokers and dealers if they believe a customer may be violating U.S. laws and regulations and requires enhanced due diligence requirements for financial institutions that administer, maintain, or manage private bank accounts or correspondent accounts for non-U.S. persons. Bank regulators routinely examine institutions for compliance with these obligations and are required to consider compliance 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 persons suspected of involvement in terrorist activities. The Bank can be requested, to search its records for any relationships or transactions with persons on those lists. If the Bank finds any relationships or transactions, it must file a suspicious activity report and contact the FBI.

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

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

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

Payment of Dividends. The Company’s principal source of cash flow, including cash flow to pay dividends to its shareholders, is dividends it receives from the Bank. Statutory and regulatory limitations apply to the Bank’s

payment of dividends to the Company. As a South Carolina chartered bank, the Bank is subject to limitations on the amount of dividends that it is permitted to pay. Unless otherwise instructed by the South Carolina Board of Financial Institutions, the Bank is generally permitted under South Carolina state banking regulations to pay cash dividends of up to 100% of net income in any calendar year without obtaining the prior approval of the South Carolina Board of Financial Institutions. Under the Federal Deposit Insurance Corporation Improvement Act, the Bank may not pay a dividend if, after paying the dividend, the Bank would be undercapitalized. The FDIC also has the authority under federal law to enjoin a bank from engaging in what in its opinion constitutes an unsafe or unsound practice in conducting its business, including the payment of a dividend under certain circumstances. The Bank currently must obtain prior approval from the FDIC and the South Carolina Board of Financial Institutions prior to the payment of any cash dividends.

Effect of Governmental Monetary Policies. Our earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve’s monetary policies have had, and are likely to continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The monetary policies of the Federal Reserve have major effects upon the levels of bank loans, investments and deposits through its open market operations in United States government securities and through its regulation of the discount rate on borrowings of member banks and the reserve requirements against member bank deposits. It is not possible to predict the nature or impact of future changes in monetary and fiscal policies.

Item 1A. Risk Factors.

Difficult market conditions and general economic trends have adversely affected our industry and our business and may continue to do so.

Our business has been directly affected by market conditions, trends in industry and finance, legislative and regulatory changes, and changes in governmental monetary and fiscal policies and inflation, all of which are beyond our control. The current economic downturn, increases in unemployment and other events that have negatively affected both household and corporate incomes, both nationally and locally, have decreased the demand for loans and our other products and services and have increased the number of customers who fail to pay interest and/or principal on their loans. As a result, we have experienced significant declines in our real estate markets with decreasing prices and increasing delinquencies and foreclosures, which have negatively affected the credit performance of our loans and resulted in increases in the level of our nonperforming assets and charge-offs of problem loans. At the same time, competition among depository institutions for deposits and quality loans has increased significantly. Bank and bank holding company stock prices have been negatively affected, as has the ability of banks and bank holding companies to raise capital or borrow in the debt markets compared to recent years. These market conditions and the tightening of credit have led to increased deficiencies in our loan portfolio, increased market volatility and widespread reduction in general business activity.

Our future success significantly depends upon the growth in population, income levels, deposits and housing starts in our market areas. Unlike many larger institutions, we are not able to spread the risks of unfavorable economic conditions across a large number of diversified economies and geographic locations. If the markets in which we operate do not recover and grow as anticipated or if prevailing economic conditions locally or nationally do not improve, our business may continue to be negatively impacted.

A significant portion of our loan portfolio is secured by real estate, and events that negatively affect the real estate market could hurt our business.

Beginning in the second half of 2007 and continuing through 2012, the financial markets were beset by significant volatility associated with subprime mortgages, including adverse impacts on credit quality and liquidity within the financial markets. The volatility has been exacerbated by a significant decline in the value of real estate. As of December 31, 2012, approximately 88% of our loans were secured by real estate mortgages. The real estate collateral for these loans provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. We do not generally originate traditional long term residential mortgages, but we do issue traditional second mortgage residential real estate loans and home equity lines of credit. A further weakening of the real estate market in our market areas could result in an increase in the number of borrowers who default on their loans and a reduction in the value of the collateral securing their loans,

which in turn could have an adverse effect on our profitability and asset quality. If we are required to liquidate the collateral securing a loan to satisfy the debt during a period of reduced real estate values, our earnings and shareholder’s equity could be adversely affected. Acts of nature, including hurricanes, tornados, earthquakes, fires and floods, which may cause uninsured damage and other loss of value to real estate that secures these loans, may also negatively impact our financial condition.

Our loan portfolio contains a number of real estate loans with relatively large balances.

Because our loan portfolio contains a number of real estate loans with relatively large balances, the deterioration of one or a few of these loans could cause a significant increase in nonperforming loans, which could result in a net loss of earnings, an increase in the provision for loan losses and an increase in loan charge-offs, all of which could have a material adverse effect on our financial condition and results of operations.

We are exposed to higher credit risk by commercial real estate, construction, and commercial lending.

Commercial real estate, commercial, and construction lending usually involves higher credit risks than that of single-family residential lending. As of December 31, 2012, the following loan types accounted for the stated percentages of our total loan portfolio: commercial real estate 37%; construction, land development and other land 10%; and commercial 10%. These types of loans involve larger loan balances to a single borrower or groups of related borrowers. Commercial real estate loans may be affected to a greater extent than residential loans by adverse conditions in real estate markets or the economy because commercial real estate borrowers’ ability to repay their loans depends on successful development of their properties, in addition to the factors affecting residential real estate borrowers. These loans also involve greater risk because they generally are not fully amortizing over the loan period, but have a balloon payment due at maturity. A borrower’s ability to make a balloon payment typically will depend on being able to either refinance the loan or sell the underlying property in a timely manner.

Risk of loss on a construction loan depends largely upon whether our initial estimate of the property’s value at completion of construction equals or exceeds the cost of the property construction (including interest), the availability of permanent take-out financing, and the builder’s ability to ultimately sell the property. During the construction phase, a number of factors can result in delays and cost overruns. If estimates of value are inaccurate or if actual construction costs exceed estimates, the value of the property securing the loan may be insufficient to ensure full repayment when completed through a permanent loan or by seizure of collateral.

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

Commercial real estate, construction, and commercial loans are more susceptible to a risk of loss during a downturn in the business cycle. Our underwriting, review and monitoring cannot eliminate all of the risks related to these loans. The banking regulators are giving commercial real estate lending greater scrutiny, and may require banks with higher levels of commercial real estate loans to implement improved underwriting, internal controls, risk management policies and portfolio stress testing, as well as possibly higher levels of allowances for losses and capital levels as a result of commercial real estate lending growth and exposures.

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

Making loans and other extensions of credit is an essential element of our business. Although we seek to mitigate risks inherent in lending by adhering to specific underwriting practices, our loans and other extensions of credit may not be repaid. The risk of nonpayment is affected 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, risks resulting from uncertainties about the future value of the collateral.

We attempt to maintain an appropriate allowance for loan losses to provide for probable losses in our loan portfolio. We periodically determine the amount of the allowance based on consideration of 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;

· regular reviews of loan delinquencies and loan portfolio quality; and

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

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

While we generally underwrite the loans in our portfolio in accordance with our own internal underwriting guidelines and regulatory supervisory guidelines, in certain circumstances we have made loans which exceed either our internal underwriting guidelines, supervisory guidelines, or both. As of December 31, 2012, we had $6,709,373 in loans that had loan-to-value ratios that exceeded regulatory supervisory guidelines. In addition, supervisory limits on commercial loan to value exceptions are set at 30% of our Bank’s capital. At December 31, 2012, we had $3,738,887 in commercial loans that exceeded the supervisory loan to value ratio. The number of loans in our portfolio with loan-to-value ratios in excess of supervisory guidelines, our internal guidelines, or both could increase the risk of delinquencies and defaults in our portfolio.

Repayment of our commercial business loans is often dependent on the cash flows of the borrower, which may be unpredictable, and the collateral securing these loans may fluctuate in value.

At December 31, 2012, commercial business loans comprised 10% of our total loan portfolio. Our commercial business loans are originated primarily based on the identified cash flow and general liquidity of the borrower and secondarily on the underlying collateral provided by the borrower and/or repayment capacity of any guarantor. The borrower’s cash flow may be unpredictable, and collateral securing these loans may fluctuate in value. Although commercial business loans are often collateralized by equipment, inventory, accounts receivable, or other business assets, the liquidation of collateral in the event of default is often an insufficient source of repayment because accounts receivable may be uncollectible and inventories may be obsolete or of limited use. In addition, business assets may depreciate over time, may be difficult to appraise, and may fluctuate in value based on the success of the business. Accordingly, the repayment of commercial business loans depends primarily on the cash flow and credit worthiness of the borrower and secondarily on the underlying collateral value provided by the borrower and liquidity of the guarantor.

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

Due to our short operating history, all of the loans in our loan portfolio and of our lending relationships are of relatively recent origin. In general, loans do not begin to show signs of credit deterioration or default until they have been outstanding for some period of time, a process we refer to as “seasoning.” As a result, a portfolio of older loans will usually 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 of the level that will prevail when the portfolio becomes more seasoned, which may be higher than current levels. If delinquencies and defaults increase, we may be required to increase our provision for loan losses, which would adversely affect our results of operations and financial condition.

Our net interest income could be negatively affected by the lower level of short-term interest rates, recent developments in the credit and real estate markets and competition in our market area.

As a financial institution, our earnings significantly depend upon our net interest income, which is the difference between the income that we earn on interest-earning assets, such as loans and investment securities, and the expense that we pay on interest-bearing liabilities, such as deposits and borrowings. Therefore, any change in general market interest rates, including changes resulting from changes in the Federal Reserve’s fiscal and monetary

policies, affects us more than non-financial institutions and can have a significant effect on our net interest income and net income.

The Federal Reserve reduced interest rates on three occasions in 2007 by a total of 100 basis points, to 4.25%, and by another 400 basis points, to a range of 0% to 0.25%, during 2009. Rates remained steady for 2011 and 2012. In 2011, the Federal Reserve announced its intentions to attempt to maintain low interest rates. Approximately 44.4% of our loans were variable rate loans at December 31, 2012. The interest rates on a significant segment of these loans decrease when the Federal Reserve reduces interest rates, while the interest that we earn on our assets may not change in the same amount or at the same rates. Accordingly, increases in interest rates may reduce our net interest income. In addition, an increase in interest rates may decrease the demand for loans. Furthermore, increases in interest rates will add to the expenses of our borrowers, which may adversely affect their ability to repay their loans with us.

Increased nonperforming loans and the decrease in interest rates reduced our net interest income during 2012 and could cause additional pressure on net interest income in future periods. This reduction in net interest income may also be exacerbated by the high level of competition that we face in our primary market areas. Any significant reduction in our net interest income could negatively affect our business and could have a material adverse effect on our capital, financial condition and results of operations.

We are subject to extensive regulation that could restrict our activities and impose financial requirements or limitations on the conduct of our business and limit our ability to receive dividends from our Bank.

We are subject to Federal Reserve regulation. Our Bank is subject to extensive regulation, supervision, and examination by our primary federal regulator, the FDIC. Also, as a member of the Federal Home Loan Bank (the “FHLB”), our Bank must comply with applicable regulations of the Federal Housing Finance Board and the FHLB. Regulation by these agencies is intended primarily for the protection of our depositors and the deposit insurance fund and not for the benefit of our shareholders. Our Bank’s activities are also regulated under consumer protection laws applicable to our lending, deposit, and other activities. A sufficient claim against our bank under these laws could have a material adverse effect on our results of operations.

We are exposed to further changes in the regulation of financial services companies.

Proposals for further regulation of the financial services industry are continually being introduced in the Congress of the United States of America and the General Assembly of the State of South Carolina. The agencies regulating the financial services industry also periodically adopt changes to their regulations. On July 21, 2010, the Dodd-Frank Act was signed into law. Pursuant to authority granted under the Dodd-Frank Act, effective on October 1, 2011, the Federal Reserve established new rules regarding interchange fees charged for electronic debit transactions by payment card issuers having assets over $10 billion. While we are not subject to the interchange fee restrictions, the new restrictions could negatively impact bank card services income for smaller banks if the reductions that are required of larger banks cause industry-wide reduction of swipe fees. On June 7, 2012, the Federal Reserve, the OCC, and the FDIC issued a joint notice of proposed rulemaking that would implement sections of the Dodd-Frank Act that encompass certain aspects of Basel III with respect to capital and liquidity. On November 9, 2012, following a public comment period, the US federal banking agencies announced that the originally proposed January 1, 2013 effective date for the proposed rules was being delayed so that the agencies could consider operations and transitional issued identified in the large volume of public comments received. The proposed rules, if adopted, would lead to significantly higher capital requirements and more restrictive leverage and liquidity ratios than those currently in place. See “Risk Factors — The short-term and long-term impact of the changing regulatory capital requirements and anticipated new capital rules is uncertain” below. It is possible that additional legislative proposals may be adopted or regulatory changes may be made that would have an adverse effect on our business. We can provide no assurance regarding the manner in which any new laws and regulations will affect us. See “Risk Factors — We are subject to extensive regulation that could restrict our activities and impose financial requirements or limitations on the conduct of our business and limit our ability to receive dividends from our Bank” above.

Financial reform legislation enacted by the U.S. Congress, and further changes in regulation to which we are exposed, will result in additional new laws and regulations that are expected to increase our costs of operations.

The Dodd-Frank Act has and will continue to significantly change bank regulatory structure and affect the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies are given significant discretion in drafting the implementing rules and regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years.

The Dodd-Frank Act also created the Bureau of Consumer Financial Protection and gives it broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. Additionally, the Bureau of Consumer Financial Protection has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets.

Proposals for further regulation of the financial services industry are continually being introduced in the Congress of the United States of America. The agencies regulating the financial services industry also periodically adopt changes to their regulations. It is possible that additional legislative proposals may be adopted or regulatory changes may be made that would have an adverse effect on our business. In addition, it is expected that such regulatory changes will increase our operating and compliance cost. We can provide no assurance regarding the manner in which any new laws and regulations will affect us.

The short-term and long-term impact of the changing regulatory capital requirements and anticipated new capital rules is uncertain.

On September 12, 2010, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee, announced an agreement to a strengthened set of capital requirements for internationally active banking organizations in the U.S. and around the world, known as Basel III. Basel III calls for increases in the requirements for minimum common equity, minimum Tier 1 capital and minimum total capital for certain systemically important financial institutions, to be phased in over time until fully phased in by January 1, 2019. Any regulations adopted for systemically significant institutions may also be applied to or otherwise impact other financial institutions such as the Company or the Bank.

Various provisions of the Dodd-Frank Act increase the capital requirements of bank holding companies, such as the Company, and non-bank financial companies that are supervised by the Federal Reserve. The leverage and risk-based capital ratios of these entities may not be lower than the leverage and risk-based capital ratios for insured depository institutions. In particular, bank holding companies, many of which have long relied on trust preferred securities as a component of their regulatory capital, will no longer be permitted to issue new trust preferred securities that count toward their Tier 1 capital. While the Basel III changes and other regulatory capital requirements will likely result in generally higher regulatory capital standards, it is difficult at this time to predict how any new standards will ultimately be applied to the Company and the Bank.

In addition, in the current economic and regulatory environment, regulators of banks and bank holding companies have become more likely to impose capital requirements on bank holding companies and banks that are more stringent than those required by applicable existing regulations.

The application of more stringent capital requirements for the Company and the Bank could, among other things, result in lower returns on invested capital, require the issuance of additional capital, and result in regulatory actions if we were to be unable to comply with such requirements.

We may be adversely affected by the soundness of other financial institutions.

Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure to many different industries and counterparties, and routinely execute transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks, and other institutional clients. Many of these transactions expose us to credit risk in the event of a default by a counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by the bank cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the credit or derivative exposure due to the bank. Any such losses could have a material adverse affect on our financial condition and results of operations.

We could experience a loss due to competition with other financial institutions.

The banking and financial services industry is very competitive. Legal and regulatory developments have made it easier for new and sometimes unregulated competitors to compete with us. The financial services industry has and is experiencing an ongoing trend towards consolidation in which fewer large national and regional banks and other financial institutions are replacing many smaller and more local banks. These larger banks and other financial institutions hold a large accumulation of assets and have significantly greater resources and a wider geographic presence or greater accessibility. In some instances, these larger entities operate without the traditional brick and mortar facilities that restrict geographic presence. Some competitors are able to offer more services, more favorable pricing or greater customer convenience than the company. In addition, competition has increased from new banks and other financial services providers that target our existing or potential customers. As consolidation continues among large banks, we expect other smaller institutions to try to compete in the markets we serve.

Technological developments have allowed competitors, including some non-depository institutions, to compete more effectively in local markets and have expanded the range of financial products, services and capital available to our target customers. If we are unable to implement, maintain and use such technologies effectively, we may not be able to offer products or achieve cost-efficiencies necessary to compete in the industry. In addition, some of these competitors have fewer regulatory constraints and lower cost structures.

Negative public opinion surrounding our company and the financial institutions industry generally could damage our reputation and adversely impact our earnings.

Reputation risk, or the risk to our business, earnings and capital from negative public opinion surrounding our company and the financial institutions industry generally, is inherent in our business. Negative public opinion can result from our actual or alleged conduct in any number of activities, including lending practices, corporate governance and acquisitions, and from actions taken by government regulators and community organizations in response to those activities. Negative public opinion can adversely affect our ability to keep and attract clients and employees and can expose us to litigation and regulatory action. Although we take steps to minimize reputation risk in dealing with our clients and communities, this risk will always be present given the nature of our business.

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

We target the banking and financial services needs of small- and medium-sized businesses. These businesses generally have fewer financial resources in terms of capital borrowing capacity than larger entities. If general economic conditions continue to negatively impact these businesses in the markets in which we operate, our business, financial condition, and results of operation may be adversely affected.

We could experience an unexpected inability to obtain needed liquidity.

Liquidity measures the ability to meet current and future cash flow needs as they become due. The liquidity of a financial institution reflects its ability to meet loan requests, to accommodate possible outflows in deposits, and to take advantage of interest rate market opportunities. The ability of a financial institution to meet its current financial obligations is a function of its balance sheet structure, its ability to liquidate assets and its access to alternative sources of funds. We seek to ensure our funding needs are met by maintaining a level of liquidity through asset/liability management as well as through, among other things, our ability to borrow funds from the Federal Home Loan Bank and the Federal Reserve Bank. As December 31, 2012, our borrowing capacity with the Federal Home Loan Bank was $11,840,000 of which $5,840,000 is available. Both institution specific events such as deterioration in our credit ratings resulting from a weakened capital position or from lack of earnings and industry-wide events such as a collapse of credit markets may result in a reduction of available funding sources sufficient to cover the liquidity demands. If we are unable to obtain funds when needed, it could materially adversely affect our business, financial condition and results of operations.

Our ability to pay cash dividends is limited.

and strengthen our capital base. Our ability to pay dividends depends on the ability of the Bank to pay dividends to us. As a South Carolina chartered bank, the Bank is subject to limitations on the amount of dividends that it is permitted to pay. Unless otherwise instructed by the South Carolina Board of Financial Institutions, the Bank is generally permitted under South Carolina state banking regulations to pay cash dividends of up to 100% of net income in any calendar year without obtaining the prior approval of the South Carolina Board of Financial Institutions. However, the Bank currently must obtain prior approval from the FDIC and the South Carolina Board of Financial Institutions prior to the payment of any cash dividends.

Our continued operations and future growth may require us to raise additional capital in the future, but that capital may not be available when it is needed.

We are required by regulatory authorities to maintain adequate levels of capital to support our operations. To support our continued operations, including any additional growth, we may need to raise additional capital. In addition, we intend to redeem the Series A Preferred Stock before the dividends on the Series A Preferred Stock increase from 5% per annum to 9% per annum in 2014, and we may need to raise additional capital to do so. Our ability to raise additional capital will depend in part on conditions in the capital markets at that time, which are outside our control, and our financial performance. Accordingly, we may be unable to raise additional capital, if and when needed, on terms acceptable to us, or at all. If we cannot raise additional capital when needed, our ability to continue our current operations or further expand our operations through internal growth and acquisitions could be materially impaired. In addition, if we decide to raise additional equity capital, your interest could be diluted.

The Preferred Stock impacts net income available to our common shareholders and earnings per common share.

The dividends declared on the Preferred Stock will reduce the net income available to common shareholders and our earnings per common share. The Preferred Stock will also receive preferential treatment in the event of liquidation, dissolution or winding up of the Company.

If we are unable or choose not to redeem the Series A Preferred Stock within five years from the issuance date, the cost of this capital to us will increase.

On October 31, 2012, the Treasury sold its Series A Preferred Stock of the Company through a private offering structured as a modified Dutch auction. The Company bid on a portion of the Series A Preferred Stock in the auction after receiving approval from its regulators to do so. The clearing price per share for the Series A Preferred Stock was $825.26 (compared to a stated value of $1,000 per share) and the clearing price per share for the Series B Preferred Stock was $801.00 (compared to a stated value of $1,000 per share). The Company was successful in repurchasing 1,156 shares of the 3,285 shares of Series A Preferred Stock outstanding through the auction process. The remaining 2,129 shares of Series A Preferred Stock and 164 shares of Series B Preferred Stock of the Company held by Treasury were sold to unrelated third-parties through the auction process. If we are unable to redeem the remaining shares of the Series A Preferred Stock prior to February 15, 2014, or if we choose not to redeem the remaining outstanding shares of the Series A Preferred Stock at that time, the cost of this capital will increase on that date, from 5.0% per annum (approximately $121,210 annually) to 9.0% per annum (approximately $206,370 annually). Depending on our financial condition at the time, this increase in the annual dividend rate could have a material negative effect on our liquidity and our financial results.

Higher FDIC deposit insurance premiums and assessments could adversely impact our financial condition.

Our deposits are insured up to applicable limits by the Deposit Insurance Fund of the FDIC and are subject to deposit insurance assessments to maintain deposit insurance. As an FDIC-insured institution, we are required to pay quarterly deposit insurance premium assessments to the FDIC. Although we cannot predict what the insurance assessment rates will be in the future, either a deterioration in our risk-based capital ratios or adjustments to the base assessment rates could have a material adverse impact on our business, financial condition, results of operations, and cash flows.

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

The banking business is highly competitive, and we experience competition in our market from many other financial institutions. We compete with commercial banks, credit unions, savings and loan associations, mortgage

banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds, and other mutual funds, as well as other super-regional, national, and international financial institutions that operate offices in our primary market areas and elsewhere. We compete with these institutions both in attracting deposits and in making loans. In addition, we have to attract our client base from other existing financial institutions and from new residents. Many of our competitors are well-established, larger financial institutions. These institutions offer some services, such as extensive and established branch networks, that we do not provide. There are also a number of other relatively new community banks in our market that share our general marketing focus on small- to medium-sized businesses and individuals. There is a risk that we will not be able to compete successfully with other financial institutions in our market, and that we may have to pay higher interest rates to attract deposits, resulting in reduced profitability. In addition, competitors that are not depository institutions are generally not subject to the extensive regulations that apply to us.

We will face risks with respect to future expansion and acquisitions or mergers.

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

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

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

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

· the risk of loss of key employees and customers.

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

The success of our growth strategy depends on our ability to identify and retain individuals with experience and relationships in the markets in which we intend to expand.

To expand our franchise successfully, we must identify and retain experienced key management members with local expertise and relationships in these markets. We expect that competition for qualified management in the markets in which we may expand will be intense and that there will be a limited number of qualified persons with knowledge of and experience in the community banking industry in these markets. Even if we identify individuals that we believe could assist us in establishing a presence in a new market, we may be unable to recruit these individuals away from more established financial institutions. In addition, the process of identifying and recruiting individuals with the combination of skills and attributes required to carry out our strategy requires both management and financial resources and is often lengthy. Our inability to identify, recruit, and retain talented personnel to manage new offices effectively would limit our growth and could materially adversely affect our business, financial condition, and results of operations.

A failure in or breach of our operational or security systems or infrastructure, or those of our third party vendors and other service providers or other third parties, including as a result of cyber attacks, could disrupt our businesses, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs, and cause losses.

We rely heavily on communications and information systems to conduct our business. Information security risks for financial institutions such as ours have generally increased in recent years in part because of the proliferation of new technologies, the use of the internet and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, and terrorists, activists, and other external parties. As customer, public, and regulatory expectations regarding operational and information security have increased, our operating systems and infrastructure must continue to be safeguarded and monitored for

potential failures, disruptions, and breakdowns. Our business, financial, accounting, and data processing systems, or other operating systems and facilities may stop operating properly or become disabled or damaged as a result of a number of factors, including events that are wholly or partially beyond our control. For example, there could be electrical or telecommunication outages; natural disasters such as earthquakes, tornadoes, and hurricanes; disease pandemics; events arising from local or larger scale political or social matters, including terrorist acts; and as described below, cyber attacks.

As noted above, our business relies on our digital technologies, computer and email systems, software and networks to conduct its operations. Although we have information security procedures and controls in place, our technologies, systems, networks, and our customers’ devices may become the target of cyber attacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss, or destruction of our or our customers’ or other third parties’ confidential information. Third parties with whom we do business or that facilitate our business activities, including financial intermediaries, or vendors that provide service or security solutions for our operations, and other unaffiliated third parties, including the South Carolina Department of Revenue, which had customer records exposed in a 2012 cyber attack, could also be sources of operational and information security risk to us, including from breakdowns or failures of their own systems or capacity constraints.

While we have disaster recovery and other policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of our information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed. Our risk and exposure to these matters remains heightened because of the evolving nature of these threats. As a result, cyber security and the continued development and enhancement of our controls, processes, and practices designed to protect our systems, computers, software, data, and networks from attack, damage or unauthorized access remain a focus for us. As threats continue to evolve, we may be required to expend additional resources to continue to modify or enhance our protective measures or to investigate and remediate information security vulnerabilities. Disruptions or failures tin the physical infrastructure or operating systems that support our businesses and clients, or cyber attacks or security breaches of the networks, systems or devices that our clients use to access our products and services could result in client attrition, regulatory fines, penalties or intervention, reputation damage, reimbursement or other compensation costs, and/or additional compliance costs, any of which could have a material effect on our results of operations or financial condition.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

Our principal executive offices consist of approximately 4,100 square feet of leased space at 1201 Knox Abbot Drive, West Columbia, South Carolina. We have an additional leased branch located at 2023 Sunset Boulevard, Cayce, South Carolina. We believe these premises will be adequate for present and anticipated needs and that we have adequate insurance to cover our premises. We believe that upon expiration of the leases we will be able to extend them on satisfactory terms or relocate to other acceptable locations.

Item 3. Legal Proceedings.

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

Item 4. Mine Safety Disclosures.

Not Applicable.

PART II

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

Our common stock is quoted on the OTC Bulletin Board under the symbol “CNRB.” Quotations on the OTC Bulletin Board reflect inter-dealer prices, without retail mark-up, mark-down, or commissions, and may not represent actual transactions.

The following is a summary of the high and low bid prices for our common stock reported by the OTC Bulletin Board for the periods indicated:

2012	High		Low
First Quarter	$	2.40	$	1.25
Second Quarter	2.70		2.25
Third Quarter	2.70		2.05
Fourth Quarter	2.80		2.05

2011	High		Low
First Quarter	$	2.50	$	1.50
Second Quarter	3.50		2.50
Third Quarter	3.55		2.00
Fourth Quarter	2.50		1.25

As of March 4, 2013, there were 1,764,439 shares of common stock outstanding held by approximately 1,789 shareholders of record.

We have not declared or paid any cash dividends on our common stock since our inception. For the foreseeable future, we do not intend to declare cash dividends. We intend to retain earnings to grow our business and strengthen our capital base. Our ability to pay dividends depends on the ability of the Bank to pay dividends to us. As a South Carolina state bank, our Bank is subject to limitations on the amount of dividends that it is permitted to pay. Unless otherwise instructed by the South Carolina Board of Financial Institutions, the Bank is generally permitted under South Carolina state banking regulations to pay cash dividends of up to 100% of net income in any calendar year without obtaining the prior approval of the South Carolina Board of Financial Institutions. In addition, our Bank is prohibited from declaring a dividend on its shares of common stock until its surplus equals its stated capital. In addition, the Bank currently must obtain prior approval from the FDIC and the South Carolina Board of Financial Institutions prior to the payment of any cash dividends.

As noted above, on October 31, 2012, the Treasury sold its Series A and Series B Preferred Stock of the Company through a private offering structured as a modified Dutch auction. The Company bid on a portion of the Series A Preferred Stock in the auction after receiving approval from its regulators to do so. The clearing price per share for the Series A Preferred Stock was $825.26 (compared to a stated value of $1,000 per share) and the clearing price per share for the Series B Preferred Stock was $801.00 (compared to a stated value of $1,000 per share). The Company was successful in repurchasing 1,156 shares of the 3,285 shares of Series A Preferred Stock outstanding through the auction process. The remaining 2,129 shares of Series A Preferred Stock and 164 shares of Series B Preferred Stock of the Company held by Treasury were sold to unrelated third-parties through the auction process. The net balance sheet impact was a reduction to shareholders’ equity of $954,000 which is comprised of a decrease in preferred stock of $1,135,000 and a $181,000 increase to retained earnings related to the discount on the shares repurchased. The redemption of the 1,156 in preferred shares will save the Company $57,800 annually in dividend expenses.

The following table sets forth equity compensation plan information at December 31, 2012.

Equity Compensation Plan Information

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)	Weighted-average exercise price of outstanding options, warrants and rights (b)		Number of securities remaining available for future issuance under equity compensation plans (c) (excluding securities reflected in column(a))
Equity compensation plans approved by security holders (1)	71,819	$	10.00	194,481

Equity compensation plans not approved by security holders (2)	90,000	$	10.00	—
Total	161,819	$	10.00	194,481

(1) Congaree Bancshares, Inc. 2007 Stock Incentive Plan.

(2) In connection with our formation, each of our organizers received, at no cost to them, a warrant to purchase one share of common stock for $10.00 per share for each share purchased during our initial public offering, up to a maximum of 10,000 warrants. The warrants are represented by separate warrant agreements. The warrants vested over a three year period beginning October 16, 2007, and they are exercisable in whole or in part during the 10 year period ending October 16, 2016. If the South Carolina Board of Financial Institutions or the FDIC issues a capital directive or other order requiring the Bank to obtain additional capital, the warrants will be forfeited if not immediately exercised.

Item 6. Selected Financial Data.

Not applicable.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

The following discussion describes our results of operations for the years ended December 31, 2012 and 2011, analyzes our financial condition as of December 31, 2012 and identifies significant factors that have affected our financial position and operating results during the periods included in the accompanying financial statements. We encourage you to read this discussion and analysis in conjunction with our financial statements and the other statistical information included in this report.

Our net income was $1,016,983 and $741,007 for the years ended December 31, 2012 and 2011, respectively. Net income before income tax benefit was $685,503 for the year ended December 31, 2012, an increase of $337,004, compared to income before tax benefit of $348,499 for the year ended December 31, 2011. The increase in net income before income taxes in 2012 resulted from an increase of $296,478 in noninterest income and an increase of $139,327 in net interest income. Noninterest expense increased from $3,961,121 for the year ended December 31, 2011 to $4,090,251 for the year ended December 31, 2012. We also recorded a provision for loan losses of $713,671 and $744,000 for the years ended December 31, 2012 and 2011, respectively.

At December 31, 2012, total assets were $113,453,610 compared to $121,993,546 at December 31, 2011, for a decrease of $8,539,936, or 7.0%. The decrease in assets resulted from a decrease in our loan portfolio of $7,643,333. Interest-earning assets comprised approximately 94.3% and 93.9% of total assets at December 31, 2012 and December 31, 2011, respectively. Gross loans totaled $80,701,245 at December 31, 2012, a decrease of $7,643,333, or 8.7%, from $88,344,578 at December 31, 2011. The reduction in gross loans was the result of our plan to reduce our overall risk profile, specifically to reduce the overall size of the balance sheet, in order to increase our capital ratios. Accordingly, we are actively seeking to improve our credit quality and preserve capital. In

addition, we transferred loans in the amount of $1,127,537 to other real estate owned during the year ended December 31, 2012. Investment securities were $27,524,705 at December 31, 2012, a decrease of $43,552, or 0.16%, from $27,568,257 at December 31, 2011. There was no investment in overnight federal funds at December 31, 2012 compared to a balance of $86,000 at December 31, 2011.

Deposits totaled $94,803,120 at December 31, 2012, a $7,723,329, or 7.53%, decrease from $102,526,449 at December 31, 2011. Shareholders’ equity was $12,449,095 and $12,281,465 at December 31, 2012 and December 31, 2011, respectively.

Like most community banks, we derive the majority of our income from interest we receive on our loans and investments. Our primary source of funds for making these loans and investments is our deposits, on which we pay interest. Consequently, one of the key measures of our success is our amount of net interest income, or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits, also known as net interest margin. Another key measure is the spread between the yield we earn on these interest-earning assets and the rate we pay on our interest-bearing liabilities, which is referred to as net interest spread.

We have included a number of tables to assist in our description of these measures. For example, the “Average Balances, Income and Expenses, and Rates” tables show for the periods indicated the average balance for each category of our assets and liabilities, as well as the average yield we earned or the average rate we paid with respect to each category. A review of these tables show that our loans historically have provided higher interest yields than our other types of interest-earning assets, which is why we have invested a substantial percentage of our earning assets into our loan portfolio. Similarly, the “Rate/Volume Analysis” table helps demonstrate the impact of changing interest rates and changing volume of assets and liabilities during the periods shown. We also track the sensitivity of our various categories of assets and liabilities to changes in interest rates, and we have included “Interest Sensitivity Analysis” tables to help explain this. Finally, we have included a number of tables that provide detail about our investment securities, our loans, our deposits and other borrowings.

There are risks inherent in all loans, so we maintain an allowance for loan losses to absorb probable losses on existing loans that may become uncollectible. We establish and maintain this allowance by charging a provision for loan losses against our operating earnings. In the “Loans” and “Provision and Allowance for Loan Losses” sections, we have included a detailed discussion of this process, as well as several tables describing our allowance for loan losses.

In addition to earning interest on our loans and investments, we earn income through fees and other expenses we charge to our clients. We describe the various components of this non-interest income, as well as our non-interest expense, in the following discussion.

Like many financial institutions across the United States and in South Carolina, our operations have been adversely affected by the current economic crisis. Beginning in 2008, we recognized that construction, acquisition, and development real estate projects were slowing, guarantors were becoming financially stressed, and increasing credit losses were surfacing. Portfolio-wide delinquencies remained at an elevated level throughout 2012. The Bank’s management continues to aggressively manage the level and number of delinquent borrowers. Delinquencies were evenly distributed across portfolios and non-accruing loans were primarily concentrated in real estate loans.

As of December 31, 2012, approximately 88% of our loans had real estate as a primary or secondary component of collateral. Included in our loans secured by real estate, we have approximately $7,556,622 of construction, land development and other land loans as of December 31, 2012, most of which are on properties located within the Columbia MSA and consist primarily of loans to individuals or closely held real estate holding companies where the borrower was holding property for current and/or future personal use. Additionally, $674,420 of all construction, land development, and other land loans are single family residence construction loans intended for use as a primary residence.

Non-performing assets remained virtually unchanged during 2012. As of December 31, 2012, our non-performing assets equaled $4.0 million, or 3.52% of assets, as compared to $4.7 million, or 3.88% of assets, as of December 31, 2011. For the year ended December 31, 2012, we recorded a provision for loan losses of $713,671 and net loan charge-offs of $814,206, or 0.97% of average loans, as compared to a $744,000 provision for loan losses

and net loan charge-offs of $900,473, or 1.03% of average loans, for the year ended December 31, 2011.

Critical Accounting Policies

We have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States of America and with general practices within the banking industry in the preparation of our financial statements. Our significant accounting policies are described in footnote 1 to our audited consolidated financial statements as of December 31, 2012, included herein. Management has discussed these critical accounting policies with the audit committee.

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

Allowance for Loan Losses

We believe the allowance for loan losses is the critical accounting policy that requires the most significant judgment and estimates used in preparation of our consolidated financial statements. Some of the more critical judgments supporting the amount of our allowance for loan losses include judgments about the creditworthiness of borrowers, the estimated value of the underlying collateral, the assumptions about cash flow, determination of loss factors for estimating credit losses, the impact of current events, and conditions, and other factors impacting the level of probable inherent losses.

Under different conditions or using different assumptions, the actual amount of credit losses incurred by us may be different from management’s estimates provided in our consolidated financial statements. Refer to the portion of this discussion that addresses our allowance for loan losses for a more complete discussion of our processes and methodology for determining our allowance for loan losses.

Income Taxes

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

Results of Operations

Net Interest Income

Our primary source of revenue is net interest income. Net interest income is the difference between income earned on interest-earning assets and interest paid on deposits and borrowings used to support such assets. The level of net interest income is determined by the balances of interest-earning assets and interest-bearing liabilities and corresponding interest rates earned and paid on those assets and liabilities, respectively. In addition to the volume of and corresponding interest rates associated with these interest-earning assets and interest-bearing liabilities, net interest income is affected by the timing of the repricing of these interest-earning assets and interest-bearing liabilities.

Net interest income was $4,586,026 for the year ended December 31, 2012, an increase of $139,327 or 3.1% over net interest income of $4,446,699 for the year ended December 31, 2011. Interest income of $5,320,246 for the year ended December 31, 2012 included $4,570,095 on loans, $736,598 on investment securities and $13,553 on federal funds sold. Loan interest and related fees decreased $292,415, or 6.0%, during 2012, due to a decrease in the loan portfolio volume. Total interest expense of $734,220 for the year ended December 31, 2012 included $632,668 related to deposit accounts and $101,552 on federal funds purchased and FHLB borrowings. Interest expense on deposits decreased $460,475, or 42.1%, during 2012 due to the decrease in deposit rates and volume during 2012.

The following table sets forth information related to our average balance sheet, average yields on assets, and average costs of liabilities. We derived these yields by dividing income or expense by the average balance of the corresponding assets or liabilities. We derived average balances from the daily balances throughout the periods indicated. The net amount of capitalized loan fees is amortized into interest income over the life of the loans.

Average Balances, Income and Expenses, and Rates

	For the Year Ended December 31, 2012						For the Year Ended December 31, 2011						For the Year Ended December 31, 2010
	Average Balance		Income/ Expense		Yield/ Rate		Average Balance		Income/ Expense		Yield/ Rate		Average Balance		Income/ Expense		Yield/ Rate
	(dollars in thousands)
Earning assets:
Federal funds sold	$	553	$	1	0.18	%	$	4,674	$	13	0.28	%	$	6,482	$	17	0.26	%
Investment securities and FHLB stock	27,712		749		2.70	%	26,390		757		2.87	%	21,030		715		3.40	%
Loans receivable(1)	84,093		4,570		5.43	%	87,807		4,863		5.54	%	100,457		5,510		5.48	%

Total earning assets	112,358		5,320		4.74	%	118,871		5,633		4.74	%	127,969		6,242		4.88	%
Noninterest-earning assets	6,058						5,750						6,358

Total assets	$	118,416					$	124,621					$	134,327

Interest-bearing liabilities:
Interest bearing transaction accounts	$	4,877	8		0.16	%	$	4,908	12		0.24	%	$	4,471	15		0.34	%
Savings & money market	49,982		280		0.56	%	51,690		495		0.96	%	43,326		676		1.56	%
Time deposits	32,458		345		1.06	%	41,615		587		1.41	%	62,024		1,260		2.03	%
Advances from FHLB	6,608		100		1.51	%	4,554		87		1.91	%	3,000		81		2.69	%
Federal funds purchased and repurchase agreement	208		1		0.48	%	192		5		2.60	%	332		7		2.17	%

Total interest-bearing liabilities	94,133		734		0.78	%	102,959		1,186		1.15	%	113,153		2,039		1.80	%

Noninterest-bearing liabilities	11,429						9,820						10,282
Shareholders’ equity	12,854						11,842						10,892

Total liabilities and shareholders’ equity	$	118,416					$	124,621					$	134,327

Net interest spread					3.96	%					3.59	%					3.08	%

Net interest margin			$	4,586	4.08	%			$	4,447	3.74	%			$	4,203	3.29	%

(1) Loan fees, which are immaterial, are included in interest income. There were $1,777,230 in nonaccrual loans for 2012 and $1,550,775 nonaccrual loans in 2011. Nonaccrual loans are included in the average balances, and income on nonaccrual loans is included on the cash basis for yield computation purposes.

Our consolidated net interest margin for the year ended December 31, 2012 was 4.08%, an increase of 34 basis points from the net interest margin of 3.74% for the year ended December 31, 2011. The net interest margin is

calculated by dividing net interest income by year-to-date average earning assets. This increase can be attributed to the costs of our funding sources. We rely on a higher volume of money market and time deposits to fund our loan portfolio and, as they mature, these deposits are being replaced at lower interest rates. Earning assets averaged $112,358,000 for the year ended December 31, 2012, decreasing from $118,871,000 for the year ended December 31, 2011. Our net interest spread was 3.96% for the year ended December 31, 2012. The net interest spread is the difference between the yield we earn on our interest-earning assets and the rate we pay on our interest-bearing liabilities. In pricing deposits, we consider our liquidity needs, the direction and levels of interest rates and local market conditions. As such, higher rates than local competitors have been paid initially to attract deposits.

Rate/Volume Analysis

Net interest income can be analyzed in terms of the impact of changing interest rates and changing volume. The following table sets forth the effect which the varying levels of interest-earning assets and interest-bearing liabilities and the applicable rates had on changes in net interest income for the comparative periods presented. Changes attributed to both rate and volume, have been allocated on a pro rata basis.

	2012 Compared to 2011									2011 Compared to 2010
	Total Change			Change in Volume			Change in Rate			Total Change			Change in Volume			Change in Rate
Interest-earning assets:
Federal funds sold	$	(12	)	$	(14	)	$	2		$	(4	)	$	(5	)	$	1
Investment securities and FHLB stock	(8		)	155			(163		)	42			109			(67		)
Loans	(293		)	(205		)	(88		)	(647		)	(701		)	54
Total interest income	(313		)	(64		)	(249		)	(609		)	(597		)	(12		)

Interest-bearing liabilities:
Interest-bearing deposits	(461		)	(130		)	(331		)	(857		)	(189		)	(668		)
FHLB advances	13			34			(21		)	6			14			(8		)
Federal funds purchased and repurchase agreement	(4		)	—			(4		)	(2		)	(5		)	3
Total interest expense	(452		)	(96		)	(356		)	(853		)	(180		)	(673		)
Net interest income	$	139		$	32		$	107		$	244		$	(417	)	$	661

Provision for Loan Losses

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

Our provision for loan losses for the year ended December 31, 2012 was $713,671, a decrease of $30,329 or 4.1% over our provision of $744,000 for the year ended December 31, 2011. The allowance as a percentage of gross loans remained at approximately 1.6% as of December 31, 2012 due to management’s evaluation of the adequacy of the reserve for possible loan losses given the size, mix, and quality of the current loan portfolio. Management also relies on our history of limited past-dues and charge-offs, as well as peer data, to determine our loan loss allowance.

Noninterest Income

Noninterest income for the year ended December 31, 2012 was $903,399 compared to $606,921 for the year ended December 31, 2011. For the year ended December 31, 2012, mortgage loan origination fees were $62,662, an increase of $36,330, or 138.0%, from 2011, due to the increase in the volume of mortgage loans originated. We expect this trend to continue as interest rates remain low. Noninterest income included gains on sales of securities available-for-sale of $520,051 for the year ended December 31, 2012, compared to $259,155 in 2011. This increase compared to 2011 was primarily due to the restructuring the investment portfolio.

Noninterest Expenses

The following table sets forth information related to our noninterest expenses for the year ended December 31, 2012 and 2011.

	2012		2011
Compensation and benefits	1,726,586		1,600,268
Occupancy and equipment	894,074		913,319
Data processing and related costs	369,386		342,928
Marketing, advertising and shareholder communications	65,704		43,181
Legal and audit	224,004		262,662
Other professional fees	13,188		31,123
Supplies and postage	67,732		65,390
Insurance	37,810		42,685
Credit related expenses	7,145		2,443
Regulatory fees and FDIC insurance	178,548		235,327
Net cost of operations of other real estate owned	323,577		234,493
Other	182,497		187,302
Total noninterest expense	$	4,090,251	$	3,961,121

Noninterest expense was $4,090,251 for the year ended December 31, 2012, compared to $3,961,121 for the year ended December 31, 2011. The most significant component of noninterest expense is compensation and benefits, which totaled $1,726,586 for the year ended December 31, 2012, compared to $1,600,268 for the year ended December 31, 2011. The increase is primarily related to increase in salaries due to employee performance. Occupancy and equipment expense of $894,074 in 2012 decreased from $913,319 in 2011. Other professional fees decreased from $31,123 in 2011 to $13,188 in 2012 due to reduction in the use of outside consultants. Net cost of operations of other real estate expenses increased from $234,493 in 2011 to $323,577 in 2012 as a result of an increase in the number of real estate owned during the year. Regulatory fees and FDIC insurance decreased from $235,327 in 2011 to $178,548 in 2012, primarily due to a decrease in FDIC insurance assessments in the second quarter of 2011.

Income Taxes

The Company had taxable income for the year ended December 31, 2012 and no taxable income for year ended 2011. Deferred tax assets represent the future tax benefit of deductible differences and, if it is more likely than not that a tax asset will not be realized, a valuation allowance is required to reduce the recorded deferred tax assets to net realizable value. Management has determined that a partial valuation allowance is needed at December 31, 2012. Management’s judgment is based on estimates concerning future income earned and positive earnings for the year ended December 31, 2012. Management has concluded that sufficient positive evidence exists to overcome any and all negative evidence in order to meet the “more likely than not” standard regarding the realization of a portion of net deferred tax assets. As a result, the valuation allowance was reduced by $494,909 in 2012.

Investments

At December 31, 2012, our available for sale investment securities portfolio was $23,463,551 and represented approximately 20.7% of our total assets. Available for sale investment securities decreased $3,488,806 from $26,952,357 at December 31, 2011. Our portfolio consisted of U.S. government sponsored agencies of $13,150,729, mortgage-backed agencies of $2,751,142, state, county and municipal investment securities of $7,072,155, and corporate bonds of $489,525.

The amortized costs and fair values of investment securities at December 31, 2012, by contractual maturity, are shown in the following chart. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Callable securities and mortgage-backed securities are included in the year of their contractual maturity date.

	Securities Available-for-Sale				Securities Held-to-Maturity
	Amortized		Estimated		Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value
Due within one year	$	13,116	$	13,181	$	—	$	—
Due after one through five years	967,522		983,267		—		—
Due after five through ten years	3,809,304		3,937,240		—		—
Due after ten years	18,051,418		18,529,863		3,506,154		3,601,700

Total securities	$	22,841,360	$	23,463,551	$	3,506,154	$	3,601,700

At December 31, 2012, we had $3,506,154 in held to maturity investment securities portfolio. At December 31, 2011, we had no held to maturity investment securities portfolio.

We believe, based on industry analyst reports and credit ratings, the deterioration in fair values of individual investment securities available-for-sale is attributed to changes in market interest rates and not in the credit quality of the issuer and, therefore, these losses are not considered other-than-temporary. We have the ability and intent to hold these securities until such time as the value recovers or the securities mature.

Investment securities with market values of approximately $4,204,110 and $4,506,798 at December 31, 2012 and 2011, respectively, were pledged to secure public deposits, as required by law.

Proceeds from sales of available-for-sale securities during 2012 and 2011 were $18,985,502 and $23,202,326, respectively. Net gains of $520,051 and $259,155 were recognized on these sales in 2012 and 2011, respectively.

We held $555,000 of non-marketable equity securities, which consisted of FHLB stock of $453,000 and Pacific Coast Bankers Bank stock of $102,000, at December 31, 2012. These investments are carried at cost, which approximates fair market value.

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

In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades 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 declines are deemed to be other than temporary.

Loans

Since loans typically provide higher interest yields than other interest-earning assets, it is our goal to ensure that the highest percentage of our earning assets is invested in our loan portfolio. Gross loans outstanding at December 31, 2012 were $80,701,245, or 74.6% of interest-earning assets and 71.1% of total assets, compared to $88,344,578, or 76.2% of interest-earning assets and 72.4% of total assets, at December 31, 2011. Due to the economic environment, the Bank made selective decisions related to originating loans in 2012. Loans originated in 2012 typically had debt service coverage ratios, debt to income ratios, loan to value ratios, and credit quality indicators that were below policy minimums. Management’s selectivity resulted in a reduction of loan originations in for the year ended December 31, 2012. In addition, as the Bank moved into its sixth year of operations, the Bank experienced the attrition of loans due to refinancing and/or payoffs from borrowers.

Loans secured by real estate mortgages comprised approximately 88% of loans outstanding at December 31, 2012 and 89% at December 31, 2011. Most of our real estate loans are secured by residential and commercial properties. We do not generally originate traditional long term residential mortgages, but we do issue traditional second mortgage residential real estate loans and home equity lines of credit. We obtain a security interest in real estate whenever possible, in addition to any other available collateral. This collateral is taken to increase the likelihood of the ultimate repayment of the loan. Generally, we limit the loan-to-value ratio on loans we make to 85%.

Commercial loans and lines of credit represented approximately 10% of our loan portfolio at December 31, 2012 and at December 31, 2011.

Our construction, land development, and other land loans represented approximately 10% of our loan portfolio at December 31, 2012 and 2011, respectively.

The following table summarizes the composition of our loan portfolio as of December 31, 2012 and 2011:

	December 31, 2012					December 31, 2011
	Amount			Percentage of Total		Amount			Percentage of Total
Real Estate:
Commercial Real Estate	$	30,022,579		37	%	$	33,004,243		37	%
Construction, Land Development, & Other Land	7,556,622			10	%	8,753,485			10	%
Residential Mortgages	12,327,482			15	%	13,265,488			15	%
Residential Home Equity Lines of Credit (HELOCs)	21,273,793			26	%	23,452,499			27	%
Total Real Estate	71,180,476			88	%	78,475,715			89	%

Commercial	8,192,486			10	%	8,660,727			10	%
Consumer	1,328,283			2	%	1,208,136			1	%
Gross loans	80,701,245			100	%	88,344,578			100	%
Less allowance for loan losses	(1,295,053		)			(1,395,588		)
Total loans, net	$	79,406,192				$	86,948,990

Maturities and Sensitivity of Loans to Changes in Interest Rates

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

The following table summarizes the loan maturity distribution by composition and interest rate types at December 31, 2012.

	One Year or Less		After one but within five years		After five years		Total
Commercial Real Estate	$	7,521,929	$	21,949,221	$	551,429	$	30,022,579
Construction Land Development, and Other Land	2,583,971		4,849,973		122,678		7,556,622
Residential Mortgage	4,637,845		6,667,364		1,022,273		12,327,482
Residential Home Equity Lines of Credit	15,244		—		21,258,549		21,273,793
Total Real Estate	14,758,989		33,466,558		22,954,929		71,180,476

Commercial	2,898,300		4,829,269		464,917		8,192,486
Consumer	269,702		943,018		115,563		1,328,283
Total Gross Loans, net of deferred loan fees	$	17,926,991	$	39,238,845	$	23,535,409	$	80,701,245

Gross Loans maturing after one year with
Fixed interest rates							$	32,452,398
Floating interest rates							$	30,321,856
Total							$	62,774,254

Provision and Allowance for Loan Losses

We have established an allowance for loan losses through a provision for loan losses charged to expense on our consolidated statement of operations. The allowance for loan losses was $1,295,053 and $1,395,588 as of December 31, 2012 and December 31, 2011, respectively, and represented 1.60% of outstanding loans at December 31, 2012 and 1.58% of outstanding loans at December 31, 2011. The allowance for loan losses represents an amount which we believe will be adequate to absorb probable losses on existing loans that may become uncollectible. Our judgment as to the adequacy of the allowance for loan losses is based on a number of assumptions about future events, which we believe to be reasonable, but which may or may not prove to be accurate. Our determination of the allowance for loan losses is based on evaluations of the collectability of loans, including consideration of factors such as the balance of impaired loans, the quality, mix, and size of our overall loan portfolio, economic conditions that may affect the borrower’s ability to repay, the amount and quality of collateral securing the loans, our historical loan loss experience, and a review of specific problem loans. We also consider subjective issues such as changes in the lending policies and procedures, changes in the local/national economy, changes in volume or type of credits, changes in volume/severity of problem loans, quality of loan review and board of director oversight, concentrations of credit, and peer group comparisons. We adjust the amount of the allowance periodically based on changing circumstances as a component of the provision for loan losses.

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

Specific Reserve

We analyze individual loans within the portfolio and make allocations to the allowance based on each individual loan’s specific factors and other circumstances that affect the collectability of the credit. Significant individual credits classified as doubtful or substandard/special mention within our credit grading system require both individual analysis and specific allocation, if necessary.

Loans in the substandard category are characterized by deterioration in quality exhibited by any number of well-defined weaknesses requiring corrective action such as declining or negative earnings trends and declining or inadequate liquidity. Loans in the doubtful category exhibit the same weaknesses found in the substandard loan; however, the weaknesses are more pronounced. These loans, however, are not yet rated as loss because certain events may occur which could salvage the debt such as injection of capital, alternative financing, or liquidation of assets.

In these situations where a loan is determined to be impaired (primarily because it is probable that all principal and interest due according to the terms of the loan agreement will not be collected as scheduled), the loan is excluded from the general reserve calculations described below and is assigned a specific reserve. These reserves are based on a thorough analysis of the most probable source of repayment which is usually the liquidation of the underlying collateral, but may also include discounted future cash flows or, in rare cases, the market value of the loan itself.

Generally, for larger collateral dependent loans, current market appraisals are ordered to estimate the current fair value of the collateral. However, in situations where a current market appraisal is not available, management uses the best available information (including recent appraisals for similar properties, communications with qualified real estate professionals, information contained in reputable trade publications and other observable market data) to estimate the current fair value. The estimated costs to sell the subject property are then deducted from the estimated fair value to arrive at the “net realizable value” of the loan and to determine the specific reserve on each impaired loan reviewed. The credit risk management group periodically reviews the fair value assigned to each impaired loan and adjusts the specific reserve accordingly.

General Reserve

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

We also maintain a general reserve in our assessment of the loan loss allowance. This general reserve considers qualitative or environmental factors that are likely to cause estimated credit losses including, but not limited to: changes in delinquent loan trends, trends in risk grades and net charge offs, concentrations of credit, trends in the nature and volume of the loan portfolio, general and local economic trends, collateral valuations, the experience and depth of lending management and staff, lending policies and procedures, the quality of loan review systems, and other external factors.

In addition, the current downturn in the real estate market has resulted in an increase in loan delinquencies, defaults and foreclosures, and we believe these trends are likely to continue. In some cases, this downturn has resulted in a significant impairment to the value of our collateral and our ability to sell the collateral upon foreclosure, and there is a risk that this trend will continue. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. If real estate values continue to decline, it is also more likely that we would be required to increase our allowance for loan losses. Based on present information and an ongoing evaluation, management considers the allowance for loan losses to be adequate to meet presently known and inherent losses in the loan portfolio. Management’s judgment about the adequacy of the allowance is based upon a number of assumptions about future events which it believes to be reasonable but which may or may not be accurate. Thus, there can be no assurance that charge-offs in future periods will not exceed the allowance for loan losses or that additional increases in the allowance for loan losses will not be required, especially considering the overall weakness in the commercial real estate market in our market areas. Management believes estimates of the level of allowance for loan losses required have been appropriate and our expectation is that the primary factors considered in the provision calculation will continue to be consistent with prior trends.

The Company identifies impaired loans through its normal internal loan review process. Loans on the Company’s potential problem loan list are considered potentially impaired loans. These loans are evaluated in determining whether all outstanding principal and interest are expected to be collected. Loans are not considered impaired if a minimal payment delay occurs and all amounts due, including accrued interest at the contractual interest rate for the period of delay, are expected to be collected. Management has determined that the Company had $4,207,769 and $2,692,395 in impaired loans at December 31, 2012 and December 31, 2011, respectively. At December 31, 2012, most of the impaired loans identified by management are collateral dependent loans and therefore the valuation allowance amounts on such loans were recorded as a charge-off. Our valuation allowance related to impaired loans totaled $500,857 and $175,009 at December 31, 2012 and December 31, 2011, respectively. The increase in impaired loans was primarily the result of two large relationships that were classified as impaired during the year ended December 31, 2012. One relationship, which consists of two loans that total $1,145,852, was modified as a troubled debt restructuring and carries a valuation allowance of $133,852 based upon management’s impairment analysis. The other loan, which totaled $548,043, carried a valuation allowance of $13,043 as of December 31, 2012. During the calendar year the bank charged off $420,836 relating to this borrower.

We have retained an independent consultant to review our loan files on a test basis to assess the grading of samples of loans. In addition, various regulatory agencies review our allowance for loan losses through periodic examinations, and they may require us to record additions to the allowance for loan losses based on their judgment about information made available to them at the time of their examination. Our losses may vary from our estimates, and there is the possibility that charge-offs in future periods will exceed the allowance for loan losses that we have estimated.

The following table presents a summary related to our allowance for loan losses for the years ended December 31, 2012 and 2011:

	2012			2011

Balance at the beginning of period	$	1,395,588		$	1,552,061
Charge-offs:
Commercial	249,801			210,957
Residential	43,401			566,484
Commercial Real Estate	422,456
Construction, Land Development and Other Land	5,790			70,800
Residential HELOCs	98,674
Consumer	1,009			53,902
Total Charged-off	$	821,131		$	902,143

Recoveries:
Residential	3,516			1,670
Commercial Real Estate	919			—
Commercial	2,490			—
Total Recoveries	$	6,925		$	1,670

Net Charge-offs	$	814,206		$	900,473

Provision for Loan Loss	$	713,671		$	744,000

Balance at end of period	$	1,295,053		$	1,395,588

Total loans at end of period	$	80,701,245		$	88,344,578

Average loans outstanding	$	84,093,000		$	87,807,000

As a percentage of average loans:
Net loans charged-off	0.97		%	1.03		%
Provision for loan losses	0.85		%	0.85		%

Allowance for loan losses as a percentage of:
Year end loans	1.60		%	1.58		%

Allocation of the Allowance For Loan Losses

The following table presents an allocation of the allowance for loan losses at the end of each of the past two years. The allocation is calculated on an approximate basis and is not necessarily indicative of future losses or allocations. The entire amount is available to absorb losses occurring in any category of loans.

	2012				2011
	Amount		% of loans in category		Amount		% of loans in category
Commercial	$	159,584	10	%	$	257,000	10	%
Commercial Real Estate	$	134,886	37	%	$	309,000	37	%
Construction, Land Development and Other Land	$	91,154	10	%	$	185,000	10	%
Consumer	$	81,839	2	%	$	55,000	1	%
Residential Mortgage	$	291,333	15	%	$	184,000	15	%
Residential HELOCs	$	444,969	26	%	$	335,000	27	%
Unallocated	$	91,288	N/A		$	71,000	N/A
Total	$	1,295,053	100	%	$	1,396,000	100	%

Non-Performing Assets

The following table summarizes non-performing assets and the income that would have been reported on non-accrual loans as of December 31, 2012 and 2011:

	December 31,
	2012			2011

Other real estate owned	$	2,214,397		$	3,181,559
Non-accrual loans	$	1,777,230		$	1,550,775
Accruing loans 90 days or more past due	$	—		$	—
Total non-performing assets	$	3,991,627		$	4,732,334
As a percentage of gross loans:	4.95		%	5.36		%

The Bank had net charge-offs on loans in the amount of $814,206 for the year ended December 31, 2012, compared to $900,473 charged off in 2011. At December 31, 2012, there were 15 loans in non-accrual status totaling $1,777,230 compared to 10 loans in nonaccrual status that totaling $1,550,775 at December 31, 2011. There were no loans contractually past due 90 days or more still accruing interest at December 31, 2012 and December 31, 2011. In addition, there were two loans restructured or otherwise impaired totaling $694,085 not already included in nonaccrual status at December 31, 2012. There were four loans restructured or otherwise impaired totaling $1,318,084 not already included in nonaccrual status at December 31, 2011. At December 31, 2012 and 2011, impaired loans totaled $4,207,769 and $2,692,395, respectively. The increase in impaired loans compared to prior year is primarily the result of an increase in nonaccrual loans for two relationships during 2012. The Bank also currently is prohibited from extending any additional credit to a borrower which has a credit that has been charged off by the Bank or classified as Substandard, Doubtful, or Loss in any report of examination, so long as such credit remains uncollected. Management is concerned about the changes in the nonperforming assets but believes that the allowance has been appropriately funded for additional losses on existing loans, based on currently available

information. The Company will continue to monitor nonperforming assets closely and make changes to the allowance for loan losses when necessary.

Generally, a loan will be placed on nonaccrual status when it becomes 90 days past due as to principal or interest, or when management believes, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of the loan is doubtful. A payment of interest on a loan that is classified as nonaccrual is applied against the principal balance. During the years ended December 31, 2012 and 2011, we received approximately $90,986 and $37,452 in interest income in relation to loans on non-accrual status, respectively, and forgone interest income related to loans on non-accrual status was approximately $75,403 and $75,069, respectively.

Management believes that the amount of nonperforming assets could continue to have a negative effect on the Company’s condition if current economic conditions do not improve. As was seen in the 2012 financial results, the effect would be lower earnings caused by larger contributions to the loan loss provision arising from a larger impairment in the loan portfolio and a higher level of loan charge-offs. Management believes the Company has credit quality review processes in place to identify problem loans quickly. Management will work with customers that are having difficulties meeting their loan payments. The last resort is foreclosure.

Potential Problem Loans

Potential problem loans consist of loans that are generally performing in accordance with contractual terms but for which we have concerns about the ability of the borrower to continue to comply with repayment terms because of the borrower’s potential operating or financial difficulties. Management monitors these loans closely and reviews performance on a regular basis. As of December 31, 2012 and 2011, potential problem loans that were not already categorized as nonaccrual totaled $3,939,305 and $4,793,269, respectively. These loans are considered in determining management’s assessment of the adequacy of the allowance for loan losses.

Deposits

Our primary source of funds for our loans and investments is our deposits. Total deposits as of the years ended December 31, 2012 and 2011 were $94,803,120 and $102,526,449, respectively. In trying to attract local deposits and increase our core deposits, we did not renew some wholesale deposits and instead focused on customer relationships with the Bank. The following table shows the average balance outstanding and the average rates paid on deposits during 2012 and 2011.

	2012				2011
	Average Amount		Rate		Average Amount		Rate
Non-interest bearing demand deposits	$	11,246,878	—	%	$	9,573,942	—	%
Interest-bearing checking	4,876,694		0.15		4,908,942		0.24
Money market	48,859,665		0.57		50,755,386		0.97
Savings	1,122,765		0.23		934,335		0.28
Time deposits less than $100,000	16,851,152		1.02		23,723,048		1.28
Time deposits $100,000 and over	15,607,197		1.10		17,892,780		1.58
Total	$	98,564,351	0.72	%	$	107,788,433	1.11	%

Core deposits, which exclude time deposits of $100,000 or more and whole sale certificates of deposit, provide a relatively stable funding source for our loan portfolio and other earning assets. Our core deposits were $79,165,203 at December 31, 2012, compared to $86,923,368 at December 31, 2011. Our loan-to-deposit ratio was 85.13% and 86.16% at December 31, 2012 and 2011, respectively. Due to the competitive interest rate environment in our market, we utilized whole sale certificates of deposit as a funding source when we were able to procure these certificates at interest rates less than those in the local market. We did not have any brokered certificates of deposit purchased outside our primary market at December 31, 2012 and December 31, 2011. We have decreased our reliance on brokered deposits as our core deposits continue to grow.

The maturity distribution of our time deposits of $100,000 or more time deposits at December 31, 2012 was as follows:

Three months or less	$	1,463,097
Over three through six months	816,084
Over six through twelve months	5,348,858
Over twelve months	8,009,878
Total	$	15,637,917

Borrowings and lines of credit

At December 31, 2012, the Bank had short-term lines of credit with correspondent banks to purchase a maximum of $5,800,000 in unsecured federal funds on a one to 14 day basis and $3,750,000 in unused federal funds on a one to 20 day basis for general corporate purposes. The interest rate on borrowings under these lines is the prevailing market rate for federal funds purchased. These accommodation lines of credit are renewable annually and may be terminated at any time at the correspondent banks’ sole discretion. At December 31, 2012 and 2011, we had no borrowings outstanding on these lines.

We are a member of the FHLB of Atlanta, from which applications for borrowings can be made. The FHLB requires that investment securities or qualifying mortgage loans be pledged to secure advances from them. We are also required to purchase FHLB stock in a percentage of each advance. At December 31, 2012 and December 31, 2011, we had $6,000,000 and $7,000,000 outstanding, respectively. The Bank borrowed the funds to reduce the cost of funds on money used to fund loans. The Bank has remaining credit availability of $5,840,000 at the FHLB. We believe that our existing stable base of core deposits along with continued growth in this deposit base will enable us to successfully meet our long term liquidity needs. The following table shows the amount outstanding, grant date, maturity date, and interest rate.

Amount		Grant Date	Maturity Date	Interest Rate

$	3,000,000	2/25/2008	2/25/2013	2.615	%
$	1,000,000	8/11/2011	2/11/2013	0.370	%
$	1,000,000	8/11/2011	8/12/2013	0.430	%
$	1,000,000	8/11/2011	8/11/2015	1.070	%

Like all banks, we are subject to the FHLB’s credit risk rating policy which assigns member institutions a rating which is reviewed quarterly. The rating system utilizes key factors such as loan quality, capital, liquidity, profitability, etc. Our ability to access our available borrowing capacity from the FHLB in the future is subject to our rating and any subsequent changes based on our financial performance as compared to factors considered by the FHLB in their assignment of our credit risk rating each quarter. In addition, the Federal Reserve Bank of Richmond as well as our correspondent banks review our financial results and could limit our credit availability based on their review.

Capital Resources

Total shareholders’ equity was $12,449,095 at December 31, 2012, an increase of $167,630 from $12,281,465 at December 31, 2011. The increase is primarily due to net income of $1,016,983, an increase of $274,180 in unrealized gain on investment securities available for sale during 2012 offset by a decrease in preferred stock of $1,135,000.

The Federal Reserve and bank regulatory agencies require bank holding companies and financial institutions to maintain capital at adequate levels based on a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 100%. The Federal Reserve guidelines contain an exemption from the capital requirements for “small bank holding companies”, which in 2006 were amended to cover most bank holding companies with less than $500 million in total assets that do not have a material amount of debt or equity securities outstanding registered with the SEC. Although our class of common stock is registered under Section 12 of the Securities Exchange Act of 1934, we believe that because our stock is not listed on any exchange or otherwise

actively traded, the Federal Reserve will interpret its new guidelines to mean that we qualify as a small bank holding company. Nevertheless, our Bank remains subject to these capital requirements. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

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

At the Bank level, we are subject to various regulatory capital requirements administered by the federal banking agencies. Under the regulations adopted by the federal regulatory authorities, a bank will be categorized as:

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

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

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

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

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

In addition, an institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters. A bank’s capital category is determined solely for the purpose of applying prompt corrective action regulations, and the capital category may not constitute an accurate representation of a bank’s overall financial condition or prospects for other purposes.

The following table sets forth the Bank’s capital ratios at December 31, 2012 and 2011. As of December 31, 2012 and 2011, the Bank was considered “well capitalized” and within compliance with the minimum capital requirements specifically established for the Bank by its Supervisory Authorities.

	2012				2011

Total risk-based capital	$	12,681	15.98	%	$	13,225	15.44	%
Tier 1 risk-based capital	11,676		14.72	%	12,141		14,17	%
Leverage capital	11,676		10.18	%	12,141		9.84	%

On January 9, 2009, we entered into the CPP Purchase Agreement with the Treasury, pursuant to which the company issued and sold to Treasury (i) 3,285 shares of our Series A Preferred Stock, and (ii) a ten-year warrant to purchase 164 shares of our Series B Preferred Stock, for an aggregate purchase price of $3,285,000 in cash. The Series A and Series B Preferred Stock qualifies as Tier 1 capital under Federal Reserve guidelines.

On October 31, 2012, the Treasury sold its Series A and Series B Preferred Stock of the Company through a private offering structured as a modified Dutch auction. The Company bid on a portion of the Series A Preferred Stock in the auction after receiving approval from its regulators to do so. The clearing price per share for the Series A Preferred Stock was $825.26 (compared to a stated value of $1,000 per share) and the clearing price per share for the Series B Preferred Stock was $801.00 (compared to a stated value of $1,000 per share). The Company was successful in repurchasing 1,156 shares of the 3,285 shares of Series A Preferred Stock outstanding through the auction process. The remaining 2,129 shares of Series A Preferred Stock and 164 shares of Series B Preferred Stock of the Company held by Treasury were sold to unrelated third-parties through the auction process. The net balance sheet impact was a reduction to shareholders’ equity of $954,000 which is comprised of a decrease in preferred stock of $1,135,000 and a $181,000 increase to retained earnings related to the discount on the shares repurchased.

As noted above, in December 2010, the Basel Committee announced the “Basel III” capital rules, which set new capital requirements for banking organizations. On June 7, 2012, the Federal Reserve, the OCC, and the FDIC issued a joint notice of proposed rulemaking that would implement sections of the Dodd-Frank Act that encompass certain aspects of Basel III with respect to capital and liquidity. On November 9, 2012, following a public comment period, the US federal banking agencies announced that the originally proposed January 1, 2013 effective date for the proposed rules was being delayed so that the agencies could consider operations and transitional issued identified in the large volume of public comments received. The proposed rules, if adopted, would lead to significantly higher capital requirements and more restrictive leverage and liquidity ratios than those currently in place. The ultimate impact of the US implementation of the new capital and liquidity standards on the Company and the Bank is currently being reviewed and is dependent on the terms of the final regulations, which may differ from the proposed regulations. At this point the Company cannot determine the ultimate effect that any final regulations, if enacted, would have on its earnings or financial position. In addition, important questions remain as to how the numerous capital and liquidity mandates of the Dodd-Frank Act will be integrated with the requirements of Basel III.

Return on Equity and Assets

The following table shows the return on average assets (net income (loss) divided by average total assets), return on average equity (net income (loss) divided by average equity), and equity to assets ratio (average equity divided by average total assets) for the years ended December 31, 2012 and 2011.

	2012		2011
Return on average assets	0.86	%	0.59	%

Return on average equity	7.91	%	6.26	%

Equity to assets ratio	10.97	%	9.50	%

Effect of Inflation and Changing Prices

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

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

Off-Balance Sheet Arrangements

Through the Bank, we have made contractual commitments to extend credit in the ordinary course of our business activities. These commitments are legally binding agreements to lend money to our clients at predetermined interest rates for a specified period of time. We evaluate each client’s creditworthiness on a case-by-

case basis. The amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on our credit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, commercial and residential real estate. We manage the credit risk on these commitments by subjecting them to normal underwriting and risk management processes. At December 31, 2012, we had issued commitments to extend credit of approximately $10,159,000 through various types of lending arrangements. There were two standby letters of credit included in the commitments for $143,000. Fixed rate commitments were $455,000 and variable rate commitments were $9,704,000.

Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. A significant portion of the unfunded commitments relate to consumer equity lines of credit and commercial lines of credit. Based on historical experience, we anticipate that a portion of these lines of credit will not be funded.

Except as disclosed in this report, we are not involved in off-balance sheet contractual relationships, unconsolidated related entities that have off-balance sheet arrangements or transactions that could result in liquidity needs or other commitments that significantly impact earnings.

Liquidity

Liquidity represents the ability of a company to convert assets into cash or cash equivalents without significant loss, and the ability to raise additional funds by increasing liabilities. Liquidity management involves monitoring our sources and uses of funds in order to meet our day-to-day cash flow requirements while maximizing profits. Liquidity management is made more complicated because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of our investment portfolio is fairly predictable and subject to a high degree of control at the time investment decisions are made. However, net deposit inflows and outflows are far less predictable and are not subject to the same degree of control.

At December 31, 2012, our liquid assets, consisting of cash and due from banks, amounted to $2,483,503, or approximately 2.19% of total assets. Our investment securities available for sale at December 31, 2012 amounted to $23,463,551, or approximately 20.7% of total assets. Unpledged investment securities traditionally provide a secondary source of liquidity since they can be converted into cash in a timely manner. At December 31, 2012, $4,204,110 of our investment securities were pledged to secure public entity deposits.

Our ability to maintain and expand our deposit base and borrowing capabilities serves as our primary source of liquidity. We plan to meet our future cash needs through the liquidation of temporary investments and the generation of deposits. In addition, we will receive cash upon the maturities and sales of loans and maturities, calls and prepayments on investment securities. We maintain federal funds purchased lines of credit with correspondent banks totaling $9,550,000. Availability on these lines of credit was $9,550,000 at December 31, 2012. We are a member of the FHLB, from which applications for borrowings can be made. The FHLB requires that investment securities or qualifying mortgage loans be pledged to secure advances from them. We are also required to purchase FHLB stock in a percentage of each advance. At December 31, 2012, we had borrowed $6,000,000 from FHLB.

We believe that our existing stable base of core deposits and borrowing capabilities will enable us to successfully meet our long-term liquidity needs.

Market Risk

Market risk is the risk of loss from adverse changes in market prices and rates, which principally arise from interest rate risk inherent in our lending, investing, deposit gathering, and borrowing activities. Other types of market risks, such as foreign currency exchange rate risk and commodity price risk, do not generally arise in the normal course of our business.

We actively monitor and manage our interest rate risk exposure principally by measuring our interest sensitivity “gap,” which is the positive or negative dollar difference between assets and liabilities that are subject to interest rate repricing within a given period of time. Interest rate sensitivity can be managed by repricing assets or liabilities, selling securities available for sale, replacing an asset or liability at maturity, or adjusting the interest rate during the life of an asset or liability. Managing the amount of assets and liabilities repricing in this same time interval helps to hedge the risk and minimize the impact on net interest income of rising or falling interest rates. We

generally would benefit from increasing market rates of interest when we have an asset-sensitive gap position and generally would benefit from decreasing market rates of interest when we are liability-sensitive. The Company is cumulatively liability sensitive over the three-month to twelve month period and asset sensitive over all periods greater than one year. The analysis presents only a static view of the timing of maturities and repricing opportunities, without taking into consideration that changes in interest rates do not affect all assets and liabilities equally. For example, rates paid on a substantial portion of core deposits may change contractually within a relatively short time frame, but those rates are viewed by us as significantly less interest-sensitive than market-based rates such as those paid on noncore deposits. Net interest income may be affected by other significant factors in a given interest rate environment, including changes in the volume and mix of interest-earning assets and interest-bearing liabilities.

Interest Rate Sensitivity

Asset-liability management is the process by which we monitor and control the mix and maturities of our assets and liabilities. The essential purposes of asset-liability management are to ensure adequate liquidity and to maintain an appropriate balance between interest sensitive assets and liabilities in order to minimize potentially adverse impacts on earnings from changes in market interest rates. Our asset-liability management committee monitors and considers methods of managing exposure to interest rate risk. The asset-liability management committee is responsible for maintaining the level of interest rate sensitivity of our interest sensitive assets and liabilities within board-approved limits.

The following table sets forth information regarding our rate sensitivity, as of December 31, 2012 at each of the time intervals. The information in the table may not be indicative of our rate sensitivity position at other points in time. In addition, the repricing distribution indicated in the table differs from the contractual maturities of certain interest-earning assets and interest-bearing liabilities presented due to consideration of prepayment speeds under various interest rate change scenarios in the application of the interest rate sensitivity methods described above.

				After three			After one but
December 31, 2012	Within three months			But within twelve months			within five years			After five years			Total

Interest-earning assets:(in thousands)
Investment securities	13			—			983			26,069			27,065
Loans	4,523			13,404			39,239			23,535			80,701
Total interest-earning assets	$	4,536		$	13,404		$	40,222		$	49,604		$	107,766

Interest-bearing liabilities:(in thousands)
Interest-bearing checking	$	5,065		$	—		$	—		$	—		$	5,065
Money market and savings	45,351			—			—			—			45,351
Time deposits	4,331			12,823			12,150			—			29,304
FHLB Advances	4,000			1,000			1,000			—			6,000
Total interest-bearing Liabilities	$	58,747		$	13,823		$	13,150		$	—		$	85,720

Period gap (in thousands)	$	(54,211	)	$	(419	)	$	27,072		$	49,604		$	22,046
Cumulative gap (in thousands)	$	(54,211	)	$	(54,630	)	$	(27,558	)	$	22,046
Ratio of cumulative gap to total interest-earning assets	(50.30		)%	(50.69		)%	(25.57		)%	20.46		%

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

Item 8. Financial Statements and Supplementary Data

INDEX TO AUDITED FINANCIAL STATEMENTS

	Page No.

Report of Independent Registered Public Accounting Firm	51
Consolidated Balance Sheets	52
Consolidated Statements of Income	53
Consolidated Statements of Comprehensive Income	54
Consolidated Statements of Changes in Shareholders’ Equity	55
Consolidated Statements of Cash Flows	56
Notes to Consolidated Financial Statements	57-85
Corporate Data	86

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors

Congaree Bancshares, Inc. and Subsidiary

Cayce, South Carolina

We have audited the accompanying consolidated balance sheets of Congaree Bancshares, Inc. and Subsidiary (the Company) as of December 31, 2012 and 2011, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal controls over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Congaree Bancshares, Inc. and Subsidiary, as of December 31, 2012 and 2011, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

/s/ Elliott Davis, LLC

Columbia, South Carolina

March 28, 2013

CONGAREE BANCSHARES, INC.

Consolidated Balance Sheets

	December 31,
	2012			2011
Assets:
Cash and cash equivalents:
Cash and due from banks	$	2,483,503		$	2,486,703
Federal funds sold	—			86,000
Total cash and cash equivalents	2,483,503			2,572,703
Securities available-for-sale	23,463,551			26,952,357
Securities held-to-maturity (fair value of $3,601,700 at December 31, 2012)	3,506,154			—
Nonmarketable equity securities	555,000			615,900
Loans receivable	80,701,245			88,344,578
Less allowance for loan losses	1,295,053			1,395,588
Loans receivable, net	79,406,192			86,948,990
Premises, furniture and equipment, net	656,914			663,958
Accrued interest receivable	463,260			561,545
Other real estate owned	2,214,397			3,181,559
Other assets	704,639			496,534
Total assets	$	113,453,610		$	121,993,546
Liabilities:
Deposits:
Noninterest-bearing transaction accounts	$	15,083,493		$	10,736,458
Interest-bearing transaction accounts	5,065,488			5,458,963
Savings and money market	45,350,973			51,297,549
Time deposits $100,000 and over	15,637,917			15,603,081
Other time deposits	13,665,249			19,430,398
Total deposits	94,803,120			102,526,449
Federal Home Loan Bank advances	6,000,000			7,000,000
Accrued interest payable	22,357			28,130
Other liabilities	179,038			157,502
Total liabilities	101,004,515			109,712,081
Commitments and contingencies (Notes 13, 14 and 19)
Shareholders’ equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized:
Series A cumulative perpetual preferred stock; 2,129 and 3,285 shares issued and outstanding as of December 31, 2012 and 2011	2,096,287			3,199,913
Series B cumulative perpetual preferred stock; 164 shares issued and outstanding	169,414			172,476
Common stock, $.01 par value, 10,000,000 shares authorized; 1,764,439 shares issued and outstanding	17,644			17,644
Capital surplus	17,688,324			17,688,324
Accumulated deficit	(7,933,220		)	(8,933,358		)
Accumulated other comprehensive income	410,646			136,466
Total shareholders’ equity	12,449,095			12,281,465
Total liabilities and shareholders’ equity	$	113,453,610		$	121,993,546

See notes to consolidated financial statements.

CONGAREE BANCSHARES, INC.

Consolidated Statements of Income

	For the years ended
	December 31,
	2012		2011
Interest income:
Loans, including fees	$	4,570,095	$	4,862,510
Investment securities, taxable	722,012		647,313
Investment securities, non-taxable	14,586		107,176
Federal funds sold and other	13,553		15,859
Total	5,320,246		5,632,858
Interest expense:
Time deposits $100,000 and over	172,023		283,146
Other deposits	460,645		809,997
Other borrowings	101,552		93,016
Total	734,220		1,186,159
Net interest income	4,586,026		4,446,699
Provision for loan losses	713,671		744,000
Net interest income after provision for loan losses	3,872,355		3,702,699
Noninterest income:
Service charges on deposit accounts	301,194		304,355
Residential mortgage origination fees	62,662		26,332
Gain on sales of securities available-for-sale	520,051		259,155
Other	19,492		17,079
Total noninterest income	903,399		606,921
Noninterest expenses:
Salaries and employee benefits	1,726,586		1,600,268
Net occupancy	546,665		528,939
Furniture and equipment	347,409		384,380
Professional fees	237,192		293,785
Regulatory fees and FDIC assessment	178,548		235,327
Net cost of operation of other real estate owned	323,577		234,493
Other operating	730,274		683,929
Total noninterest expense	4,090,251		3,961,121
Income before income taxes	685,503		348,499
Income tax benefit	331,480		392,508
Net income	1,016,983		741,007
Net accretion of preferred stock to redemption value	$	28,724	$	29,129
Preferred dividends	169,532		179,010
Net income available to common shareholders	$	818,727	$	532,868
Income per common share
Basic and diluted income per common share	$	0.46	$	0.30
Average common shares outstanding	1,764,439		1,764,439

See notes to consolidated financial statements.

CONGAREE BANCSHARES, INC.

Consolidated Condensed Statements of Comprehensive Income

	December 31,
	2012			2011
Net Income	$	1,016,983		$	741,007
Other comprehensive income:
Unrealized holding gains (losses) on securities available for sale, net of taxes of $35,572 at December 31, 2012 and $189,820 at December 31, 2011	(69,054		)	371,778
Reclassification adjustment for gains included in net income, net of taxes of $176,817 at December 31, 2012 and $88,113 at December 31, 2011	343,234			171,042
Other comprehensive income	274,180			542,820
Comprehensive Income	$	1,291,163		$	1,283,827

See notes to consolidated financial statements.

CONGAREE BANCSHARES, INC.

Consolidated Statements of Changes in Shareholders’ Equity

For the years ended December 31, 2012 and 2011

														Accumulated
														Other
	Preferred Stock					Common Stock			Capital		Accumulated			Comprehensive
	Shares		Amount			Shares	Amount		Surplus		Deficit			Income (Loss)			Total
Balance, December 31, 2010	3,449		$	3,343,260		1,764,439	$	17,644	$	17,688,324	$	(9,466,226	)	$	(406,354	)	$	11,176,648
Net Income											741,007						741,007
Other comprehensive income														542,820			542,820
Accretion of Series A discount on preferred stock			32,191								(32,191		)				—
Amortization of Series B premium on preferred stock			(3,062		)						3,062						—
Dividends on preferred stock											(179,010		)				(179,010		)
Balance, December 31, 2011	3,449		3,372,389			1,764,439	17,644		17,688,324		(8,933,358		)	136,466			12,281,465
Net Income											1,016,983						1,016,983
Other comprehensive income														274,180			274,180
Redemption of Series A preferred stock, net	(1,156	)	(1,135,412		)						181,411						(954,001		)
Accretion of Series A discount on preferred stock			31,786								(31,786		)				—
Amortization of Series B premium on preferred stock			(3,062		)						3,062						—
Dividends on preferred stock											(169,532		)				(169,532		)
Balance, December 31, 2012	2,293		$	2,265,701		1,764,439	$	17,644	$	17,688,324	$	(7,933,220	)	$	410,646		$	12,449,095

See notes to consolidated financial statements.

CONGAREE BANCSHARES, INC.

Consolidated Statements of Cash Flows

	For the years ended
	December 31,
	2012			2011
Cash flows from operating activities:
Net income	$	1,016,983		$	741,007
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	713,671			744,000
Deferred income tax benefit	(331,480		)	(392,508		)
Depreciation and amortization expense	149,633			194,024
Discount accretion and premium amortization	116,126			169,628
Decrease (increase) in accrued interest receivable	98,285			(57,792		)
Decrease in accrued interest payable	(5,773		)	(15,929		)
Gain on sale of securities available-for-sale	(520,051		)	(259,155		)
Write downs on other real estate owned	265,011			184,399
Loss on sale of other real estate owned	13,013			19,640
(Increase) decrease in other assets	(17,870		)	14,857
Increase (decrease) in other liabilities	21,536			(33,504		)
Net cash provided by operating activities	1,519,084			1,308,667
Cash flows from investing activities:
Purchase of securities available-for-sale	(23,703,668		)	(36,424,529		)
Purchase of securities held-to-maturity	(3,523,521		)	—
Proceeds from maturities, calls, and paydowns of securities available-for-sale	9,043,689			7,894,410
Proceeds from sales of securities available-for-sale	18,985,502			23,202,326
Proceeds from sales of securities held-to-maturity	—			1,205,623
Purchase of nonmarketable equity securities	—			(170,700		)
Proceeds from sales of nonmarketable equity securities	60,900			29,100
Net decrease in loans receivable	5,701,590			464,847
Purchase of premises, furniture and equipment	(142,589		)	(104,273		)
Proceeds from sales of other real estate owned	1,816,675			533,280
Net cash provided (used) by investing activities	8,238,578			(3,369,916		)
Cash flows from financing activities:
Increase in noninterest-bearing deposits	4,347,035			1,444,558
Decrease in interest-bearing deposits	(12,070,364		)	(5,504,101		)
(Decrease) increase in borrowings from FHLB	(1,000,000		)	4,000,000
Repurchase of preferred stock	(954,001		)	—
Dividends paid on preferred stock	(169,532		)	(358,020		)
Net cash used by financing activities	(9,846,862		)	(417,563		)
Net decrease in cash and cash equivalents	(89,200		)	(2,478,812		)
Cash and cash equivalents, beginning of year	2,572,703			5,051,515
Cash and cash equivalents, end of year	$	2,483,503		$	2,572,703

See notes to consolidated financial statements.

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Management’s Estimates - The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for losses on loans, including valuation allowances for impaired loans, and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowances for losses on loans and foreclosed real estate, management obtains independent appraisals for significant properties. Management must also make estimates in determining the estimated useful lives and methods for depreciating premises and equipment.

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

Concentrations of Credit Risk - Financial instruments, which potentially subject the Company to concentrations 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 various personal and commercial purposes primarily in the Lexington County region of South Carolina. The Company’s loan portfolio is not concentrated in loans to any single borrower or a relatively small number of borrowers. Additionally, management is not aware of any concentrations of loans to classes of borrowers or industries that would be similarly affected by economic conditions.

In addition to monitoring potential concentrations of loans to particular borrowers or groups of borrowers, industries and geographic regions, management monitors exposure to credit risk from concentrations of lending products and practices such as loans that subject borrowers to substantial payment increases (e.g. principal deferral periods, loans with initial interest-only periods, etc.) and loans with high loan-to-value ratios. Management has determined that there is no concentration of credit risk associated with its lending policies or practices. Additionally, there are industry practices that could subject the Company to increased credit risk should economic conditions change over the course of a loan’s life. For example, the Company makes variable rate loans and fixed rate principal-amortizing loans with maturities prior to the loan being fully paid (i.e. balloon payment loans). These loans are underwritten and monitored to manage the associated risks. Therefore, management believes that these particular practices do not subject the Company to unusual credit risk.

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

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Investment Securities - Securities are classified in one of three categories: trading, available for sale, or held to maturity. Trading securities are bought and held principally for the purpose of selling them in the near term. Held to maturity securities are those securities for which the Bank has the ability and intent to hold the securities until maturity. All other securities not included in trading or held to maturity are classified as available for sale. At December 31, 2012 and 2011, the Bank had no trading securities.

Held-to-maturity securities are recorded at cost, adjusted for the amortization or accretion of premiums or discounts. Securities available-for-sale are carried at amortized cost and adjusted to estimated market value by recognizing the aggregate unrealized gains or losses in a valuation account. Aggregate market valuation adjustments are recorded in shareholders’ equity net of deferred income taxes. Management evaluates investment securities for other-than-temporary impairment on a quarterly basis. A decline in the market value of any investment below cost that is deemed other-than-temporary is charged to earnings for the decline in value deemed to be credit related and a new cost basis in the security is established. The decline in value attributed to non-credit related factors is recognized in other comprehensive income. The adjusted cost basis of investments available-for-sale is determined by specific identification and is used in computing the gain or loss upon sale.

Nonmarketable Equity Securities - Nonmarketable equity securities include the cost of the Company’s investment in the stock of the Federal Home Loan Bank and Pacific Coast Bankers Bank. These stocks have no quoted market value and no ready market exists. The Company’s investment in Federal Home Loan Bank stock at December 31, 2012 and 2011 was $453,000 and $513,900, respectively. The Company’s investment in Pacific Coast Bankers Bank stock at December 31, 2012 and 2011 was $102,000.

Loans Receivable - Loans are stated at their recorded investment. Interest income is computed using the simple interest method and is recorded in the period earned.

When serious doubt exists as to the collectibility of a loan or when a loan becomes contractually 90 days past due as to principal or interest, interest income is generally discontinued unless the estimated net realizable value 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 loan origination costs (principally salaries and employee benefits) are deferred and amortized to income over the contractual life of the related loans or commitments, adjusted for prepayments, using the straight-line method.

The Company identifies impaired loans through its normal internal loan review process. Loans on the Company’s problem loan watch list are considered potentially impaired loans. These loans are evaluated in determining whether all outstanding principal and interest are expected to be collected. Loans are not considered impaired if a minimal payment delay occurs and all amounts due, including accrued interest at the contractual interest rate for the period of delay, are expected to be collected.

Allowance for Loan Losses — An allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that the collection of the principal is unlikely. The allowance represents an amount, which, in management’s judgment, will be adequate to absorb probable losses on existing loans that may become uncollectible.

Management’s judgment in determining the adequacy of the allowance is based on evaluations of the probability of collection of loans. These evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, current economic conditions that may affect the borrower’s ability to pay, overall portfolio quality, and review of specific problem loans.

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

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Allowance for Loan Losses (continued) - Management believes the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses. Such regulators may require additions to the allowance based on their judgments of information available to them at the time of their examination.

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

Other Real Estate Owned - Other real estate owned represents properties acquired through or in lieu of loan foreclosure and is initially recorded at fair market value less estimated disposal costs. Costs of improvements are capitalized, whereas costs relating to holding other real estate and valuation adjustments are expensed. Revenue and expenses from operations and changes in valuation allowance are included in other real estate owned expense.

Income Taxes - Income taxes are the sum of amounts currently payable to taxing authorities and the net changes in income taxes payable or refundable in future years. Income taxes deferred to future years are determined utilizing a liability approach. This method gives consideration to the future tax consequences associated with differences between financial accounting and tax bases of certain assets and liabilities which are principally the allowance for loan losses, depreciable premises and equipment, and the net operating loss carryforward. The Bank believes its loss positions in prior years may adversely impact its ability to recognize the full benefit of its deferred tax asset. Therefore, the Bank currently has placed a valuation allowance for a portion of its deferred tax asset. The Bank believes that its income tax filing positions taken or expected to be taken in its tax returns will more likely than not be sustained upon audit by the taxing authorities and does not anticipate any adjustments that will result in a material adverse impact on the Bank’s financial condition, results of operations, or cash flow. Therefore, no reserves for uncertain income tax positions have been recorded.

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

Income Per Share - Basic income per common share for 2012 and 2011 represents income available to shareholders divided by the weighted-average number of common shares outstanding during the period. Dilutive income per common share is adjusted to reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued. The only potential common share equivalents are those related to stock options and warrants. Stock options and warrants which are anti-dilutive are excluded from the calculation of diluted net income per common share. The Company deemed the options and warrants not dilutive for the years ended December 31, 2012 and 2011 due to the exercise price of all options and warrants exceeding the average market price of the Company’s stock during the period.

Stock-Based Compensation - The Company accounts for its stock compensation plans using a fair value based method whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period.

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

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

Interest paid on deposits and other borrowings totaled $739,993 and $1,202,088 for the years ended December 31, 2012 and 2011, respectively. Changes in the valuation account for securities available-for-sale, including deferred tax effects, are considered non-cash transactions for purposes of the statement of cash flows and are presented in detail in the notes to the financial statements. In addition, transfers of loans to other real estate owned and changes in dividends payable are also considered non-cash transactions. The Bank transferred loans in the amount of $1,127,537 and $625,711 to other real estate owned during the years ended December 31, 2012 and 2011, respectively. The Bank did not transfer any investment securities between categories during the year ended December 31, 2012.

There were income tax payments during the years ended December 31, 2012 and 2011 in the amount of $23,520 and $18,000, respectively.

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

Fair Values of Financial Instruments - Fair values of financial instruments are estimated using relevant market value information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.

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

The Company is subject to the regulations of various governmental agencies. These regulations can and do change significantly from period to period. The Company also undergoes periodic examinations by the regulatory agencies, which may subject it to further changes with respect to asset valuations, amounts of required loss allowances and operating restrictions from the regulators’ judgments based on information available to them at the time of their examination.

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Recent Accounting Pronouncements - The following is a summary of recent authoritative pronouncements that may affect accounting, reporting, and disclosure of financial information by the Company:

In April 2011, the criteria used to determine effective control of transferred assets in the Transfers and Servicing topic of the ASC was amended by ASU 2011-03. The requirement for the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms and the collateral maintenance implementation guidance related to that criterion were removed from the assessment of effective control. The other criteria to assess effective control were not changed. The amendments are effective for the Company beginning January 1, 2012 but are not expected to have a material effect on the financial statements.

ASU 2011-04 was issued in May 2011 to amend the Fair Value Measurement topic of the ASC by clarifying the application of existing fair value measurement and disclosure requirements and by changing particular principles or requirements for measuring fair value or for disclosing information about fair value measurements. The amendments are effective for the Company beginning January 1, 2012 but are not expected to have a material effect on the financial statements.

The Comprehensive Income topic of the ASC was amended in June 2011. The amendment eliminates the option to present other comprehensive income as a part of the statement of changes in shareholders’ equity. The amendment requires consecutive presentation of the statement of net income and other comprehensive income and requires an entity to present reclassification adjustments from other comprehensive income to net income on the face of the financial statements. The amendments were applicable to the Company on January 1, 2012 and have been applied retrospectively.

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

Reclassifications - Certain captions and amounts in the 2011 consolidated financial statements were reclassified to conform with the 2012 presentation. The reclassifications did not have an impact on the previously reported income or shareholders’ equity.

NOTE 2 - CASH AND DUE FROM BANKS

The Company is required to maintain cash balances with its correspondent banks to cover all cash letter transactions. At December 31, 2012 and 2011, the requirement was met by the cash balance in the vault.

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

NOTE 3 - INVESTMENT SECURITIES

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

			Gross Unrealized				Estimated
December 31, 2012	Costs		Gains		Losses		Fair Value
Government sponsored enterprises	$	998,042	$	2,478	$	—	$	1,000,520
Corporate bonds	474,486		15,039		—		489,525
Small Business Administration Securities	11,867,028		301,391		18,210		12,150,209
Mortgage-backed securities	2,751,792		13,496		14,146		2,751,142
State, county and municipal	6,750,012		337,508		15,365		7,072,155
	$	22,841,360	$	669,912	$	47,721	$	23,463,551

December 31, 2011
Government sponsored enterprises	$	5,791,616	$	4,153	$	11,690	$	5,784,079
Mortgage-backed securities	1,550,263		47,501		—		1,597,764
Small Business Administration Securities	11,819,381		61,680		24,801		11,856,260
State, county and municipal	7,584,332		204,484		74,562		7,714,254
	$	26,745,592	$	317,818	$	111,053	$	26,952,357

The amortized cost and estimated fair values of securities held-to-maturity were:

Amortized

Gross Unrealized

Estimated

December 31, 2012

Costs

Gains

Losses

Fair Value

State, county and municipal

3,506,154

95,546

—

3,601,700

There were no securities classified as held-to-maturity at December 31, 2011.

Proceeds from sales of available-for-sale securities during 2012 and 2011 were $18,985,502 and $23,202,326, respectively. Gross gains of $520,051 and $245,242 were recognized on those sales in 2012 and 2011, respectively. Gross losses of $0 and $51,546 were recognized on those sales in 2012 and 2011, respectively. Proceeds from sales of held to maturity securities during 2011 were $1,205,623. Gross gains of $65,459 were recognized on those sales in 2011. There were no losses recognized on those sales. There were no sales of held to maturity securities during 2012.

	Securities Available-for-Sale				Securities Held-to-Maturity
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due within one year	$	13,116	$	13,181	$	—	$	—
Due after one through five years	967,522		983,267		—		—
Due after five through ten years	3,809,304		3,937,240		—		—
Due after ten years	18,051,418		18,529,863		3,506,154		3,601,700

Total securities	$	22,841,360	$	23,463,551	$	3,506,154	$	3,601,700

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

NOTE 3 - INVESTMENT SECURITIES - continued

The following table shows gross unrealized losses and fair value of securities available-for-sale, aggregated by investment category, and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2012.

	Less than 12 months				12 months or more				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Small Business Administration Securities	$	1,521,165	$	18,210	$	—	$	—	$	1,521,165	$	18,210
Mortgage-backed securities	1,011,241		14,146		—		—		1,011,241		14,146
State, county and municipal	1,248,054		15,365		—		—		1,248,054		15,365
	$	3,780,460	$	47,721	$	—	$	—	$	3,780,460	$	47,721

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 unrealized loss position, at December 31, 2011.

	Less than 12 months				12 months or more				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Government sponsored enterprises	$	6,123,430	$	36,491	$	—	$	—	$	6,123,430	$	36,491
State, county and municipal	2,696,848		74,562		—		—		2,696,848		74,562
	$	8,820,278	$	111,053	$	—	$	—	$	8,820,278	$	111,053

Securities classified as available-for-sale are recorded at fair market value. There were no securities in a continuous unrealized loss position for more than twelve months at December 31, 2012 or 2011.

There were no held to maturity securities in a continuous loss position at December 31, 2012. There were no held to maturity securities at December 31, 2011.

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

NOTE 3 - INVESTMENT SECURITIES - continued

In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades 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 declines are deemed to be other-than-temporary.

Investment securities with market values of approximately $4,204,110 and $4,506,798 at December 31, 2012 and 2011, respectively, were pledged to secure public deposits, as required by law.

NOTE 4 - LOANS RECEIVABLE

Major classifications of loans receivable at December 31 are summarized as follows:

	December 31, 2012					December 31, 2011
	Amount			Percentage of Total		Amount			Percentage of Total
Real Estate:
Commercial Real Estate	$	30,022,579		37	%	$	33,004,243		37	%
Construction, Land Development, & Other Land	7,556,622			10	%	8,753,485			10	%
Residential	12,327,482			15	%	13,265,488			15	%
Residential Home Equity Lines of Credit (HELOCs)	21,273,793			26	%	23,452,499			27	%
Total Real Estate	71,180,476			88	%	78,475,715			89	%

Commercial	8,192,486			10	%	8,660,727			10	%
Consumer	1,328,283			2	%	1,208,136			1	%
Gross loans	80,701,245			100	%	88,344,578			100	%
Less allowance for loan losses	(1,295,053		)			(1,395,588		)
Total loans, net	$	79,406,192				$	86,948,990

The credit quality indicators utilized by the Company to internally analyze the loan portfolio are the internal risk ratings. Loans classified as pass credits have no material weaknesses and are performing as agreed. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. Loans classified as substandard or worse are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

The following is an analysis of our loan portfolio by credit quality indicators at December 31, 2012:

Grade:	Commercial		Commercial Real Estate		Construction, Land Development, and Other Land		Consumer		Residential		Residential HELOCs		Total
Pass	$	6,979,557	$	28,330,009	$	6,718,502	$	1,256,610	$	10,330,147	$	19,142,295	$	72,757,120
Special Mention	964,700		475,282		211,415		7,126		552,045		1,728,737		3,939,305
Substandard or Worse	248,229		1,217,288		626,705		64,547		1,445,290		402,761		4,004,820
Total	$	8,192,486	$	30,022,579	$	7,556,622	$	1,328,283	$	12,327,482	$	21,273,793	$	80,701,245

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

NOTE 4 - LOANS RECEIVABLE - continued

The following is an analysis of our loan portfolio by credit quality indicators at December 31, 2011:

Grade:	Commercial		Commercial Real Estate		Construction, Land Development, and Other Land		Consumer		Residential		Residential HELOCs		Total
Pass	$	7,128,910	$	30,420,039	$	6,976,391	$	1,110,399	$	10,835,930	$	21,784,060	$	78,255,729
Special Mention	1,073,539		739,155		320,761		—		444,576		1,166,773		3,744,804
Substandard or Worse	458,278		1,845,049		1,456,333		97,737		1,984,982		501,666		6,344,045
Total	$	8,660,727	$	33,004,243	$	8,753,485	$	1,208,136	$	13,265,488	$	23,452,499	$	88,344,578

The following is an aging analysis of our loan portfolio at December 31, 2012:

	30 - 59 Days Past Due		60 - 89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans Receivable		Recorded Investment > 90 Days and Accruing
Commercial	$	866,402	$	89,996	$	5,344	$	961,742	$	7,230,744	$	8,192,486	$	—
Commercial Real Estate	156,159		—		566,492		722,651		29,299,928		30,022,579		—
Construction, Land Development, & Other Land	88,380		—		—		88,380		7,468,242		7,556,622		—
Consumer	22,226		—		201,797		224,023		1,104,260		1,328,283		—
Residential	351,682		132,653		144,327		628,662		11,698,820		12,327,482		—
Residential HELOC	—		—		—		—		21,273,793		21,273,793		—
Total	$	1,484,849	$	222,649	$	917,960	$	2,625,458	$	78,075,787	$	80,701,245	$	—

The following is an aging analysis of our loan portfolio at December 31, 2011:

	30 - 59 Days Past Due		60 - 89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans Receivable		Recorded Investment > 90 Days and Accruing
Commercial	$	89,946	$	279,604	$	—	$	369,550	$	8,291,177	$	8,660,727	$	—
Commercial Real Estate	161,654		—		52,118		213,772		32,790,471		33,004,243		—
Construction, Land Development, & Other Land	—		—		812,429		812,429		7,941,056		8,753,485		—
Consumer	—		—		—		—		1,208,136		1,208,136		—
Residential	486,748		—		273,661		760,409		12,505,079		13,265,488		—
Residential HELOC	99,155		—		—		99,155		23,353,344		23,452,499		—
Total	$	837,503	$	279,604	$	1,138,208	$	2,255,315	$	86,089,263	$	88,344,578	$	—

The following is an analysis of loans receivable on nonaccrual status as of December 31:

	2012		2011
Commercial	$	134,707	$	216,168
Commercial Real Estate	1,061,128		52,118
Construction, Land Development, & Other Land	—		812,429
Consumer	215,892		67,200
Residential	365,503		402,860
Residential HELOCs	—		—
Total	$	1,777,230	$	1,550,775

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

NOTE 4 - LOANS RECEIVABLE - continued

Generally, a loan will be placed on nonaccrual status when it becomes 90 days past due as to principal or interest, or when management believes, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of the loan is doubtful. A payment of interest on a loan that is classified as nonaccrual is applied against the principal balance. During the years ended December 31, 2012 and 2011, we received approximately $90,986 and $37,452, respectively, in interest income in relation to loans on non-accrual status, respectively, and forgone interest income related to loans on non-accrual status was approximately $75,403 and $75,069, respectively.

The following table summarizes the allowance for loan losses and recorded investment in gross loans, by portfolio segment, at and for the period ended December 31, 2012:

	Commercial			Commercial Real Estate			Construction, Land Development & Other Land			Consumer			Residential			Residential - HELOCs			Unallocated		Total
Allowance for Loan Losses
Beginning Balance	$	256,831		$	308,864		$	184,910		$	54,729		$	183,938		$	335,225		$	71,091	$	1,395,588
Charge Offs	(249,801		)	(422,456		)	(5,790		)	(1,009		)	(43,401		)	(98,674		)	—		(821,131		)
Recoveries	2,490			919			—			—			3,516			—			—		6,925
Provision	150,064			247,559			(87,966		)	28,119			147,280			208,418			20,197		713,671
Ending Balance	$	159,584		$	134,886		$	91,154		$	81,839		$	291,333		$	444,969		$	91,288	$	1,295,053

Ending Balances:
Individually evaluated for impairment	$	19,017		$	15,292		$	—		$	62,452		$	221,941		$	182,155		$	—	$	500,857
Collectively evaluated for impairment	$	140,567		$	119,594		$	91,154		$	19,387		$	69,392		$	262,814		$	91,288	$	794,196

Loans Receivable:
Ending Balance - Total	$	8,192,486		$	30,022,579		$	7,556,622		$	1,328,283		$	12,327,482		$	21,273,793		$	—	$	80,701, 245

Ending Balances:
Individually evaluated for impairment	$	169,951		$	1,400,319		$	504,027		$	258,762		$	1,356,291		$	518,419		$	—	$	4,207,769
Collectively evaluated for impairment	$	8,022,535		$	28,622,260		$	7,052,595		$	1,069,521		$	10,971,191		$	20,755,374		$	—	$	76,493,476

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

NOTE 4 - LOANS RECEIVABLE - continued

The following table summarizes the allowance for loan losses and recorded investment in gross loans, by portfolio segment, at and for the period ended December 31, 2011:

	Commercial			Commercial Real Estate			Construction, Land Development & Other Land			Consumer			Residential			Residential - HELOCs			Unallocated		Total
Allowance for Loan Losses
Beginning Balance	$	405,061		$	332,346		$	114,958		$	39,393		$	185,696		$	439,515		$	35,092	$	1,552,061
Charge Offs	(210,957		)	(206,425		)	(70,800		)	(53,902		)	(33,160		)	(326,899		)	—		(902,143		)
Recoveries	1,670			—			—			—			—			—			—		1,670
Provision	61,057			182,943			140,752			69,238			31,402			222,609			35,999		744,000
Ending Balance	$	256,831		$	308,864		$	184,910		$	54,729		$	183,938		$	335,225		$	71,091	$	1,395,588

Ending Balances:
Individually evaluated for impairment	$	54,168		$	818		$	29,905		$	15,607		$	74,511		$	—		$	—	$	175,009
Collectively evaluated for impairment	$	202,663		$	308,046		$	155,005		$	39,122		$	109,427		$	335,225		$	71,091	$	1, 220,579

Loans Receivable:
Ending Balance - Total	$	8,660,727		$	33,004,243		$	8,753,485		$	1,208,136		$	13,265,488		$	23,452,499		$	—	$	88,344,578

Ending Balances:
Individually evaluated for impairment	$	216,168		$	394,631		$	1,326,751		$	67,200		$	687,645		$	—		$	—	$	2,692,395
Collectively evaluated for impairment	$	8,444,559		$	32,609,612		$	7,426,734		$	1,140,936		$	12,577,843		$	23,452,499		$	—	$	85,652,183

The Company considers a loan to be impaired when it is probable that it will be unable to collect all amounts of principal and interest due according to the original terms of the loan agreement. The Company’s analysis under generally accepted accounting principles indicates that the level of the allowance for loan losses is appropriate to cover estimated credit losses on individually evaluated loans as well as estimated credit losses inherent in the remainder of the portfolio. We recognized $226,458 and $126,216 in interest income on loans that were impaired during the years ended December 31, 2012, and 2011, respectively.

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

NOTE 4 - LOANS RECEIVABLE - continued

At December 31, 2012, the Company had 25 impaired loans totaling $4,207,769 or 5% of gross loans. At December 31, 2011, the Company had 18 impaired loans totaling $2,692,395 or 3.05% of gross loans. There were no loans that were contractually past due 90 days or more and still accruing interest at December 31, 2012 or 2011. There were seven loans restructured or otherwise impaired totaling $1,765,817 not already included in nonaccrual status at December 31, 2012. There were 12 loans restructured or otherwise impaired totaling $1,999,781 not already included in nonaccrual status at December 31, 2011. During the year ended December 31, 2012 and 2011, we received approximately $90,986 and $37,452 in interest income in relation to loans on non-accrual status, respectively, and forgone interest income related to loans on non-accrual status was approximately $75,403 and $75,069, respectively.

The following is an analysis of our impaired loan portfolio detailing the related allowance recorded at December 31, 2012:

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded
Commercial	$	5,344	$	5,344	$	—	$	7,130	$	526
Commercial Real Estate	833,827		833,827		—		824,854		52,071
Construction, Land Development, & Other Land	504,027		504,027		—		508,496		29,249
Consumer	—		—		—		—		—
Residential	317,651		317,651		—		318,172		21,264
Residential HELOC	174,371		174,371		—		174,368		7,429

With an allowance recorded
Commercial	$	164,607	$	164,607	$	19,017	$	99,720	$	2,604
Commercial Real Estate	566,492		1,107,104		15,292		1,071,194		31,626
Construction, Land Development, & Other Land	—		—		—		—		—
Consumer	258,762		258,762		62,452		259,719		12,862
Residential	1,038,640		1,038,640		221,941		1,014,203		61,730
Residential HELOC	344,048		473,360		182,155		376,735		7,097

Total
Commercial	$	169,951	$	169,951	$	19,017	$	106,850	$	3,130
Commercial Real Estate	1,400,319		1,940,931		15,292		1,896,048		83,697
Construction, Land Development, & Other Land	504,027		504,027		—		508,496		29,249
Consumer	258,762		258,762		62,452		259,719		12,862
Residential	1,356,291		1,356,291		221,941		1,332,375		82,994
Residential HELOC	518,419		647,731		182,155		551,103		14,526
	$	4,207,769	$	4,877,693	$	500,857	$	4,654,591	$	226,458

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

NOTE 4 - LOANS RECEIVABLE - continued

The following is an analysis of our impaired loan portfolio detailing the related allowance recorded at December 31, 2011:

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate	358,713		515,996		—		512,821		36,274
Construction, Land Development, & Other Land	594,146		627,820		—		626,668		15,638
Consumer	—		—		—		—		—
Residential	379,812		412,804		—		406,734		7,078
Residential HELOC	—		—		—		—		—

With an allowance recorded
Commercial	$	216,168	$	216,168	$	54,168	$	223,638	$	20,863
Commercial Real Estate	35,918		224,926		818		202,965		—
Construction, Land Development, & Other Land	732,605		761,577		29,905		847,916		31,565
Consumer	67,200		196,512		15,607		120,547		2,147
Residential	307,833		307,141		74,511		214,801		12,651
Residential HELOC	—		—		—		—		—

Total
Commercial	$	216,168	$	216,168	$	54,168	$	223,638	$	20,863
Commercial Real Estate	394,631		740,922		818		715,786		36,274
Construction, Land Development, & Other Land	1,326,751		1,389,397		29,905		1,474,584		47,203
Consumer	67,200		196,512		15,607		120,547		2,147
Residential	687,645		719,945		74,511		621,535		19,729
Residential HELOC	—		—		—		—		—
	$	2,692,395	$	3,262,944	$	175,009	$	3,156,090	$	126,216

Troubled Debt Restructurings

The Company considers a loan to be a TDR when the debtor experiences financial difficulties and the Company provides concessions such that we will not collect all principal and interest in accordance with the original terms of the loan agreement. Concessions can relate to the contractual interest rate, maturity date, or payment structure of the note. As part of our workout plan for individual loan relationships, we may restructure loan terms to assist borrowers facing challenges in the current economic environment. At December 31, 2012 and December 31, 2011, we had 14 loans totaling $2,639,229 and 12 loans totaling $1,999,781, respectively, which we considered to be TDRs. During the year ended December 31, 2012, we modified four loans that were considered to be TDRs. We modified the interest rate for two of these loans and the interest rate and term were modified for two of these loans. During the twelve months ended December 31, 2011, we modified eight loans that were considered to be TDRs. We extended the terms for five of these loans and the interest rate and term were modified for three of these loans.

Our policy with respect to accrual of interest on loans restructured in a TDR follows relevant supervisory guidance. That is, if a borrower has demonstrated performance under the previous loan terms and shows capacity to perform under the restructured loan terms, continued accrual of interest at the restructured interest rate is likely. If a borrower was materially delinquent on payments prior to the restructuring but shows capacity to meet the restructured loan terms, the loan will likely continue as nonaccrual going forward. Lastly, if the borrower does not perform under the restructured terms, the loan is placed on nonaccrual status.

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

NOTE 4 - LOANS RECEIVABLE - continued

We will continue to closely monitor these loans and will cease accruing interest on them if management believes that the borrowers may not continue performing based on the restructured note terms. If, after previously being classified as a TDR, a loan is restructured a second time, then that loan is automatically placed on nonaccrual status. Our policy with respect to nonperforming loans requires the borrower to make a minimum of six consecutive payments in accordance with the loan terms before that loan can be placed back on accrual status. Further, the borrower must show capacity to continue performing into the future prior to restoration of accrual status. To date, we have not restored any nonaccrual loan classified as a TDR to accrual status. We believe that all of our modified loans meet the definition of a TDR.

The following table summarizes the recorded investment in our TDRs before and after their modification during the respective period.

	For the year ended December 31, 2012
		Pre-Modification		Post-Modification
		Outstanding		Outstanding
	Number	Recorded		Recorded
	of Contracts	Investment		Investment
Troubled Debt Restructurings
Commercial	1	$	142,500	$	129,363
Commercial real estate	1	500,780		494,637
Consumer	1	45,075		42,870
Residential	1	653,175		651,215
		$	1,341,530	$	1,318,085

There are no loans restructured within the last twelve months that defaulted during the year ended December 31, 2012. The bank considers any loans that are 30 days or more past due to be in default.

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

NOTE 4 - LOANS RECEIVABLE - continued

	For the twelve months ended December 31, 2011
	Number of Contracts	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
Troubled Debt Restructuring
Commercial
Commercial Real Estate	1	$	343,000	$	343,000
Consumer	1	201,000		67,000
Residential	6	369,000		376,000
		$	913,000	$	786,000

NOTE 5 - PREMISES, FURNITURE AND EQUIPMENT

Premises, furniture and equipment consisted of the following:

	December 31,
	2012		2011
Building and improvements	$	366,271	$	337,462
Furniture and equipment	1,229,409		1,099,530
Automobiles	98,496		98,496
Total	1,694,176		1,535,488
Less, accumulated depreciation	1,037,262		871,530
Premises, furniture and equipment, net	$	656,914	$	663,958

Depreciation expense was $149,633 and $194,024 for the years ended 2012 and 2011, respectively.

NOTE 6 - OTHER REAL ESTATE OWNED

Transactions in other real estate owned for the years ended December 31, 2012 and 2011 are summarized below:

	2012			2011
Balance, beginning of year	$	3,181,559		$	3,293,167
Additions	1,127,537			625,711
Sales	(1,829,688		)	(552,920		)
Write downs	(265,011		)	(184,399		)
Balance, end of year	$	2,214,397		$	3,181,559

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

NOTE 7 - DEPOSITS

At December 31, 2012, the scheduled maturities of certificates of deposit were as follows:

Maturing In:	Amount
2013	$	17,153,829
2014	6,153,496
2015	3,323,544
2016	825,712
2017	1,846,585
Total	$	29,303,166

The Company did not have any third party brokered deposits at December 31, 2012 and 2011.

NOTE 8 - FHLB ADVANCES

At December 31, 2012 and December 31, 2011, we had $6,000,000 and $7,000,000 advances outstanding, respectively. FHLB advances at December 31, 2012 consisted of the following:

Interest Basis	Current Rate		Maturity	Outstanding Balance
Convertible	2.615	%	February 25, 2013	$	3,000,000
Fixed	0.370	%	February 11, 2013	$	1,000,000
Fixed	0.430	%	August 12, 2013	$	1,000,000
Fixed	1.070	%	August 11, 2015	$	1,000,000

NOTE 9 - STOCK COMPENSATION PLAN

Under the terms of employment agreements with the Chief Business Development Officer, the Chief Financial Officer (CFO), and the former Chief Executive Officer (CEO) and President, stock options were granted to each as part of their compensation and benefits package. Under these agreements, the former CEO and President was granted 79,399 stock options, the Chief Business Development Officer 61,755 options and the CFO 44,110 options. The former CEO and President resigned on January 21, 2009 at which time 79,399 options were forfeited. All options granted to the executive officers vest over five years. The options have an exercise price of $10.00 per share and terminate ten years 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 Plan has 194,481 shares available to grant at December 31, 2012 with 71,819 options still outstanding. The Company did not grant any options during 2012 or 2011.

The Company did not recognize any stock-based employee compensation expense associated with its stock option grants during 2012 and 2011. The Company recognized the compensation expense for stock option grants with graded vesting schedules on a straight-line basis over the requisite service period of the award. As of December 31, 2012, all the compensation cost related to stock option grants had been recognized.

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

NOTE 9 - STOCK COMPENSATION PLAN - continued

A summary of the activity under the stock option plan for the year ended December 31, 2012 and 2011 is as follows:

	2012			2011
		Weighted				Weighted
		Average				Average
		Exercise				Exercise
	Shares	Price		Shares		Price
Outstanding, beginning of year	71,819	$	10.00	82,391		$	10.00
Granted during the year	—	—
Exercised during the year	—	—
Forfeited during the year	—	—		(10,572	)	10.00
Outstanding, end of year	71,819	$	10.00	71,819		$	10.00
Options exercisable at year end	71,819	$	10.00	71,819		$	10.00

The weighted average contractual life of the options outstanding as of December 31, 2012 is 3.88 years. There was no aggregate intrinsic value of options outstanding or exercisable at December 31, 2012. All of the options outstanding as of December 31, 2012 are fully vested.

NOTE 10 - STOCK WARRANTS

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

At December 31, 2012, 90,000 shares of the outstanding warrants were exercisable. There was no compensation expense related to warrants for the years ended December 31, 2012 and 2011. As of December 31, 2012, all the compensation cost related to stock warrants had been recognized.

NOTE 11 - INCOME TAXES

Income tax benefit is summarized as follows:

	Years ended December 31,
	2012			2011
Current portion:
Federal	$	1,802		$	—
State	22,882			16,476
Total current	24,684			16,476
Deferred income taxes	(214,919		)	(131,050		)
Income tax benefit	$	(190,235	)	$	(114,574	)
Income tax benefit is allocated as follows:
To continuing operations	$	(331,480	)	$	(392,508	)
To other comprehensive income	141,245			277,934
Income tax benefit	$	(190,235	)	$	(114,574	)

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

NOTE 11 - INCOME TAXES - continued

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

	Years ended December 31,
	2012			2011
Deferred tax assets:
Allowance for loan losses	$	248,544		$	366,023
Net operating loss carryforward	2,153,450			2,261,422
Organization and start-up costs	173,258			192,873
Other	356,737			256,654
Deferred tax assets	2,931,989			3,076,972
Valuation allowance	(1,987,632		)	(2,482,541		)
Total deferred tax assets	944,357			594,431

Deferred tax liabilities:
Unrealized gain on securities available for sale	211,545			70,300
Accumulated depreciation	93,210			93,709
Prepaid expenses	43,563			46,326
Loan origination costs	42,436			45,412
Total deferred tax liabilities	390,754			255,747
Net deferred tax asset	$	553,603		$	338,684

Deferred tax assets represent the future tax benefit of deductible differences and, if it is more likely than not that a tax asset will not be realized, a valuation allowance is required to reduce the recorded deferred tax assets to net realizable value. Management has determined that a partial valuation allowance is needed at December 31, 2012. Management’s judgment is based on estimates concerning future income earned and positive earnings for the year ended December 31, 2012. Management has concluded that sufficient positive evidence exists to overcome any and all negative evidence in order to meet the “more likely than not” standard regarding the realization of a portion of net deferred tax assets. The valuation allowance was reduced by $494,909 in 2012. Net deferred tax assets are recorded in other assets on the Company’s consolidated balance sheet.

The Company has a federal net operating loss of $6,250,598 and a state net operating loss of $855,961 as of December 31, 2012. These net operating losses expire in the years 2026 through 2032.

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

	2012			2011
Tax expense (benefit) at statutory rate	$	233,071		$	118,490
Tax exempt income	(111,066		)	(91,089		)
State income, net of federal income tax benefit	15,102			21,498
Change in valuation allowance	(494,909		)	(427,152		)
Other	26,322			(14,255		)
Income tax benefit	$	(331,480	)	$	(392,508	)

The Company had analyzed the tax positions taken or expected to be taken in its tax returns and concluded it has no liability related to uncertain tax positions. Tax returns for 2009 and subsequent years are subject to examination by taxing authorities.

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

NOTE 12 - RELATED PARTY TRANSACTIONS

Certain parties (principally certain directors and executive officers of the Company, their immediate families and business interests) were loan customers of and had other transactions in the normal course of business with the Company. Related party loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than the normal risk of collectibility. The following table summarizes the Bank’s related party loan activity for the year ended December 31, 2012 and 2011:

	2012			2011
Balance, January 1	$	3,893,365		$	3,301,462
Disbursements	1,396,818			918,819
Repayments	(1,746,836		)	(326,916		)
Balance, December 31,	$	3,543,347		$	3,893,365

Deposits by directors, including their affiliates and executive officers, at December 31, 2012 and 2011 were $1,751,645 and $1,636,019, respectively.

NOTE 13 - LEASES

The Company has entered into an agreement to lease an office facility under a noncancellable operating lease agreement expiring in 2023. The Company may, at its option, extend the lease of its office facility at 2023 Sunset Boulevard in West Columbia, South Carolina, for two additional five year periods. The Company also entered into a sale-leaseback agreement in December 2009 for a portion of the property located in Cayce, South Carolina. The lease is for a period of 15 years. The Company may, at its option, extend the lease for three consecutive renewal terms of five years each. In June 2010, the Company entered into a sale-leaseback agreement for the branch and office building located at 1201 Knox Abbot Drive in Cayce, South Carolina. The lease is for a period of 15 years. The Company may, at its option, extend the lease for two consecutive renewal terms of five years each. Minimum rental commitments as of December 31, 2012 are as follows:

2013	$	407,859
2014	416,015
2015	424,336
2016	433,028
2017 and thereafter	3,488,125
Total	$	5,169,363

The leases have various renewal options and require increased rentals under various standard percentages. Rental expenses, net of rental income, charged to occupancy and equipment expense in 2012 and 2011 were $355,899 and $337,326, respectively.

NOTE 14 - COMMITMENTS AND CONTINGENCIES

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

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

NOTE 15 - INCOME PER COMMON SHARE

All income per share calculations have been made using the weighted average number of shares outstanding during the period. The potentially dilutive securities are incentive stock options and unvested shares of restricted stock granted to certain key members of management and warrants granted to the organizers of the Company. The number of dilutive shares is calculated using the treasury method, assuming that all options and warrants were exercisable at the end of each period. No TARP warrants are outstanding. The exercise price of all outstanding options and warrants was greater than the average market price of the Company’s stock during the year and thus, are not considered in the calculation of dilutive earnings per share as the effect is not deemed to be dilutive.

	2012		2011
Net income per common share - basic computation:
Net income available to common shareholders	$	818,727	$	532,868
Average common shares outstanding - basic	$	1,764,439	$	1,764,439
Basic income per common share	$	0.46	$	0.30

NOTE 16 - REGULATORY MATTERS

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct adverse material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

As previously disclosed, following the FDIC’s safety and soundness examination of the Bank in the fourth quarter of 2009, the Bank entered into a Consent Order (the “Consent Order”) with the FDIC and the South Carolina Board of Financial Institutions (the “SCBFI”) on May 11, 2010. The Consent Order set forth specific actions needed to address certain findings from the FDIC’s Report of Examination and to address the Bank’s financial condition, primarily related to capital planning, liquidity/funds management, policy and planning issues, management oversight, loan concentrations and classifications, and non-performing loans. The Board of Directors and management of the Bank have aggressively worked to improve these practices and procedures. As a result, on April 12, 2011, the Bank received notices from the FDIC and SCBFI pursuant to which these regulatory agencies determined that the protection of the depositors, other customers and shareholders of the Bank, as well as the Bank’s safe and sound operation, do not require the continued existence of the Consent Order. Accordingly, the FDIC and SCBFI terminated the Consent Order as of April 8, 2011. Although the Consent Order has been terminated, certain regulatory restrictions and requirements remain, including, among other things, a requirement that the Bank achieve and maintain Total Risk Based capital at least equal to 10% of risk-weighted assets and Tier 1 capital at least equal to 8% of total assets. As of December 31, 2012 and December 31, 2011, the Bank was considered to be in compliance with the minimum capital requirements established by the regulatory restrictions and was considered “well-capitalized” under regulatory capital framework. The Board of Directors and management intend to continue to take all actions necessary to enable the Bank to comply with the requirements of the regulatory restrictions.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum ratios of Tier 1 and total capital as a percentage of assets and off-balance-sheet exposures, adjusted for risk weights ranging from 0% to 100%. Tier 1 capital consists of common shareholders’ equity, excluding the unrealized gain or loss on securities available-for-sale, minus certain intangible assets. Tier 2 capital consists of the allowance for loan losses subject to certain limitations. Total capital for purposes of computing the capital ratios consists of the sum of Tier 1 and Tier 2 capital. The regulatory minimum requirements are 4% for Tier 1 and 8% for total risk-based capital.

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

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

NOTE 16 - REGULATORY MATTERS - continued

The following table summarizes the capital amounts and ratios of the Bank and the regulatory minimum requirements at December 31:

									To Be Well-
									Capitalized Under
					For Capital				Prompt Corrective
	Actual				Adequacy Purposes				Action Provisions
(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
December 31, 2012
Total capital (to risk-weighted assets)	$	12,681	15.98	%	$	6,346	8.00	%	$	7,933	10.00	%
Tier 1 capital (to risk-weighted assets)	11,676		14.72	%	3,173		4.00	%	4,760		6.00	%
Tier 1 capital (to average assets)	11,676		10.18	%	4,587		4.00	%	5,733		5.00	%

December 31, 2011
Total capital (to risk-weighted assets)	$	13,225	15.44	%	$	6,853	8.00	%	$	8,566	10.00	%
Tier 1 capital (to risk-weighted assets)	12,141		14.17	%	3,427		4.00	%	5,140		6.00	%
Tier 1 capital (to average assets)	12,141		9.84	%	4,935		4.00	%	6,168		5.00	%

Under the Bank’s current regulatory restrictions, we are required to achieve and maintain Total Risk Based capital at least equal to 10% of risk-weighted assets and Tier 1 capital at least equal to 8% of total assets. As of December 31, 2012, the Bank was considered to be in compliance with the minimum capital requirements established in the regulatory restrictions and “well-capitalized” under prompt corrective action provisions.

NOTE 17 - UNUSED LINES OF CREDIT

As of December 31, 2012 and 2011, the Company had unused lines of credit to purchase federal funds from unrelated banks totaling $9,550,000 and $9,550,000, respectively. These lines of credit are available on a one to twenty day basis for general corporate purposes. The Company also has a credit line to borrow funds from the FHLB. The remaining credit availability as of December 31, 2012 was $5,840,000.

NOTE 18 - RESTRICTIONS ON DIVIDENDS, LOANS, OR ADVANCES

Since the Company is a bank holding company, its ability to declare and pay dividends is dependent on certain federal and state regulatory considerations, including the guidelines of the Federal Reserve. The Federal Reserve has issued a policy statement regarding the payment of dividends by bank holding companies. In general, the Federal Reserve’s policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the bank holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. The Federal Reserve’s policies also require that a bank holding company serve as a source of financial strength to its subsidiary banks by standing ready to use available resources to provide adequate capital funds to those banks during periods of financial stress or adversity and by maintaining the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks where necessary. In addition, under the prompt corrective action regulations, the ability of a bank holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. These regulatory policies could affect the ability of the Company to pay dividends or otherwise engage in capital distributions.

In addition, since the Company is legal entity separate and distinct from the Bank and does not conduct stand-alone operations, its ability to pay dividends depends on the ability of the Bank to pay dividends to it, which is also subject to regulatory restrictions. As a South Carolina chartered bank, the Bank is subject to limitations on the amount of dividends that it is permitted to pay. Unless otherwise instructed by the South Carolina Board of Financial Institutions, the Bank is generally permitted under South Carolina state banking regulations to pay cash dividends of up to 100% of net income in any calendar year without obtaining the prior approval of the South Carolina Board of Financial Institutions. Under the Federal Deposit Insurance Corporation Improvement Act, the Bank may not pay a dividend if, after paying the dividend, the Bank would be undercapitalized. The FDIC also has the authority under federal law to enjoin a bank from engaging in what in its opinion constitutes an unsafe or unsound practice in conducting its business, including the payment of a dividend

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

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

under certain circumstances. The Bank currently must obtain prior approval from the FDIC and the South Carolina Board of Financial Institutions prior to the payment of any cash dividends.

NOTE 19 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

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

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained if deemed necessary by the Company upon extension of credit is based on management’s credit evaluation of the borrower. Collateral held varies, but may include accounts receivable, negotiable instruments, inventory, property, plant and equipment, and real estate. Commitments to extend credit, including unused lines of credit, amounted to $10,158,860 and $10,228,217 at December 31, 2012 and 2011, respectively.

Standby letters of credit represent an obligation of the Company to a third party contingent upon the failure of the Company’s customer to perform under the terms of an underlying contract with the third party or obligates the Company to guarantee or stand as surety for the benefit of the third party. The underlying contract may entail either financial or nonfinancial obligations and may involve such things as the shipment of goods, performance of a contract, or repayment of an obligation. Under the terms of a standby letter, generally drafts will be drawn only when the underlying event fails to occur as intended. The Company can seek recovery of the amounts paid from the borrower. The majority of these standby letters of credit are unsecured. Commitments under standby letters of credit are usually for one year or less. At December 31, 2012 and 2011, the Company has recorded no liability for the current carrying amount of the obligation to perform as a guarantor; as such amounts are not considered material. The Company had approximately $143,000 and $225,000 in letters of credit outstanding as of December 31, 2012 and 2011 respectively.

NOTE 20 - PREFERRED STOCK

On January 9, 2009, as part of the Capital Purchase Program established by the U.S. Department of the Treasury (“Treasury”) under the Emergency Economic Stabilization Act of 2009 (the “EESA”), the Company entered into a Letter Agreement with Treasury dated January 9, 2010, pursuant to which the Company issued and sold to Treasury 3,285 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A, having a liquidation preference of $1,000 per share (the “Series A Preferred Stock”), and a ten-year warrant to purchase 164 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series B, (the “Series B Preferred Stock”), having a liquidation preference of $1,000 per share, at an initial exercise price of $0.01 per share (the “Warrant”), for an aggregate purchase price of $3,285,000 in cash. The Warrant was immediately exercised. The Preferred Stock, Series A, has a dividend rate of 5% for the first five years and 9% thereafter. The Preferred Stock, Series B, has a dividend rate of 9% per year.

On October 31, 2012, the Treasury sold its Series A and Series B preferred stock of the Company through a private offering structured as a modified Dutch auction. The Company bid on a portion of the preferred stock in the auction after receiving approval from its regulators to do so. The clearing price per share for the Series A Preferred Stock was $825.26 (compared to a stated value of $1,000 per share) and the clearing price per share for the Series B Preferred Stock was $801.00 (compared to a stated value of $1,000 per share). The Company was successful in repurchasing 1,156 shares of the 3,285 shares of Series A preferred stock outstanding through the auction process. The remaining 2,129 shares of Series A preferred stock and 164 shares of Series B preferred stock of the Company held by Treasury were sold to unrelated third-parties through the auction process. The net balance sheet impact was a reduction to shareholders’ equity of $954,001 which is

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

NOTE 20 - PREFERRED STOCK - continued

comprised of a decrease in preferred stock of $1,135,412 and a $181,411 increase to retained earnings related to the discount on the shares repurchased. The redemption of the 1,156 preferred shares will save the Company $57,800 annually in dividend expenses.

NOTE 21 - FAIR VALUE OF FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

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

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

Cash and Due from Banks and Certificates of Deposit - The carrying amount is a reasonable estimate of fair value, due to the short-term nature of such items and is classified as Level 1.

Federal Funds Sold - Federal funds sold are for a term of one day, and the carrying amount approximates the fair value and is classified as Level 1.

Investment Securities - The fair values of securities held-to-maturity are based on quoted market prices or dealer quotes. The fair values of securities available-for-sale equal the carrying amounts, which are the quoted market prices and classified as Level 2. If quoted market prices are not available, fair values are based on quoted market prices of comparable securities. The carrying value of nonmarketable equity securities approximates the fair value since no ready market exists for the stocks resulting in a Level 2 classification.

Loans Receivable — The fair value of loans is calculated using discounted cash flows by loan type resulting in a Level 3 classification. For certain categories of loans, such as variable rate loans which are repriced frequently and have no significant change in credit risk, fair values are based on the carrying amounts. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

Deposits - The fair value of demand deposits, savings, and money market accounts is the amount payable on demand at the reporting date. The fair values of certificates of deposit are estimated using a discounted cash flow calculation that applies current interest rates to a schedule of aggregated expected maturities and are classified as Level 2.

FHLB Advances - For disclosure purposes, the fair value of the Federal Home Loan Bank (the “FHLB”) fixed rate borrowing is estimated using discounted cash flows, based on the current incremental borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.

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

Off-Balance Sheet Financial Instruments - In the ordinary course of business, the Company enters into off-balance sheet financial instruments consisting of commitments to extend credit and letters of credit. Because these commitments are made using variable rates and have short maturities, the contract value is a reasonable estimate of fair value.

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

NOTE 21 - FAIR VALUE OF FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS — continued

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

	Fair Value Measurements
					Quoted
					Prices in
					Active Markets		Significant
					for Identical		Other		Significant
					Assets or		Observable		Unobservable
	Carrying				Liabilities		Inputs		Inputs
	Amount		Fair Value		(Level 1)		(Level 2)		(Level 3)

December 31, 2012
Financial Instruments — Assets:
Cash and due from banks	$	2,483,503	$	2,483,503	$	2,483,503	$	—	$	—
Securities available-for-sale	23,463,551		23,463,551		—		23,463,551		—
Securities held-to-maturity	3,506,154		3,601,700		—		3,601,700		—
Nonmarketable equity securities	555,000		555,000		—		555,000		—
Loans, net	79,406,192		77,889,798		—		—		77,889,798
Accrued interest receivable	463,260		463,260		463,260		—		—

Financial Instruments — Liabilities:
Demand deposit, interest-bearing transaction, and savings accounts	65,499,954		65,499,954		65,499,954		—		—
Time Deposits	29,303,166		29,560,448		—		29,560,448		—
Federal Home Loan Bank advances	6,000,000		6,024,081		—		6,024,081		—
Accrued interest payable	22,357		22,357		22,357		—		—

	Carrying		Estimated
	Amount		Fair Value
December 31, 2011
Financial Instruments - Assets:
Cash and due from banks	$	2,486,703	$	2,486,703
Federal funds sold	86,000		86,000
Securities available-for-sale	26,952,357		26,952,357
Nonmarketable equity securities	615,900		615,900
Loans, net	86,948,990		86,064,131
Accrued interest receivable	561,545		561,545

Financial Instruments - Liabilities:
Demand deposit, interest-bearing transaction, and savings accounts	67,492,970		67,492,970
Time Deposits	35,033,479		35,435,465
Federal Home Loan Bank advances	7,000,000		7,018,342
Accrued interest payable	28,130		28,130

	December 31, 2012				December 31,2011
	Notional		Estimated		Notional		Estimated
	Amount		Fair Value		Amount		Fair Value
Off-Balance Sheet Financial Instruments:
Commitments to extend credit	$	10,158,860	$	—	$	10,228,217	$	—
Financial standby letters of credit	143,000		—		225,000		—

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

NOTE 21 - FAIR VALUE OF FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS — continued

Fair Value Measurements

The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine the fair value. These levels are:

Level 1 - Valuation is based upon quoted prices for identical instruments traded in active markets.

Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

Level 3 - Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of option pricing models, discounted cash flow models and similar techniques.

Following is a description of valuation methodologies used for assets and liabilities recorded at fair value.

Investment Securities Available for Sale

Investment securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange such as the New York Stock Exchange, Treasury securities that are traded by dealers or brokers in active over-the counter markets and money market funds. Level 2 securities include mortgage backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.

Loans

The Company does not record loans at fair value on a recurring basis, however, from time to time, a loan is considered impaired and an allowance for loan loss is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan are considered impaired. Once a loan is identified as individually impaired, management measures impairment. The fair value of impaired loans is estimated using one of several methods, including the collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring a specific allowance represent loans for which the fair value of expected repayments or collateral exceed the recorded investment in such loans. At December 31, 2012 and 2011, a significant amount of the impaired loans were evaluated based upon the fair value of the collateral. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the loan as nonrecurring Level 3. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the loan as nonrecurring Level 3.

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

NOTE 21 - FAIR VALUE OF FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS — continued

Other Real Estate Owned

Foreclosed assets are adjusted to fair value upon transfer of the loans to other real estate owned. Real estate acquired in settlement of loans is recorded initially at estimated fair value of the property less estimated selling costs at the date of foreclosure. The initial recorded value may be subsequently reduced by additional allowances, which are charges to earnings if the estimated fair value of the property less estimated selling costs declines below the initial recorded value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level 3. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset as nonrecurring Level 3.

The table below presents the balances of assets and liabilities measured at fair value on a recurring basis by level within the hierarchy.

	December 31, 2012
	Total		Level 1		Level 2		Level 3
Securities available-for-sale
Government sponsored enterprises	$	1,000,520	$	—	$	1,000,520	$	—
Corporate bonds	489,525		—		489,525		—
Small Business Administration Securities	12,150,209		—		12,150,209		—
Mortgage-backed securities	2,751,142		—		2,751,142		—
State, county and municipals	7,072,155		—		7,072,155		—
Total assets	$	23,463,551	$	—	$	23,463,551	$	—

	December 31, 2011
	Total		Level 1		Level 2		Level 3
Securities available-for-sale
Government sponsored enterprises	$	5,784,079	$	—	$	5,784,079	$	—
Mortgage-backed securities	1,597,764		—		1,597,764		—
Small Business Administration Securities	11,856,260		—		11,856,260		—
State, county and municipals	7,714,254		—		7,714,254		—
Total assets	$	26,952,357	$	—	$	26,952,357	$	—

There were no liabilities measured at fair value on a recurring basis at December 31, 2012 or 2011.

Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The following table presents the assets and liabilities measured at fair value on a nonrecurring basis as of December 31, 2012 and 2011, aggregated by level in the fair value hierarchy within which those measurements fall.

	December 31, 2012
	Total		Level 1		Level 2		Level 3
Collateral dependent impaired loans	$	3,240,353	$	—	$	—	$	3,240,353
Other real estate owned	2,214,397		—		—		2,214,397
Total assets	$	5,454,750	$	—	$	—	$	5,454,750

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

NOTE 21 - FAIR VALUE OF FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS — continued

	December 31, 2011
	Total		Level 1		Level 2		Level 3
Collateral dependent impaired loans	$	2,346,663	$	—	$	—	$	2,346,663
Other real estate owned	3,181,559		—		—		3,181,559
Total assets	$	5,528,222	$	—	$	—	$	5,528,222

	Valuation Technique	Unobservable Input	General Range
Nonrecurring Measurements:
Collateral dependent impaired loans	Discounted appraisals	Collateral discounts	0 – 10%
Other real estate owned	Discounted appraisals	Collateral discounts and Estimated costs to sell	0 – 10%

There were no liabilities measured at fair value on a nonrecurring basis at December 31, 2012 or 2011.

Impaired loans which are measured for impairment using the fair value of collateral for collateral dependent loans, had a carrying value of $3,527,660 at December 31, 2012 with a valuation allowance of $287,307. Impaired loans had a carrying value of $2,496,596 at December 31, 2011, with a valuation allowance of $149,933.

Other real estate owned, which is measured at the lower of carrying or fair value less costs to sell, had a net carrying value of $2,214,397 at December 31, 2012 and $3,181,559 at December 31, 2011. There was $265,011 in write downs of other real estate owned during the year ended December 31, 2012 and there were $184,399 in write downs of other real estate owned during the year ended December 31, 2011.

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

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

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

Condensed Balance Sheets

	December 31,
	2012		2011
Assets:
Cash	$	3,146	$	3,146
Investment in banking subsidiary	12,437,087		12,276,853
Deferred tax asset	23,853		23,853
Total assets	$	12,464,086	$	12,303,852
Liabilities and shareholders’ equity:
Other liabilities	$	14,991	$	22,387
Total liabilities	14,991		22,387
Shareholders’ equity	12,449,095		12,281,465
Total liabilities and shareholders’ equity	$	12,464,086	$	12,303,852

Condensed Statements of Income

	For the years ended
	December 31,
	2012			2011
Income:
Dividend income from banking subsidiary	$	1,130,169		$	—
Expenses:
Interest	—			4,188
Other expenses	—			2,472
Total expense	—			6,660
Loss before income taxes and equity in undistributed earnings of banking subsidiary	—			(6,660		)
Equity in undistributed income of banking subsidiary	(113,786		)	723,814
Income tax benefit	—			23,853
Net income	$	1,016,983		$	741,007

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

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

Condensed Statements of Cash Flows

	For the years ended
	December 31,
	2012			2011
Cash flows from operating activities:
Net income	$	1,016,983		$	741,007
Adjustments to reconcile net income to net cash used by operating activities:
Equity in undistributed (income) losses of banking subsidiary	113,786			(723,814		)
Decrease in accrued interest payable	—			(4,856		)
Decrease in other liabilities	(7,236		)	—
Increase in deferred tax asset	—			(23,853		)
Net cash used by operating activities	1,123,533			(11,516		)
Cash flows from financing activities:
Dividends paid on preferred stock	(169,532		)	(358,020		)
Repurchase of Preferred Stock	(954,001		)	—
Net cash used by financing activities	(1,123,533		)	(358,020		)
Net decrease in cash and cash equivalents	—			(369,536		)
Cash, beginning of year	3,146			372,682
Cash, end of year	$	3,146		$	3,146

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

CORPORATE DATA

ANNUAL MEETING:

The Annual Meeting of Shareholders of Congaree Bancshares, Inc. and Subsidiary, will be held on May 16, 2013 at Clarion Inn - Airport, 500 Chris Drive, West Columbia, South Carolina 29169.

CORPORATE OFFICE:

1219 Knox Abbott Drive

Cayce, South Carolina 29033

Phone 803.794.2265

INDEPENDENT AUDITORS:	CORPORATE COUNSEL:

Elliott Davis, LLC	Nelson Mullins Riley & Scarborough, LLP
1901 Main Street, Suite 900	Atlantic Station
Columbia, South Carolina 29202	201 17th Street NW, Suite 1700
	Atlanta, Georgia 30363

STOCK INFORMATION:

The Common Stock of Congaree Bancshares, Inc. is listed on the OTC bulletin board under the ticker symbol CNRB.OB. Trading and quotations of the common stock have been limited and sporadic. Trading prices have ranged from $3.55 per share to $1.25 per share during 2012. As of December 31, 2012, there were 1,764,439 shares outstanding.

The ability of Congaree Bancshares, Inc. to pay cash dividends is dependent upon receiving cash in the form of dividends from Congaree State Bank. However, certain restrictions exist regarding the ability of the Bank to transfer funds to the Company in the form of cash dividends. All of the Bank’s dividends to the Company are payable only from the retained earnings of the Bank.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Based on our management’s evaluation (with participation of our principal executive officer and principal financial officer), as of the end of the period covered by this report, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and is accumulated and communicated to our management, including our principal executive officer and principal financial officer as appropriate to allow timely decisions regarding required disclosure.

Management’s Report on Internal Control Over Financial Reporting

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

Under the supervision and with the participation of management, including the principal executive officer and the principal financial officer, our management has evaluated the effectiveness of our internal control over financial reporting as of December 31, 2012 based on the criteria established in a report entitled “Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission” and the interpretive guidance issued by the Commission in Release No. 34-55929. Based on this evaluation, our management has evaluated and concluded that our internal control over financial reporting was effective as of December 31, 2012.

We are continuously seeking to improve the efficiency and effectiveness of our operations and of our internal controls. This results in modifications to our processes throughout the company. However, there has been no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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

Internal Control over Financial Reporting

There was no change in our internal control over financial reporting during our fourth quarter of fiscal 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information.

None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance.

Information required by Item 10 is hereby incorporated by reference from our proxy statement for our 2013 annual meeting of shareholders to be held on May 16, 2013.

Item 11. Executive Compensation.

Information required by Item 11 is hereby incorporated by reference from our proxy statement for our 2013 annual meeting of shareholders to be held on May 16, 2013.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Information required by Item 12 is hereby incorporated by reference from our proxy statement for our 2013 annual meeting of shareholders to be held on May 16, 2013.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

Information required by Item 13 is hereby incorporated by reference from our proxy statement for our 2013 annual meeting of shareholders to be held on May 16, 2013.

Item 14. Principal Accountant and Fees.

Information required by Item 14 is hereby incorporated by reference from our proxy statement for our 2013 annual meeting of shareholders to be held on May 16, 2013.

PART IV

Item 15. Exhibits.

(a)(1) Financial Statements

The following consolidated financial statements are included in Item 8 of this report:

· Report of Independent Registered Public Accounting Firm

· Consolidated Balance Sheets as of December 31, 2012 and 2011

· Consolidated Statements of Income for the Years Ended December 31, 2012 and 2011

· Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2012 and 2011

· Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2012 and 2011

· Consolidated Statements of Cash Flows for the Years Ended December 31, 2012 and 2011

· Notes to Consolidated Financial Statements

(2) Financial Statement Schedules

These schedules have been omitted because they are not required, are not applicable or have been included in our consolidated financial statements.

(3) Exhibits

See the “Exhibit Index” immediate following the signature page to this report.

SIGNATURES

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

		CONGAREE BANCSHARES, INC.

Date: March 28, 2013	By:	/s/ Charles A. Kirby
		Charles A. Kirby
		President and Chief Executive Officer (Principal Executive Officer)


Date: March 28, 2013	By:	/s/ Charlie T. Lovering
		Charlie T. Lovering
		Chief Financial Officer (Principal Financial and Accounting Officer)

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Charles A. Kirby, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.

Signature	Title	Date

/s/ Thomas Hal Derrick	Director	March 28, 2013
Thomas Hal Derrick

/s/ Charles A. Kirby	President and Chief Executive Officer	March 28, 2013
Charles A. Kirby	(Principal Executive Officer)

/s/ Stephen P. Nivens	Senior Vice President, Director	March 28, 2013
Stephen P. Nivens

/s/ E. Daniel Scott	Director	March 28, 2013
E. Daniel Scott

/s/ Nitin C. Shah	Director	March 28, 2013
Nitin C. Shah

/s/ J. Larry Stroud	Director	March 28, 2013
J. Larry Stroud

/s/ Donald E. Taylor	Director	March 28, 2013
Donald E. Taylor

/s/ John D. Thompson	Director	March 28, 2013
John D. Thompson

/s/ Charlie T. Lovering	Chief Financial Officer,	March 28, 2013
Charlie T. Lovering	(Principal Financial and Accounting Officer)

/s/ Harry Michael White	Director	March 28, 2013
Harry Michael White

/s/ Samuel M. Corley	Director	March 28, 2013
Samuel M. Corley

/s/ J. Kevin Reeley	Director	March 28, 2013
J. Kevin Reeley

EXHIBIT INDEX

3.1. Articles of Incorporation (incorporated by reference to Exhibit 3.1 of the Company’s Form SB-2, File No. 333-131931)

3.2 Articles of Amendment to Articles of Incorporation (incorporated by reference to Exhibit 3.2 of the Company’s Form SB-2, File No. 333-131931).

3.3 Articles of Amendment to the Company’s Restated Articles of Incorporation establishing the terms of the Series A Preferred Stock (incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed on January 12, 2009).

3.4 Articles of Amendment to the Company’s Restated Articles of Incorporation establishing the terms of the Series B Preferred Stock (incorporated by reference to Exhibit 3.2 of the Company’s Form 8-K filed on January 12, 2009).

3.5 Bylaws (incorporated by reference to Exhibit 3.3 of the Company’s Form SB-2, File No. 333-131931).

4.1 See Exhibits 3.1 and 3.2 for provisions in Congaree Bancshares, Inc.’s Articles of Incorporation and Bylaws defining the rights of holders of the common stock (incorporated by reference to Exhibit 4.1 of the Company’s Form SB-2, File No. 333-131931).

4.2 Form of certificate of common stock (incorporated by reference to Exhibit 4.2 of the Company’s Form SB-2, File No. 333-131931).

4.3 Form of Series A Preferred Stock Certificate (incorporated by reference to Exhibit 4.2 of the Company’s Form 8-K filed on January 12, 2019).

4.4 Form of Series B Preferred Stock Certificate (incorporated by reference to Exhibit 4.3 of the Company’s Form 8-K filed on January 12, 2019).

10.1 Employment Agreement between Congaree Bancshares, Inc. and Charlie T. Lovering dated September 14, 2006 (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed September 14, 2006).*

10.2 Employment Agreement between Congaree Bancshares, Inc. and Stephen P. Nivens dated February 15, 2006 (incorporated by reference to Exhibit 10.2 of the Company’s Form SB-2, File No. 333-121485).*

10.3 Employment Agreement by and between Charles A. Kirby, Congaree Bancshares, Inc. and Congaree State Bank dated October 20, 2010. (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed October 26, 2010).*

10.4 Amendment to the Amended and Restated Employment Agreement of Stephen P. Nivens, dated October 20, 2010. (incorporated by reference to Exhibit 10.3 of the Company’s Form 8-K filed October 26, 2010).*

10.5 Amendment to the Amended and Restated Employment Agreement of Charlie T. Lovering, dated October 20, 2010. (incorporated by reference to Exhibit 10.4 of the Company’s Form 8-K filed October 26, 2010).*

10.6 Form of Stock Warrant Agreement (incorporated by reference to Exhibit 10.5 of the Company’s Form SB-2, File No. 333-131931).*

10.7 Congaree Bancshares, Inc. 2007 Stock Incentive Plan. (incorporated by reference to Exhibit 10.5 of the Company’s Form10-K as for the period ended December 31, 2007).*

10.9 Amendment No. 1 to the Congaree Bancshares, Inc. 2007 Stock Incentive Plan adopted October 15, 2008 (incorporated by reference to the Company’s Form 10-Q as Exhibit 10.1 for the period ended September 30, 2008).*

21.1 Subsidiaries of the Company.

23.1 Consent of Elliott Davis, LLC.

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.

99.1 Certification of the Chief Executive Officer Pursuant to Section 111(b)(4) of the Emergency Economic Stabilization Act of 2009.

99.2 Certification of the Chief Financial Officer Pursuant to Section 111(b)(4) of the Emergency Economic Stabilization Act of 2009.

101 The following materials from the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, formatted in eXtensible Business Reporting Language (XBRL); (i) the Consolidated Balance Sheets at December 31, 2012 and December 31, 2011, (ii) Consolidated Statements of Income for the years ended December 31, 2012 and 2011, (iii) Consolidated Statements of Comprehensive Income for the year ended December 31, 2012 and 2011 (iv) Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2012 and 2011, (v) Consolidated Statements of Cash Flows for the years ended December 31, 2012 and 2011, and (vi) Notes to Consolidated Financial Statements*.

* Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

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

* Copies of exhibits are available upon written request to Corporate Secretary, Congaree Bancshares, Inc., 1201 Knox Abbott Drive, Cayce, South Carolina 29033.

For the twelve months ended
December 31, 2011

Troubled Debt Restructurings that subsequently
defaulted during the period

Number of
Contracts

Recorded
Investment

Residential