UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

(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, 2015
or
o	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to

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

For the fiscal year ended December 31, 2014

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)

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 þ~~

~~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 þx

Indicate by check mark ~~whether~~if the registrant ~~(1)~~is not ~~has~~required ~~filed~~to ~~all~~file reports ~~required~~pursuant to ~~be filed by~~ Section 13 or Section 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~~Act. ~~Yes þ 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 þ o No ox

Indicate by check mark ifwhether ~~disclosure~~the ofregistrant (1) ~~delinquent~~has ~~filers~~filed ~~pursuant~~all reports required to ~~Item~~be ~~405~~filed ofby ~~Regulation~~Section ~~S-K~~13 isor ~~not~~15(d) ~~contained~~of ~~herein,~~the ~~and~~Securities ~~will~~Exchange ~~not~~Act ~~be contained,~~of to1934 during the ~~best~~preceding 12 ofmonths ~~registrant’s~~(or ~~knowledge,~~for insuch ~~definitive~~shorter ~~proxy~~period orthat ~~information~~the ~~statements~~registrant ~~incorporated~~was byrequired ~~reference in~~to ~~Part~~file ~~III~~such ofreports), ~~this~~and ~~Form~~(2) ~~10-K~~has orbeen ~~any~~subject ~~amendment~~ to ~~this~~such filing ~~Form~~requirements ~~10-K.~~for þthe past 90 days.

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

~~The~~Indicate ~~aggregate~~by ~~market~~check ~~value~~mark ofwhether the ~~voting~~registrant has submitted electronically and ~~nonvoting~~ ~~common~~posted ~~equity~~on ~~held~~its bycorporate ~~non-affiliates~~Web ofsite, ~~the~~if ~~registrant~~any, ~~(computed~~every byInteractive ~~reference~~Data File required to ~~the~~be ~~price~~submitted and atposted ~~which~~pursuant ~~the~~to ~~stock~~Rule ~~was~~405 ~~most recently~~of ~~sold)~~Regulation ~~was~~S-T ~~$5,587,155~~(§ as232.405 of this chapter) during the ~~last~~preceding ~~business~~12 ~~day~~months of(or for such shorter period that the registrant’s ~~most~~was ~~recently~~required ~~completed~~to ~~second~~submit ~~fiscal~~and ~~quarter~~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. x

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 $9,020,448 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 þx

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 1018, ~~2015~~2016
Common Stock, $.01 par value per share		1,~~764~~765,~~439~~939 shares

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s ~~Proxy~~definitive ~~Statement~~proxy statement relating to ~~the registrant’s~~its ~~Annual~~annual ~~Meeting~~or ofspecial ~~Shareholders,~~meeting toof beshareholders ~~held~~which oninvolves ~~May~~the ~~21,~~election ~~2015,~~of directors 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;
our ability to successfully consummate our previously announced merger with Carolina Financial Corporation, including the ability to obtain required governmental approvals of the merger on the proposed terms and schedule or that the terms of the proposed merger may need to be unfavorably modified to satisfy such approvals or other closing conditions;
the diversion of management time from core banking functions due to merger-related issues;
potential difficulty in maintaining relationships with clients, associates or business partners as a result of our previously announced merger with Carolina Financial Corporation;
increases in competitive pressure in the banking and financial services industries;
changes in the interest rate environment, which could reduce anticipated or actual margins;
our expectations regarding our operating revenues, expenses, effective tax rates and other results of operations;
changes in political conditions or the legislative or regulatory environment, including 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;
cybersecurity breaches, including potential business disruptions or financial losses;
changes in technology;
our current and future products, services, applications and functionality and plans to promote them;
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;
examinations by our regulatory authorities, including the possibility that the regulatory authorities may, among other things, require us to increase our allowance for loan losses or write-down assets;
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 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;
our ability to attract and retain key personnel;
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”).

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 update or otherwise revise any forward-looking statements.

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 located at 1201 Knox Abbott Drive, Cayce, South Carolina and a second office located at 2023 Sunset Boulevard, West Columbia, South Carolina.

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, ~~2014~~2015, our consolidated total assets were $~~112~~109,~~922~~141,~~086~~050, our consolidated total loans were $7880,~~426~~980,~~868~~708, our consolidated total deposits were $8790,~~958~~541,~~312~~366, and our consolidated total shareholders’ equity was approximately $13,~~344~~559,~~948~~606.

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.

Significant Recent Developments

On January 5, 2016, Carolina Financial Corporation (“Carolina Financial”), the parent holding company for CresCom Bank, CBAC, Inc. (the “Merger Sub”), a wholly-owned subsidiary of the Carolina Financial, and the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”), which provides that, subject to the terms and conditions set forth in the Agreement, Carolina Financial will acquire the Company in a cash and stock transaction with a total current value of approximately $16.278 million.

Subject to the terms and conditions of the Merger Agreement, the Merger Sub will merge with and into the Company, and the Company will then promptly merge with and into Carolina Financial, with Carolina Financial being the surviving corporation in the merger. In addition, as soon as practicable following the merger of Merger Sub with and into the Company, the Bank will be merged with and into CresCom Bank.

The Merger Agreement contains customary representations and warranties from Carolina Financial and the Company, and Carolina Financial and the Company have agreed to customary covenants and agreements, including, among others, covenants and agreements relating to ( l ) the conduct of their respective businesses during the interim period between the execution of the Merger Agreement and the closing of the merger, (2) the Company’s obligation to facilitate its shareholders’ consideration of, and voting upon, the necessary approval of the Merger Agreement, (3) the recommendation by the board of directors of the Company in favor of the necessary approval by its shareholders, (4) the Company’s non-solicitation obligations relating to alternative business combination transactions, and (5) Carolina Financials’ intention to establish an advisory board consisting of the current directors of the Company.

The boards of directors of Carolina Financial and the Company have approved the Merger Agreement. The transaction is anticipated to close in the second quarter of 2016, subject to customary closing conditions, including regulatory approvals, the approval of the shareholders of the Company and other customary closing conditions.

The Merger Agreement provides certain termination rights for both Carolina Financial and the Company including, but not limited to, a right by either party to terminate the agreement if both (A) the average of the daily closing price of Carolina Financial common stock over a specified period prior to the anticipated closing date is less than 80% of closing price on the date of the Merger Agreement and (B) the average of the daily closing price of Carolina Financial common stock over the same specified period is down 15% more than any change in the KBW Nasdaq Regional Banking Index (KRX) since the date of the Merger Agreement. In the event that the Company provides notice of its intent to terminate the Merger Agreement due to these conditions being met, Carolina Financial may, but is not obligated to, increase the exchange ratio. The Company may elect to accept the increased exchange ratio or proceed with termination of the Merger Agreement. The Merger Agreement further provides that upon termination of the Merger Agreement under certain circumstances, the Company will be obligated to pay Carolina Financial a termination fee of $750,000.

The forgoing description of the Merger Agreement and the transactions contemplated thereby does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement, which is incorporated as Exhibit 2.1 to this Annual Report on Form 10-K.

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. 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. The office 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 34,~~800~~700 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~~2014, Lexington County’s population increased by 2125.511% (an increase of 4653,~~377~~431 people), for a ranking of ~~sixth~~eight among the 46 counties in South Carolina in terms of population growth over the last decade. Based on a ~~2010~~2014 estimate, Lexington County ranks ~~sixth~~eight as far as the largest counties, amongst the top ten in the State. In ~~2010~~2014, Lexington County had a total of 62270,~~391~~263 residents. According to the most recent data published by the FDIC, as of June 30, ~~2014~~2015, the Bank maintained a 2.6145% deposit market share in Lexington County. As of June 30, ~~2014~~2015, our market share in Cayce, South Carolina is is 12.4932% and our market share in West Columbia, South Carolina is 87.8425%.

Despite being in what we believe is one of the best markets in South Carolina, we may be particularly sensitive to changes in the state and local economies. The economic downturn that began in the latter half of 2007 resulted in higher unemployment rates and lower property values in our South Carolina markets. As a result, we ~~are~~have ~~spending~~spent significant time on finding credit solutions for our customers and managing and disposing of ~~real~~ real estate acquired in settlement of loans as effectively as possible. The weakening in the state and local economies ~~has~~ also impacted our loan demand and, to a lesser extent, available deposits. While economic conditions in our primary markets in South Carolina, as well as the U.S. and worldwide, have shown signs of improvement, there can be no assurance that this improvement will continue or that our local markets will not experience another economic decline.

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, ~~2014~~2015, we had gross loans of $7880,~~426~~980,~~868~~708, representing 6974.52% 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~~loan committee of ~~directors’~~the ~~loan~~board ~~committee~~of directors. 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, ~~2014~~2015, our allowance for loan losses was approximately 1.2833% 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, ~~2014~~2015, loans secured by first or second mortgages on real estate made up approximately $6669,~~810~~095,~~711~~913, or 85% of our loan portfolio. These loans will generally fall into one of two categories, commercial real estate and residential home equity lines of credit, but also include residential real estate. 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% 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% of total capital. An institution will come under increased supervisory scrutiny as the total of such loans approaches these levels. ~~As of December 31, 2014 non-1-to-4 family residential loans equaled 22.6% of total capital and all loans in excess of supervisory guidelines equaled 28.5% 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, ~~2014~~2015, our individual residential real estate loans ranged in size from $712,~~247~~838 to $1,~~261~~135,~~465~~065, with an average loan size of approximately $~~124~~117,~~308~~264. 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, ~~2014~~2015, residential real estate loans (other than construction loans) totaled $11,~~560~~491,~~614~~959, or 1514% of our loan portfolio.

· Residential Home Equity Lines of Credit. At December 31, ~~2014~~2015, our individual residential home equity lines of credit ranged in principal balances from $0 to $~~506~~599,~~676~~329, with an average principal balance of approximately $6863,~~135~~990. 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, ~~2014~~2015, the principal balance of residential home equity lines of credit totaled $1614,~~995~~525,~~363~~638, or 2118% of our loan portfolio.

· Commercial Real Estate Loans. At December 31, ~~2014~~2015, our individual commercial real estate loans ranged in size from $0 to $1,~~202~~184,~~602~~741, with an average loan size of approximately $~~266~~232,~~292~~425. 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, ~~2014~~2015, commercial real estate loans (other than construction loans) totaled $3032,~~280~~539,~~899~~464, or 3940% 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, ~~2014~~2015, total construction, land development, and other land loans amounted to $710,~~973~~538,~~835~~852, or 1013% 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, ~~2014~~2015, commercial loans amounted to $10,~~308~~503,~~132~~730, or 13% 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,~~308~~381,~~025~~065 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, ~~2014~~2015, we had 2220 full-time employees and ~~five~~four part-time employees. 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 Developments

~~The~~Although ~~Dodd-Frank~~the ~~Wall~~financial ~~Street~~crisis ~~Reform~~has ~~and~~now ~~Consumer~~passed, ~~Protection~~two ~~Act.~~legislative ~~The~~and regulatory responses – the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) ~~impacts~~and ~~financial institutions~~the inBasel ~~numerous~~III-based ~~ways,~~capital ~~including:~~rules – will continue to have an impact on our operations.

· The ~~creation~~Dodd-Frank ofWall aStreet ~~Financial~~Reform ~~Stability~~and ~~Oversight~~Consumer Protection ~~Council~~Act. ~~responsible~~On ~~for~~July ~~monitoring~~21, ~~and~~2010, ~~managing~~President ~~systemic~~Obama ~~risk~~signed into law The Dodd-Frank Act. The Dodd-Frank Act specifically impacts financial institutions in numerous ways, including:

·The ~~Granting~~creation ~~additional authority to the Board~~ of ~~Governors~~a ofFinancial ~~the~~Stability ~~Federal~~Oversight ~~Reserve~~Council ~~(the~~responsible for ~~“Federal~~monitoring ~~Reserve”)~~and tomanaging ~~regulate~~systemic ~~certain types of nonbank financial companies~~risk,
7Granting additional authority to the Board of Governors of the Federal Reserve (the “Federal Reserve”) to regulate certain types of nonbank financial companies,
· Granting new authority to the FDIC as liquidator and receiver,
· Changing the manner in which deposit insurance assessments are made,
· Requiring regulators to modify capital standards,
· Establishing the ~~Bureau of~~ Consumer Financial Protection Bureau (the “CFPB”),
· Capping interchange fees that banks with assets of $10 billion or more charge merchants for debit card transactions,
· Imposing more stringent requirements on mortgage lenders, and
· Limiting banks’ proprietary trading activities.

There are many provisions in the Dodd-Frank Act mandating regulators to adopt new regulations and conduct studies upon which future regulation may be based. While some have been issued, many remain to be issued. Governmental intervention and new regulations could materially and adversely affect our business, financial condition and results of operations.

Basel Capital Standards. The Basel Committee on Banking Supervision, an international forum for cooperation on banking supervisory matters, promulgates capital standards for banking organizations. In July 2013, the federal bank regulatory agencies issued a final rule that will revise their risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision (“Basel III”) and certain provisions of the Dodd-Frank Act. The final rule applies to all depository institutions, top-tier bank holding companies with total consolidated assets of $500 million or more (which does not include the Company) and top-tier savings and loan holding companies. The final rule became effective for the Bank on January 1, 2015 (subject to a phase-in period for certain provisions), and all of the requirements in the final rule will be fully phased in by January 1, 2019.

Effective January 1, 2015, the final rule requires the Bank to comply with the following new minimum capital ratios: (i) a new common equity Tier 1 capital ratio of 4.5% of risk-weighted assets; (ii) a Tier 1 capital ratio of 6.0% of risk-weighted assets (increased from the current requirement of 4.0%); (iii) a total capital ratio of 8.0% of risk-weighted assets (unchanged from current requirement); and (iv) a leverage ratio of 4.0% of total assets. These are the initial capital requirements, which will be phased in over a five-year period. When fully phased in on January 1, 2019, the rule will require the Bank to maintain (i) a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% common equity Tier 1 ratio as that buffer is phased in, effectively resulting in a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 7.0% upon full implementation), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation), (iii) a minimum ratio of total capital to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation), and (iv) a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average assets.

The capital conservation buffer requirement will be phased in beginning January 1, 2016, at 0.625% of risk-weighted assets, increasing each year until fully implemented at 2.5% on January 1, 2019. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of common equity Tier 1 to risk-weighted assets above the minimum but below the conservation buffer will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall.

The final rule also revised the “prompt corrective action” regulations pursuant to Section 38 of the Federal Deposit Insurance Act by (i) introducing a common equity Tier 1 capital ratio requirement at each level (other than critically undercapitalized), with the required ratio being 6.5% for well-capitalized status; (ii) increasing the minimum Tier 1 capital ratio requirement for each category, with the minimum ratio for well-capitalized status being 8.0% (as compared to the current 6.0%); and (iii) eliminating the current provision that provides that a bank with a composite supervisory rating of 1 may have a 3.0% Tier 1 leverage ratio and still be well-capitalized.

~~The~~There ~~new~~are ~~capital~~many ~~requirements~~provisions ~~also include changes~~ in the ~~risk~~Dodd-Frank Act ~~weights~~mandating ofregulators ~~assets~~ to ~~better~~adopt ~~reflect~~new ~~credit~~regulations ~~risk~~ and ~~other~~conduct ~~risk~~studies ~~exposures.~~upon ~~These~~which ~~include~~future aregulation ~~150%~~may ~~risk~~be ~~weight~~based. ~~(up~~While ~~from 100%)~~some ~~for certain high volatility commercial real estate acquisition, development and construction loans and nonresidential mortgage~~have ~~loans~~been ~~that are 90 days past due or otherwise on nonaccrual status~~issued, amany ~~20%~~remain ~~(up~~to ~~from~~be ~~0%)~~issued. ~~credit~~Governmental ~~conversion~~intervention ~~factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable, a 250% risk weight (up from 100%) for mortgage servicing rights~~ and ~~deferred~~new ~~tax~~regulations ~~assets~~could ~~that~~materially ~~are not deducted from capital,~~ and ~~increased~~adversely ~~risk-weights~~affect ~~(from~~our 0%business, tofinancial upcondition toand ~~600%)~~results ~~for~~of ~~equity exposures~~operations.

IfBasel Capital Standards. Regulatory capital rules released in July 2013 to implement capital standards, referred to as Basel III and developed by an international body known as the ~~new~~Basel Committee on Banking Supervision, impose higher minimum capital ~~ratios~~requirements ~~described~~for bank holding companies and banks. ~~above~~The ~~had~~rules ~~been~~apply ~~effective~~to asall national and state banks and savings associations regardless of ~~December~~size 31and bank holding companies and savings and loan holding companies with $500 million or more in total consolidated assets. More stringent requirements are imposed on “advanced approaches” banking organizations-those organizations with $250 billion or more in total consolidated assets, ~~2014~~$10 billion or more in total foreign exposures, ~~based~~or onthat ~~management’s~~have ~~interpretation~~opted ~~and~~in ~~understanding~~to ofthe Basel II capital regime. The requirements in the ~~new~~rule ~~rules,~~began to phase in on January 1, 2015 for the Bank, ~~would~~and ~~have~~the ~~remained~~requirements ~~“well~~in ~~capitalized”~~the asrule ofwill ~~such~~be ~~date~~fully phased in by January 1, 2019.

~~Volcker~~The ~~Rule.~~rule ~~Section~~includes ~~619~~certain ofnew ~~the~~and ~~Dodd~~higher risk-~~Frank~~based ~~Act,~~capital ~~known~~and asleverage ~~the~~requirements ~~“Volcker~~than ~~Rule,”~~those ~~prohibits~~currently ~~any bank, bank holding company, or affiliate (referred to collectively as “banking entities”) from engaging~~ in ~~two types of activities: “proprietary trading” and the ownership or sponsorship of private equity or hedge funds that are referred to as “covered funds~~place.” ~~On December 10~~Specifically, ~~2013, our primary federal regulators,~~ the ~~Federal~~following ~~Reserve~~minimum ~~Board~~capital ~~and~~requirements ~~the FDIC, together with other federal banking agencies, the SEC and the~~apply ~~Commodity Futures Trading Commission, finalized a regulation~~ to ~~implement~~ the Volcker Rule. The deadline for compliance with the Volcker Rule is July 21, 2015. At December 31, 2014, the Company has evaluated our securities portfolio and has determined that we do not hold any covered funds.Bank:

a new common equity Tier 1 risk-based capital ratio of 4.5%,
a Tier 1 risk-based capital ratio of 6% (increased from the former 4% requirement),
a total risk-based capital ratio of 8% (unchanged from the former requirement), and
a leverage ratio of 4% (also unchanged from the former requirement).

Under the rule, Tier 1 capital is redefined to include two components: Common Equity Tier 1 capital and additional Tier 1 capital. The new and highest form of capital, Common Equity Tier 1 capital, consists solely of common stock (plus related surplus), retained earnings, accumulated other comprehensive income, and limited amounts of minority interests that are in the form of common stock. Additional Tier 1 capital includes other perpetual instruments historically included in Tier 1 capital, such as noncumulative perpetual preferred stock. Tier 2 capital consists of instruments that currently qualify in Tier 2 capital plus instruments that the rule has disqualified from Tier 1 capital treatment. Cumulative perpetual preferred stock, formerly includable in Tier 1 capital, is now included only in Tier 2 capital. Accumulated other comprehensive income (AOCI) is presumptively included in Common Equity Tier 1 capital and often would operate to reduce this category of capital. The rule provided a one-time opportunity at the end of the first quarter of 2015 for covered banking organizations to opt out of much of this treatment of AOCI. We made this opt-out election and, as a result, will retain the pre-existing treatment for AOCI.

In addition, in order to avoid restrictions on capital distributions or discretionary bonus payments to executives, a covered banking organization must maintain a “capital conservation buffer” on top of its minimum risk-based capital requirements. This buffer must consist solely of Tier 1 Common Equity, but the buffer applies to all three measurements (Common Equity Tier 1, Tier 1 capital and total capital). The capital conservation buffer will be phased in incrementally over time, becoming fully effective on January 1, 2019, and will consist of an additional amount of common equity equal to 2.5% of risk-weighted assets. As of January 1, 2016, the Bank is required to hold a capital conservation buffer of 0.625%, increasing by that amount each successive year until 2019.

In general, the rules have had the effect of increasing capital requirements by increasing the risk weights on certain assets, including high volatility commercial real estate, certain loans past due 90 days or more or in nonaccrual status, mortgage servicing rights not includable in Common Equity Tier 1 capital, equity exposures, and claims on securities firms, that are used in the denominator of the three risk-based capital ratios.

Volcker Rule. Section 619 of the Dodd-Frank Act, known as the “Volcker Rule,” prohibits any bank, bank holding company, or affiliate (referred to collectively as “banking entities”) from engaging in two types of activities: “proprietary trading” and the ownership or sponsorship of private equity or hedge funds that are referred to as “covered funds.” Proprietary trading, in general, is trading in securities on a short-term basis for a banking entity’s own account. Funds subject to the ownership and sponsorship prohibition are those not required to register with the SEC because they have only accredited investors or no more than 100 investors. In December 2013, our primary federal regulators, the Federal Reserve and the FDIC, together with other federal banking agencies, the SEC and the Commodity Futures Trading Commission, finalized a regulation to implement the Volcker Rule. At December 31, 2015, the Company has evaluated our securities portfolio and has determined that we do not hold any covered funds.

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. ~~The~~Two statutes, the Bank Holding Company Act and the Change in Bank Control Act, together with regulations promulgated ~~thereunder~~under them, require ~~Federal Reserve approval~~some ~~prior~~form toof ~~any~~regulatory ~~person~~review orbefore any company ~~acquiring~~may acquire “control” of a bank or a bank holding company. ~~Control~~Under isthe ~~conclusively~~Bank Holding ~~presumed~~Company Act, control is deemed to exist if ana ~~individual or~~ company acquires 25% or more of any class of voting securities of a bank holding company; controls the election of a majority of the members of the board of directors; or exercises a controlling influence over the management or policies of a bank or bank holding company. ~~Control~~In guidance issued in 2008, the Federal Reserve has stated that an investor generally will not be ~~rebuttably presumed~~viewed toas ~~exist~~having ifa controlling influence over a ~~person~~bank ~~acquires~~holding ~~more~~company when the investor holds, in aggregate, less than 33% of the total equity of a bank or bank holding company (voting and nonvoting equity), provided such investor’s ownership does not include 15% or more of ~~which~~any itclass ~~may~~of ~~own,~~voting securities. Prior Federal Reserve approval is necessary before an entity acquires sufficient control to become a bank holding company. Natural persons, certain non-business trusts, and other entities are not treated as companies (or ~~have~~bank ~~the~~holding ~~power~~companies), toand ~~vote~~their acquisitions are not ~~more~~subject ~~than~~to ~~15%~~review ofunder ~~any~~the ~~class~~Bank Holding Company Act. State laws generally, including South Carolina law, require state approval before an acquirer may become the holding company of ~~voting~~a ~~securities~~state bank.

Under the Change in Bank Control Act, a person or company is generally required to file a notice with the Federal Reserve if it will, as a result of the transaction, own or control 10% or more of any class of voting securities or direct the management or policies of a bank or bank holding company and either if the bank or bank holding company has registered securities or if the acquirer would be the largest holder of that class of voting securities after the acquisition. For a change in control at the holding company level, both the Federal Reserve and the subsidiary bank’s primary federal regulator must approve the change in control; at the bank level, only the bank’s primary federal regulator is involved. Transactions subject to the Bank Holding Company Act are exempt from Change in Control Act requirements. For state banks, state laws, including that of South Carolina, typically require approval by the state bank regulator as well

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.

1011

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~~has ~~certain~~adopted capital ~~requirements~~guidelines onpursuant ~~bank~~to ~~holding~~which ~~companies~~it ~~under~~assesses the ~~Bank~~adequacy ~~Holding~~of ~~Company~~capital ~~Act,~~in ~~including~~examining and supervising a ~~minimum~~bank ~~leverage~~holding ~~ratio~~company and ain ~~minimum~~analyzing ~~ratio~~applications ofunder ~~“qualifying”~~the ~~capital~~Bank toHolding ~~risk-weighted~~Company ~~assets~~Act. These ~~requirements~~guidelines ~~are~~apply ~~essentially~~on a consolidated basis ~~the~~to ~~same~~bank asholding ~~those~~companies ~~that~~with ~~apply~~$500 tomillion ~~the~~or ~~Bank~~more ~~and~~in ~~are~~assets, ~~described~~or ~~below~~with ~~under~~fewer ~~“Congaree~~assets ~~State~~but ~~Bank—Prompt~~certain ~~Corrective~~risky ~~Action.”~~activities, and on a bank-only ~~Subject~~basis to ~~our~~other ~~capital~~companies. ~~requirements~~These ~~and~~bank ~~certain~~holding ~~other~~company ~~restrictions,~~capital weadequacy guidelines are ~~able~~similar to ~~borrow~~those ~~money~~imposed toby ~~make~~the aFDIC ~~capital~~on ~~contribution~~the toBank. ~~the~~For ~~Bank,~~a ~~and~~bank ~~these~~holding ~~loans~~company ~~may~~with beless ~~repaid~~than ~~from~~$500 ~~dividends~~million ~~paid~~in ~~from~~total ~~the~~consolidated ~~Bank~~assets, tosuch as the Company., ~~Our~~the ~~ability~~capital toguidelines apply ~~pay~~on ~~dividends~~a ~~depends on~~bank only basis and the ~~Bank~~Federal Reserve expects the holding company’s ~~ability~~subsidiary banks to ~~pay~~be ~~dividends~~well tocapitalized usunder the prompt corrective action regulations. In July 2013, ~~which~~the isFederal ~~subject~~Reserve, tothe ~~regulatory~~FDIC ~~restrictions~~and asthe ~~described~~Office ~~below~~of inthe ~~“Congaree State~~Comptroller ~~Bank—Dividends.”~~of Wethe Currency ~~are~~(the ~~also~~“OCC”) ~~able~~approved revisions to ~~raise~~their capital ~~for~~adequacy ~~contribution~~guidelines and prompt corrective action rules to implement the ~~Bank~~Basel byIII ~~issuing~~regulatory ~~securities~~capital ~~without having~~reforms toand ~~receive~~changes ~~regulatory~~required ~~approval~~by the Dodd-Frank Act. For additional information, ~~subject~~see the tosection ~~compliance~~below ~~with~~entitled ~~federal~~“Congaree ~~and~~State ~~state~~Bank— ~~securities~~Prompt ~~laws~~Corrective Action.”

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.

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 described below in “Congaree State Bank – Dividends.”

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 under it, which set forth five capital categories, each with specific regulatory consequences. Under current regulations, the categories are as noted below. Beginning in January 2015, however, the minimum capital levels for each prompt corrective action category will be increased pursuant to the new capital regulations adopted in July 2013, described above under “Supervision and Regulation – Basel Capital Standards.” The following is a list of the current criteria for each prompt corrective action category:

Ÿ 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.

Ÿ 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.

Ÿ 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%.

Ÿ 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%.

Ÿ 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.

AnPrompt ~~insured~~Corrective ~~depository~~Action. As ~~institution may not pay~~an ainsured ~~management~~depository ~~fee to a bank holding company controlling that~~ institution ~~or any other person having control of the institution if~~, ~~after~~ ~~making~~ the ~~payment,~~Bank ~~the institution, would be undercapitalized. In addition, an institution cannot make a capital distribution, such as a dividend or other distribution that~~ is inrequired ~~substance~~to acomply ~~distribution~~with ofthe capital torequirements ~~the~~promulgated ~~owners~~under of the ~~institution~~Federal ~~if following~~Deposit ~~such~~Insurance aAct ~~distribution~~and the ~~institution~~prompt ~~would~~corrective beaction ~~undercapitalized.~~regulations ~~Thus~~thereunder, ifwhich ~~payment~~set offorth ~~such~~five acapital ~~management~~categories, ~~fee~~each orwith ~~the making of such~~specific ~~would~~regulatory ~~cause~~consequences. ~~the~~Under ~~Bank~~these ~~to become undercapitalized~~regulations, itthe ~~could~~categories ~~not pay a management fee or dividend to us.~~are:

AsWell Capitalized — The institution exceeds the required minimum level for each relevant capital measure. A well capitalized institution (i) has total risk-based capital ratio of ~~December~~10% 31or greater, (ii) ~~2014~~has a Tier 1 risk-based capital ratio of 8% or greater, ~~the~~(iii) ~~Bank’s~~has ~~ratios~~a common equity Tier 1 risk-based capital ratio of 6.5% ~~were~~or ~~sufficient~~greater, ~~for~~(iv) ~~the~~has ~~Bank~~a leverage capital ratio of 5% or greater, and (v) is not subject to beany ~~considered~~order ~~“well-capitalized”~~or ~~under~~written ~~the~~directive ~~regulatory~~to ~~framework~~meet and maintain a specific capital level for ~~prompt~~any ~~corrective action~~capital measure.

AsAdequately ~~further~~Capitalized ~~described~~— ~~under “Supervision~~The ~~and~~institution ~~Regulation~~meets –the ~~Basel~~required minimum ~~Capital~~level ~~Standards,”~~for ineach ~~July~~relevant ~~2013,~~capital ~~the~~measure. ~~federal~~No ~~bank~~capital ~~regulatory~~distribution ~~agencies issued~~may abe ~~final~~made ~~rule~~ that ~~will~~would ~~revise~~result ~~their~~in ~~risk-based capital requirements and~~ the ~~method~~institution ~~for calculating risk-weighted assets~~becoming toundercapitalized. ~~make~~An ~~them~~adequately ~~consistent~~capitalized ~~with~~institution ~~agreements~~(i) ~~that~~has ~~were~~a ~~reached~~total byrisk-based ~~Basel~~capital ~~III~~ratio ~~and certain provisions~~ of ~~the~~8% ~~Dodd-Frank~~or ~~Act.~~greater, ~~The~~(ii) ~~final rule~~has ~~became~~a ~~effective on January~~ Tier 1, ~~2015 and applies to all depository institutions, top~~risk-~~tier~~based ~~bank~~capital ~~holding~~ratio ~~companies with total consolidated assets~~ of ~~$500~~6% ~~million~~ or ~~more~~greater, (~~which~~iii) ~~does~~has ~~not~~a ~~include~~common ~~the~~equity ~~Company)~~Tier ~~and~~1 ~~top~~risk-~~tier~~based ~~savings~~capital ~~and~~ratio ~~loan~~of ~~holding companies~~4. It5% isor ~~management’s belief that~~greater, ~~as of December 31, 2014, the Bank would have met all capital adequacy requirements under Basel~~and ~~III~~(iv) onhas a ~~fully~~leverage ~~phased-in~~capital ~~basis~~ratio ifof ~~such~~4% ~~requirements~~or ~~were effective at that time~~greater.

Undercapitalized — The institution fails to meet the required minimum level for any relevant capital measure. An undercapitalized institution (i) has a total risk-based capital ratio of less than 8%, (ii) has a Tier 1 risk-based capital ratio of less than 6%, (iii) has a common equity Tier 1 risk-based capital ratio of less than 4.5% or greater, or (iv) has a leverage capital ratio of less than 4%.

Significantly Undercapitalized — The institution is significantly below the required minimum level for any relevant capital measure. A significantly undercapitalized institution (i) has a total risk-based capital ratio of less than 6%, (ii) has a Tier 1 risk-based capital ratio of less than 4%, (iii) has a common equity Tier 1 risk-based capital ratio of less than 3% or greater, or (iv) has 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 has 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 a 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 a bank is not well capitalized, it cannot accept brokered deposits without prior regulatory approval. In addition, a bank that is not well capitalized cannot offer an effective yield in excess of 75 basis points over interest paid on deposits of comparable size and maturity in such institution’s normal market area for deposits accepted from within its normal market area, or national rate paid on deposits of comparable size and maturity for deposits accepted outside the bank’s normal market area. Moreover, the FDIC generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or paying any management fee to its parent holding company if the depository institution would thereafter be categorized as undercapitalized. Undercapitalized institutions are subject to growth limitations (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) and are required to submit a capital restoration plan. The agencies may not accept a capital restoration plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution’s capital. In addition, for a capital restoration plan to be acceptable, the depository institution’s parent holding company must guarantee that the institution will comply with the capital restoration plan. The aggregate liability of the parent holding company is limited to the lesser of an amount equal to 5.0% of the depository institution’s total assets at the time it became categorized as undercapitalized or the amount that is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it is categorized as significantly undercapitalized.

Significantly undercapitalized categorized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become categorized as adequately capitalized, requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. 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 a bank to become undercapitalized, it could not pay a management fee or dividend to the bank holding company.

As of December 31, 2015, the Bank’s ratios were sufficient for the Bank to be considered “well-capitalized” under the regulatory framework for prompt corrective action.

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. 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 bank’s regulator 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.

FDIC insured institutions are required to pay a Financing Corporation assessment to fund the interest on bonds issued to resolve thrift failures in the 1980s. The Financing Corporation quarterly assessment for the fourth quarter of ~~2014~~2015 equaled 12.7525 basis points for each $100 of average consolidated total assets minus average tangible equity. These assessments, which may be revised based upon the level of deposits, will continue until the bonds mature in the years 2017 through 2019.

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. 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 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 from purchasing low quality assets from an affiliate.

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 will apply 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 transactions that create credit exposure to an affiliate or an insider. Any such transactions with affiliates must be fully secured. The current exemption from Section 23A for transactions with financial subsidiaries will be eliminated. The Dodd Frank Act will additionally prohibit 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.15

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~~ time for comparable transactions with nonaffiliated companies. If there are no comparable transactions, a bank’s (or one of its subsidiaries’) affiliate transaction must be on terms and under circumstances, including credit standards, that in good faith would be offered to, or would apply to, nonaffiliated companies. These requirements apply to all transactions subject to Section 23A as well as to certain other transactions.

~~Regulation~~The Waffiliates ~~generally~~of ~~excludes~~a ~~all~~bank ~~non-~~include any holding company of the bank, any other company under common control with the bank (including any company controlled by the same shareholders ~~and~~who ~~non-savings~~control ~~association~~the ~~subsidiaries~~bank), any subsidiary of ~~banks~~the ~~from~~bank ~~treatment~~that asis ~~affiliates~~itself a bank, ~~except~~any tocompany in which the ~~extent~~majority ~~that~~of the ~~Federal~~directors ~~Reserve~~or ~~decides~~trustees toalso ~~treat~~constitute ~~these~~a ~~subsidiaries~~majority asof ~~affiliates.~~the ~~The~~directors ~~regulation~~or ~~also~~trustees ~~limits~~of the ~~amount~~bank or holding company of ~~loans~~the ~~that~~bank, ~~can~~any becompany ~~purchased~~sponsored and byadvised on a contractual basis by the bank ~~from~~ or an affiliate, toand ~~not~~any ~~more~~mutual ~~than~~fund ~~100%~~advised by a bank or any of the bank’s affiliates. ~~capital~~Regulation W generally excludes all non-bank and ~~surplus~~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 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 ~~extensions~~credit include derivative transactions, repurchase and reverse repurchase agreements, and securities borrowing and lending transactions to the extent that such transactions cause a bank to have credit exposure to an insider. Any extension of credit to an insider (i) must be made on substantially the same terms, including interest rates and collateral requirements, as those prevailing at at the time for comparable transactions with unrelated 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.

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~~Federal toDeposit ~~Financial~~Insurance ~~Privacy~~ Act, which, ~~imposes~~among aother ~~duty~~things, tolimits ~~maintain~~the ~~confidentiality~~amount of ~~consumer~~deposit ~~financial~~insurance ~~records~~available ~~and~~per ~~prescribes~~account ~~procedures~~to ~~for~~$250,000 ~~complying~~and ~~with~~imposes ~~administrative~~other ~~subpoenas~~limits ofon ~~financial records~~deposit-taking; ~~and~~

· the ~~Electronic~~Right ~~Funds Transfer Act and Regulation E issued by the Federal Reserve~~ to ~~implement~~Financial ~~that~~Privacy Act, which ~~governs~~imposes ~~automatic~~a ~~deposits~~duty to ~~and~~maintain ~~withdrawals~~confidentiality ~~from~~of ~~deposit~~consumer ~~accounts~~financial records and ~~customers’~~prescribes ~~rights~~procedures ~~and~~for ~~liabilities~~complying ~~arising~~with ~~from~~administrative ~~the~~subpoenas ~~use~~ of ~~automated~~financial ~~teller machines and other electronic banking services.~~records;

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; and

the Truth in Savings Act and Regulation DD, which requires depository institutions to provide disclosures so that consumers can make meaningful comparisons about depository institutions and accounts.

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.

1617

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, Data Security and Credit Reporting. ~~Financial~~ 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~~Recent ~~other~~cyber ~~lending~~attacks ~~institutions,~~against ~~the~~banks ~~Bank~~and ~~utilizes~~other ~~credit~~institutions ~~bureau~~that ~~data~~resulted in ~~its~~unauthorized ~~underwriting~~access ~~activities.~~to ~~Use~~confidential ofcustomer ~~such~~information ~~data~~have isprompted ~~regulated under~~ the Federal ~~Credit~~banking ~~Reporting Act on a uniform,~~agencies ~~nationwide~~to ~~basis,~~issue ~~including~~several ~~credit~~warnings ~~reporting, prescreening, sharing of information between affiliates,~~ and ~~the~~extensive ~~use~~guidance ofon ~~credit~~cyber ~~data~~security. The ~~Fair~~agencies ~~and~~are ~~Accurate~~likely ~~Credit~~to ~~Transactions~~devote ~~Act~~more ofresources ~~2003 (the “FACT Act”) authorizes states~~ to ~~enact~~this ~~identity theft laws~~part ~~that~~of ~~are~~their ~~not~~safety ~~inconsistent~~and ~~with~~soundness ~~the~~examination ~~conduct~~than ~~required~~they byhave ~~the~~in ~~provisions of~~ the ~~FACT Act~~past.

In addition, pursuant to the Fair and Accurate Credit Transactions Act of 2003 (the “FACT Act”) and the implementing regulations of the federal banking agencies and Federal Trade Commission, the Bank is required to have in place an “identity theft red flags” program to detect, prevent and mitigate identity theft. The Bank has implemented an identity theft red flags program designed to meet the requirements of the FACT Act and the joint final rules. Additionally, the FACT Act amends the Fair Credit Reporting Act to generally prohibit a person from using information received from an affiliate to make a solicitation for marketing purposes to a consumer, unless the consumer is given notice and a reasonable opportunity and a reasonable and simple method to opt out of the making of such solicitations.

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.

1718

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.

Incentive Compensation. In June 2010, the Federal Reserve, the FDIC and the OCC issued a comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors.

The Federal Reserve will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as the Company, that are not “large, complex banking organizations.” These reviews will be tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.

The Dodd-Frank Act required the federal banking agencies, the SEC, and certain other federal agencies to jointly issue a regulation on incentive compensation. The agencies proposed such a rule in 2011, which reflects the 2010 guidance, but the agencies have not finalized the rule as of December 31, 2015.

Item 1A. Risk Factors.

The Company cannot be sure of the market value of the merger consideration that the Company’s shareholders will receive as a result of the proposed merger with Carolina Financial.

Subject to the terms and conditions of the Merger Agreement, each share of the Company’s common stock will be converted into the right to receive one of the following: (i) $8.10 in cash, (ii) 0.4806 shares of Carolina Financials’ common stock, or (iii) a combination of cash and Carolina Financial common stock, subject to the limitation that, excluding any dissenting shares, the total merger consideration shall be prorated to 40% cash consideration and 60% stock consideration. Cash will also be paid in lieu of fractional shares. The market value of the merger will vary from the closing price of Carolina Financial’s common stock on the date we announced the merger, on the date that the proxy statement/prospectus is mailed to our shareholders for the special meeting to, among other things, approve the merger, on the date of the special shareholders meeting, on the date we complete the merger and thereafter. Stock price changes may result from a variety of factors, including general market and economic conditions, changes in our respective businesses, operations and prospects, and regulatory considerations. Many of these factors are beyond our control.

Any change in the market price of Carolina Financial common stock prior to completion of the merger will affect the market value of the merger consideration that the Company’s shareholders will receive upon completion of the merger, and there will be no adjustment to the merger consideration for changes in the market price of either shares of Carolina Financial common stock or shares of our common stock.

We may fail to realize all of the anticipated benefits of the merger.

The success of the merger will depend, in part, on the resulting institution’s ability to realize the anticipated benefits and cost savings from continuing the businesses of the Company and Carolina Financial. However, to realize these anticipated benefits and cost savings, the businesses of the Company and Carolina Financial must be successfully combined. The anticipated benefits and cost savings of the merger may not be realized fully or at all or may take longer to realize than expected.

The Company has operated and, until the completion of the merger, will continue to operate, independently. It is possible that the integration process could result in the loss of key employees, the disruption of each company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect our ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits of the merger. Integration efforts between the two companies will also divert the attention of management and resources and could result in deposit attrition or other adverse operational results. These integration matters could have an adverse effect on the Company during the pre-merger transition period and on the combined company following the merger.

The merger is subject to the receipt of consents and approvals from government entities that may impose conditions that could have an adverse effect on the combined company following the merger.

Before the merger may be completed, various approvals or consents must be obtained from the Federal Reserve, the FDIC, the South Carolina Board of Financial Institutions and other various domestic and foreign banking, securities, antitrust, and other regulatory authorities. These government entities may impose conditions on the completion of the merger or require changes to the terms of the merger. Such conditions or changes could have the effect of delaying completion of the merger or imposing additional costs on or limiting the revenues of the combined company following the merger, any of which might have an adverse effect on the combined company following the merger.

If the merger is not completed, the Company will have incurred incremental expenses without realizing the expected benefits of the merger.

The Company has incurred incremental expenses in connection with the negotiation and planned completion of the transactions contemplated by the Merger Agreement. If the merger is not completed, the Company will have to recognize these expenses without realizing the expected benefits of the merger.

The merger is subject to certain closing conditions that, if not satisfied or waived, will result in the merger not being completed, which may cause the market price of our common stock to decline.

The merger is subject to customary conditions to closing, including the receipt of required regulatory approvals and approvals of the Company’s shareholders and that no injunction by any court of competent jurisdiction preventing the consummation of the merger shall be in effect. If any condition to the merger is not satisfied or waived, to the extent permitted by law, the merger will not be completed. In addition, the Company and Carolina Financial may terminate the Merger Agreement under certain circumstances even if the merger is approved by the Company’s shareholders, including but not limited to if the merger has not been completed on or before June 30, 2016. If the Company and Carolina Financial do not complete the merger, the market price of our common stock may decline to the extent that the current market price of those shares reflects a market assumption that the merger will be completed. In addition, neither company would realize any of the expected benefits of having completed the merger. If the merger is not completed, additional risks could materialize, which could materially and adversely affect the Company’s business, financial results, financial condition and stock price.

The market price of Carolina Financial common stock after the merger may be affected by factors different from those currently affecting the shares of the Company or Carolina Financial.

The businesses of the Company and Carolina Financial differ in important respects, including without limitation Carolina Financial’s focus on wholesale mortgage origination through its subsidiary Crescent Mortgage Company, and, accordingly, the results of operations of the combined company and the market price of the combined company’s shares of common stock may be affected by factors different from those currently affecting the independent result of operations of the Company and Carolina Financial.

The Merger Agreement limits the Company’s ability to pursue an alternative acquisition proposal and requires the Company to pay a termination fee of $750,000 under limited circumstances relating to alternative acquisition proposals.

The Merger Agreement prohibits the Company from soliciting, initiating or knowingly encouraging or facilitating certain alternative acquisition proposals with any third party, subject to exceptions set forth in the Merger Agreement. The Merger Agreement also provides for the payment by the Company of a termination fee in the amount of $750,000 in the event that the Company terminates the Agreement for certain reasons. These provision might discourage a potential competing acquirer that might have an interest in acquiring all or a significant part of the Company from considering or proposing such an acquisition.

Our business may be adversely affected by conditions in the financial markets and economic conditions generally.

In recent years, economic growth and business activity across a wide range of industries and regions in the U.S. has been slow and uneven. Furthermore, there are continuing concerns related to the level of U.S. government debt and fiscal actions that may be taken to address that debt. There can be no assurance that economic conditions will continue to improve, and these conditions could worsen. In addition, declining oil prices, on-going federal budget negotiations, the implementation of the employer mandate under the Patient Protection and Affordable Care Act and the level of U.S. debt may have a destabilizing effect on financial markets.

Our financial performance generally, and in particular the ability of borrowers to pay interest on and repay principal of outstanding loans and the value of collateral securing those loans, as well as demand for loans and other products and services we offer, is highly dependent upon the business environment in the primary markets where we operate and in the U.S. as a whole. A favorable business environment is generally characterized by, among other factors, economic growth, efficient capital markets, low inflation, low unemployment, high business and investor confidence, and strong business earnings. Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth, business activity or investor or business confidence; limitations on the availability or increases in the cost of credit and capital; increases in inflation or interest rates; high unemployment, natural disasters; or a combination of these or other factors.

Overall, during recent years, the business environment has been adverse for many households and businesses in the U.S. and worldwide. While economic conditions in our primary markets of South Carolina, as well as the U.S. and worldwide, have shown signs of improvement, there can be no assurance that this improvement will continue or that our local markets will not experience another economic decline. Economic pressure on consumers and uncertainty regarding continuing economic improvement may result in changes in consumer and business spending, borrowing and savings habits. Such conditions could have a material adverse effect on the credit quality of our loan portfolio and our business, financial condition and results of operations.

Changes in local economic conditions where we operate could have a negative effect.

Our success depends significantly on growth, or lack thereof, in population, income levels, deposits and housing starts in the geographic markets in which we operate. The local economic conditions in these areas have a significant impact on our commercial, real estate and construction loans, the ability of borrowers to repay these loans, and the value of the collateral securing these loans. Unlike larger financial institutions that are more geographically diversified, we are a community banking franchise. Adverse changes in, and further deterioration of, the economic conditions of the Southeast United States in general or in our primary markets in South Carolina could negatively affect our financial condition, results of operations and profitability. While economic conditions in South Carolina, along with the U.S. and worldwide, have shown signs of improvement, there can be no assurance that this improvement will continue. A continuing deterioration in economic conditions could result in the following consequences, any of which could have a material adverse effect on our business:

· loan delinquencies may increase;

· problem assets and foreclosures may increase;

· demand for our products and services may decline; and

· collateral for loans that we make, especially real estate, may decline in value, in turn reducing a customer’s borrowing power, and reducing the value of assets and collateral associated with the our loans.

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.

A significant portion of our loan portfolio is secured by real estate. As of December 31, ~~2014~~2015, approximately 85% of our loans were secured by real estate mortgages. 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. We have identified credit concerns with respect to certain loans in our loan portfolio which are primarily related to the economic downturn that began in the latter half of 2007. This downturn resulted in increased inventories of unsold real estate, higher vacancy rates, lower lease rates and higher foreclosure rates, which in turn caused property values for real estate collateral to decline. While economic conditions and real estate in our primary markets of South Carolina have shown signs of improvement, there can be no assurance that this improvement will continue or that our local markets will not experience another economic decline. Deterioration in the real estate market could cause us to adjust our opinion of the level of credit quality in our loan portfolio. Such a determination may lead to an additional increase in our provisions for loan losses, which could also adversely affect our business, financial condition, and results of operations. 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, ~~2014~~2015, the following loan types accounted for the stated percentages of our total loan portfolio: commercial real estate 3940%; construction, land development and other land 1013%; and commercial 13%. 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.

1922

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, ~~2014~~2015, we had a total of $32,~~623~~657,~~686~~658 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, ~~2014~~2015, we had $2,~~864~~226,~~546~~773 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, ~~2014~~2015, commercial business loans comprised 13% 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.

2023

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 2013 and 2014. Approximately 3833.28% of our loans were variable rate loans at December 31, ~~2014~~2015. 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.

The reduction in net interest income may 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, have an adverse impact on our operations, and impose financial requirements or limitations on the conduct of our business.

We operate in a highly regulated industry and are subject to examination, supervision, and comprehensive regulation by various regulatory agencies. We are subject to regulation by the Federal Reserve. The Bank is subject to extensive regulation, supervision, and examination by our primary federal regulator, the FDIC, the regulating authority that insures client deposits, and by our primary state regulator, the South Carolina Board of Financial Institutions. Also, as a member of the Federal Home Loan Bank (the “FHLB”), the 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. The Bank’s activities are also regulated under consumer protection laws applicable to our lending, deposit, and other activities. A sufficient claim against us under these laws could have a material adverse effect on our results of operations.

Further, changes in laws, regulations and regulatory practices affecting the financial services industry could subject us to additional costs, limit the types of financial services and products we may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things. Failure to comply with laws, regulations or policies could also result in heightened regulatory scrutiny and in sanctions by regulatory agencies (such as a memorandum of understanding, a written supervisory agreement or a cease and desist order), civil money penalties and/or reputation damage. Any of these consequences could restrict our ability to expand our business or could require us to raise additional capital or sell assets on terms that are not advantageous to us or our shareholders and could have a material adverse effect on our business, financial condition and results of operations. While we have policies and procedures designed to prevent any such violations, such violations may occur despite our best efforts.

2124

~~The~~New ~~Dodd-Frank~~capital ~~Act~~rules ~~may~~that ~~have~~were arecently ~~material~~issued ~~adverse~~generally ~~effect~~require insured depository institutions and certain holding companies to hold more capital. The impact of the new rules on our financial condition and operations is uncertain but could be materially adverse.

~~The~~In July 2013, the federal bank regulatory agencies issued a final rule that will revise their risk based capital requirements and the method for calculating risk weighted assets to make them consistent with agreements that were reached by Basel III and certain provisions of the Dodd-Frank Act. ~~imposes~~Bank ~~significant~~holding companies ~~regulatory~~with less than $500 million in total consolidated assets, such as the Company, are not subject to the final rule, nor are savings and ~~compliance~~loan ~~changes~~holding companies substantially engaged in commercial activities or insurance underwriting. The requirements in the rule began to phase in on ~~our~~January ~~business~~1, ~~including:~~2015 for covered banking organizations such as the Bank. The requirements in the rule will be fully phased in by January 1, 2019.

·The ~~changes~~rule toincludes ~~regulatory~~certain new and higher risk-based capital and leverage requirements; than those currently in place. Specifically, the following minimum capital requirements apply to the Bank:

·a ~~exclusion~~new ofcommon ~~hybrid~~equity ~~securities,~~Tier ~~including~~1 ~~trust~~risk-based ~~preferred~~capital ~~securities,~~ratio ~~issued~~of ~~on or after May 19~~4.5%, ~~2010 from Tier 1 capital;~~
·a ~~creation~~Tier of1 ~~new~~risk-based ~~government~~capital ~~regulatory~~ratio ~~agencies~~of 6% (~~such~~increased asfrom the ~~Financial~~former 4% ~~Stability Oversight Council, which oversees systemic risk, and the CFPB, which develops and enforces rules for bank and non-bank providers of consumer financial products~~requirement);,
·a ~~potential~~total ~~limitations~~risk-based oncapital ~~federal~~ratio ~~preemption;~~of 8% (unchanged from the former requirement), and
·a ~~changes~~leverage toratio ~~deposit~~of ~~insurance~~4% ~~assessments;~~(also unchanged from the former requirement).

·Under ~~regulation~~the rule, Tier 1 capital is redefined to include two components: Common Equity Tier 1 capital and additional Tier 1 capital. The new and highest form of ~~debit~~capital, ~~interchange~~Common Equity ~~fees~~Tier we1 ~~earn;~~capital, consists solely of common stock (plus related surplus), retained earnings, accumulated other comprehensive income, and limited amounts of minority interests that are in the form of common stock. Additional Tier 1 capital includes other perpetual instruments historically included in Tier 1 capital, such as noncumulative perpetual preferred stock. Tier 2 capital consists of instruments that currently qualify in Tier 2 capital plus instruments that the rule has disqualified from Tier 1 capital treatment. Cumulative perpetual preferred stock, formerly includable in Tier 1 capital, is now included only in Tier 2 capital. Accumulated other comprehensive income (AOCI) is presumptively included in Common Equity Tier 1 capital and often would operate to reduce this category of capital. The rule provided a one-time opportunity at the end of the first quarter of 2015 for covered banking organizations to opt out of much of this treatment of AOCI. We made this opt-out election and, as a result, will retain the pre-existing treatment for AOCI.

·In ~~changes~~addition, in ~~retail~~order to avoid restrictions on capital distributions or discretionary bonus payments to executives, a covered banking ~~regulations~~organization must maintain a “capital conservation buffer” on top of its minimum risk-based capital requirements. This buffer must consist solely of Tier 1 Common Equity, ~~including~~but ~~potential~~the ~~limitations~~buffer applies to all three measurements (Common Equity Tier 1, Tier 1 capital and total capital). The capital conservation buffer will be phased in incrementally over time, becoming fully effective on ~~certain~~January ~~fees~~1, 2019, and will consist of an additional amount of common equity equal to 2.5% of risk-weighted assets. As of January 1, 2016, we ~~may~~are ~~charge;~~required ~~and~~to hold a capital conservation buffer of 0.625%, increasing by that amount each successive year until 2019.

·In ~~changes~~general, inthe ~~regulation~~rules have had the effect of increasing ~~consumer~~capital requirements by increasing the risk weights on certain assets, including high volatility commercial real estate, certain loans past due 90 days or more or in nonaccrual status, mortgage ~~loan~~servicing ~~origination~~rights not includable in Common Equity Tier 1 capital, equity exposures, and claims on securities firms, that are used in the denominator of the three risk-based ~~retention~~capital ratios.

In addition, in the ~~Dodd-Frank~~current ~~Act~~economic ~~restricts~~and ~~the~~regulatory ~~ability~~environment, ofbank ~~banks~~regulators tomay ~~engage~~impose incapital ~~certain~~requirements ~~proprietary~~that ~~trading~~are ormore tostringent ~~sponsor~~than orthose ~~invest~~required by applicable existing regulations. The application of more stringent capital requirements for us could, among other things, result in ~~private~~lower returns on equity, orrequire ~~hedge~~the ~~funds.~~raising ~~The~~of ~~Dodd-Frank Act~~additional ~~also~~capital, ~~contains~~and ~~provisions~~result ~~designed~~in regulatory actions if we were to ~~limit~~be ~~the~~unable ~~ability~~to comply with such requirements. Implementation of ~~insured~~changes ~~depository~~to ~~institutions,~~asset ~~their~~risk ~~holding~~weightings ~~companies~~for ~~and~~risk ~~their~~based capital calculations, items included or deducted ~~affiliates~~in tocalculating ~~conduct~~regulatory ~~certain~~capital ~~swaps~~or ~~and~~additional ~~derivatives~~capital ~~activities~~conservation buffers, could result in management modifying our business strategy and could limit our ability to ~~take~~make ~~certain~~distributions, ~~principal~~including ~~positions~~paying individends ~~financial~~or ~~instruments~~buying back our shares.

Some provisions of the Dodd-Frank Act became effective immediately upon its enactment. Many provisions, however, will require regulations to be promulgated by various federal agencies in order to be implemented, some but not all of which have been proposed or finalized by the applicable federal agencies. The provisions of the Dodd-Frank Act may have unintended effects, which will not be clear until after implementation. Certain changes resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity and leverage requirements or otherwise adversely affect our business. These changes may also require us to invest significant management attention and resources to evaluate and make any changes necessary to comply with new statutory and regulatory requirements. Failure to comply with the new requirements may negatively impact our results of operations and financial condition. While we cannot predict what effect any presently contemplated or future changes in the laws or regulations or their interpretations would have on us, these changes could be materially adverse to investors in our common stock.25

New capital rules that were recently issued generally require insured depository institutions and their holding companies to hold more capital. The impact of the new rules on our financial condition and operations is uncertain but could be materially adverse.

In July 2013, the federal bank regulatory agencies issued a final rule that will revise their risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by Basel III and certain provisions of the Dodd-Frank Act. This rule substantially amended the regulatory risk-based capital rules applicable to us. The requirements in the rule began to phase in on January 1, 2015 for the Bank. The requirements in the rule will be fully phased in by January 1, 2019.

The final rule increases capital requirements and generally includes two new capital measurements that will affect us, a risk-based common equity Tier 1 ratio and a capital conservation buffer. Common Equity Tier 1 (“CET1”) capital is a subset of Tier 1 capital and is limited to common equity (plus related surplus), retained earnings, accumulated other comprehensive income and certain other items. Other instruments that have historically qualified for Tier 1 treatment, including non-cumulative perpetual preferred stock, are consigned to a category known as Additional Tier 1 capital and must be phased out over a period of nine years beginning in 2014. The rule permits bank holding companies with less than $15 billion in assets to continue to include trust preferred securities and non-cumulative perpetual preferred stock issued before May 19, 2010 in Tier 1 capital, but not CET1. Tier 2 capital consists of instruments that have historically been placed in Tier 2, as well as cumulative perpetual preferred stock.

The final rule adjusts all three categories of capital by requiring new deductions from and adjustments to capital that will result in more stringent capital requirements and may require changes in the ways we do business. Among other things, the current rule on the deduction of mortgage servicing assets from Tier 1 capital has been revised in ways that are likely to require a greater deduction than we currently make and that will require the deduction to be made from CET1. This deduction phases in over a three-year period from 2015 through 2017. We closely monitor our mortgage servicing assets, and we expect to maintain our mortgage servicing asset at levels below the deduction thresholds by a combination of sales of portions of these assets from time to time either on a flowing basis as we originate mortgages or through bulk sale transactions. Additionally, any gains on sale from mortgage loans sold into securitizations must be deducted in full from CET1. This requirement phases in over three years from 2015 through 2017. Under the earlier rule and through 2014, no deduction was required.

Beginning in 2015, the minimum capital requirements for the Bank will be (i) a CET1 ratio of 4.5%, (ii) a Tier 1 capital (CET1 plus Additional Tier 1 capital) of 6% (up from 4%) and (iii) a total capital ratio of 8% (the current requirement). Our leverage ratio requirement will remain at the 4% level now required. Beginning in 2016, a capital conservation buffer will phase in over three years, ultimately resulting in a requirement of 2.5% on top of the CET1, Tier 1 and total capital requirements, resulting in a require CET1 ratio of 7%, a Tier 1 ratio of 8.5%, and a total capital ratio of 10.5%. Failure to satisfy any of these three capital requirements will result in limits on paying dividends, engaging in share repurchases and paying discretionary bonuses. These limitations will establish a maximum percentage of eligible retained income that could be utilized for such actions. While the final rules will result in higher regulatory capital standards, it is difficult at this time to predict when or how any new standards will ultimately be applied to us.

In addition to the higher required capital ratios and the new deductions and adjustments, the final rule increases the risk weights for certain assets, meaning that we will have to hold more capital against these assets. For example, commercial real estate loans that do not meet certain new underwriting requirements must be risk-weighted at 150%, rather than the current 100%. There are also new risk weights for unsettled transactions and derivatives. We also will be required to hold capital against short-term commitments that are not unconditionally cancelable; currently, there are no capital requirements for these off-balance sheet assets. All changes to the risk weights take effect in full in 2015.

In addition, in the current economic and regulatory environment, bank regulators may impose capital requirements that are more stringent than those required by applicable existing regulations. The application of more stringent capital requirements for us could, among other things, result in lower returns on equity, require the raising of additional capital, and result in regulatory actions if we were to be unable to comply with such requirements. Implementation of changes to asset risk weightings for risk-based capital calculations, items included or deducted in calculating regulatory capital or additional capital conservation buffers, could result in management modifying our business strategy and could limit our ability to make distributions, including paying dividends or buying back our shares.

We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations.

The federal Bank Secrecy Act, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (which we refer to as the “Patriot Act”) and other laws and regulations require financial institutions, among other duties, to institute and maintain effective anti-money laundering programs and file suspicious activity and currency transaction reports as appropriate. The federal Financial Crimes Enforcement Network, established by the U.S. Treasury to administer the Bank Secrecy Act, is authorized to impose significant civil money penalties for violations of those requirements and has recently engaged in coordinated enforcement efforts with the individual federal banking regulators, as well as the U.S. Department of Justice, Drug Enforcement Administration and Internal Revenue Service. There is also increased scrutiny of compliance with the rules enforced by the OFAC. Federal and state bank regulators also have begun to focus on compliance with Bank Secrecy Act and anti-money laundering regulations. If our policies, procedures and systems are deemed deficient or the policies, procedures and systems of the financial institutions that we have already acquired or may acquire in the future are deficient, we would be subject to liability, including fines and regulatory actions such as restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan, including our acquisition plans, which would negatively impact our business, financial condition and results of operations. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us.

Federal, state and local consumer lending laws may restrict our ability to originate certain mortgage loans or increase our risk of liability with respect to such loans and could increase our cost of doing business.

Federal, state and local laws have been adopted that are intended to eliminate certain lending practices considered “predatory.” These laws prohibit practices such as steering borrowers away from more affordable products, selling unnecessary insurance to borrowers, repeatedly refinancing loans and making loans without a reasonable expectation that the borrowers will be able to repay the loans irrespective of the value of the underlying property. The CFPB has issued several rules on mortgage lending, notably a rule requiring all home mortgage lenders to determine a borrower’s ability to repay the loan. Loans with certain terms and conditions and that otherwise meet the definition of a “qualified mortgage” may be protected from liability to a borrower for failing to make the necessary determinations. In either case, we may find it necessary to tighten our mortgage loan underwriting standards in response to the CFPB rules, which may constrain our ability to make loans consistent with our business strategies. It is our policy not to make predatory loans and to determine borrowers’ ability to repay, but the law and related rules create the potential for increased liability with respect to our lending and loan investment activities. They increase our cost of doing business and, ultimately, may prevent us from making certain loans and cause us to reduce the average percentage rate or the points and fees on loans that we do make.

We are subject to federal and state fair lending laws, and failure to comply with these laws could lead to material penalties.

Federal and state fair lending laws and regulations, such as the Equal Credit Opportunity Act and the Fair Housing Act, impose nondiscriminatory lending requirements on financial institutions. The Department of Justice, CFPB and other federal and state agencies are responsible for enforcing these laws and regulations. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. A successful challenge to our performance under the fair lending laws and regulations could adversely impact our rating under the CRA and result in a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on merger and acquisition activity and restrictions on expansion activity, which could negatively impact our reputation, business, financial condition and results of operations.

Failure to comply with government regulation and supervision could result in sanctions by regulatory agencies, civil money penalties, and damage to our reputation.

Our operations are subject to extensive regulation by federal, state, and local governmental authorities. Given the current disruption in the financial markets, we expect that the government will continue to pass new regulations and laws that will impact us. Compliance with such regulations may increase our costs and limit our ability to pursue business opportunities. Failure to comply with laws, regulations, and policies could result in sanctions by regulatory agencies, civil money penalties, and damage to our reputation. While we have policies and procedures in place that are designed to prevent violations of these laws, regulations, and policies, there can be no assurance that such violations will not occur.

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.

~~The~~Consumers ~~downgrade~~may ofdecide ~~the~~not ~~U.S.~~to ~~credit~~use ~~rating~~banks ~~could~~to ~~negatively~~complete ~~impact our~~their ~~business, results of operations and~~ financial ~~condition~~ transactions.

~~Recent~~Technology ~~U.S.~~and ~~debt~~other ~~ceiling~~changes ~~and~~are ~~budget~~allowing ~~deficit~~parties ~~concerns~~to ~~together~~complete ~~with~~financial ~~signs~~transactions ofthrough ~~deteriorating~~alternative ~~sovereign~~methods ~~debt~~that ~~conditions~~historically ~~in Europe,~~ have ~~increased~~involved ~~the possibility of additional credit-rating downgrades and economic slowdowns in the U~~banks.S. ~~Although~~For ~~U.S.~~example, ~~lawmakers~~consumers ~~passed legislation to raise the federal debt~~can ~~ceiling~~now inmaintain ~~2011,~~funds ~~Standard~~that &would ~~Poor’s~~have ~~Ratings~~historically ~~Services~~been ~~lowered~~held ~~its~~as ~~long-term~~bank ~~sovereign~~deposits ~~credit~~in ~~rating~~brokerage onaccounts, ~~the~~mutual ~~U.S.~~funds ~~from~~or ~~“AAA”~~general-purpose toreloadable ~~“AA+”~~prepaid ~~in August 2011~~cards. ~~The~~Consumers ~~impact~~can ofalso ~~any~~complete ~~further~~transactions ~~downgrades~~such toas ~~the~~paying ~~U.S.~~bills ~~government’s sovereign credit rating~~ and/or ~~its perceived~~transferring ~~creditworthiness~~funds ~~could~~directly ~~adversely affect~~ without the ~~U.S.~~assistance ~~and~~of ~~global financial markets and economic conditions~~banks. InThe ~~January~~process ~~2013, the~~of ~~U.S.~~eliminating ~~government~~banks ~~adopted~~as ~~legislation to suspend the debt limit until March 19~~intermediaries, ~~2013.~~known Inas ~~October 2013~~“disintermediation,” ~~the~~could ~~debt ceiling was suspended~~result ~~until February 7, 2014, and~~ in ~~February 2014,~~ the ~~debt~~loss ~~ceiling~~of ~~was~~fee ~~suspended further until March 16~~income, ~~2015.~~as ~~Moody’s~~well ~~and~~as ~~Fitch~~the ~~have each~~loss ~~warned~~of ~~that~~customer ~~they~~deposits ~~may~~and ~~downgrade~~ the ~~U.S.~~related ~~government’s~~income ~~rating~~generated iffrom ~~the~~those ~~federal debt is not stabilized~~deposits. AThe ~~downgrade~~ loss of ~~the~~these ~~U.S. government’s~~revenue ~~credit~~streams ~~rating or a default by the U.S. government to satisfy its debt obligations likely would create broader financial turmoil~~ and ~~uncertainty, which would weigh heavily on~~ the ~~global~~lower ~~banking~~cost ~~system.~~of Itdeposits isas ~~possible~~a ~~that~~source ~~any~~of ~~such~~funds ~~impact~~ could have a material adverse effect on our ~~business,~~financial condition and results of operations ~~and financial condition~~.

Failure to keep pace with technological change could adversely affect our business.

The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on our business and, in turn, our financial condition and results of operations.

New lines of business or new products and services may subject us to additional risk.

From time to time, we may implement new lines of business or offer new products and services within existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new products and services, we may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business and/or a new product or service. Furthermore, any new line of business and/or new product or service could have a significant impact on the effectiveness of our system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business and/or new products or services could have a material adverse effect on our business and, in turn, our financial condition and results of operations.

A downgrade of the U.S. credit rating could negatively impact our business, results of operations and financial condition.

In August 2011, Standard & Poor’s Ratings Services lowered its long-term sovereign credit rating on the U.S. from “AAA” to “AA+”. If U.S. debt ceiling, budget deficit or debt concerns, domestic or international economic or political concerns, or other factors were to result in further downgrades to the U.S. government’s sovereign credit rating or its perceived creditworthiness, it could adversely affect the U.S. and global financial markets and economic conditions. A downgrade of the U.S. government’s credit rating or any failure by the U.S. government to satisfy its debt obligations could create financial turmoil and uncertainty, which could weigh heavily on the global banking system. It is possible that any such impact could have a material adverse effect on our business, results of operations and financial condition.

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, ~~2014~~2015, our borrowing capacity with the Federal Home Loan Bank was $2223,~~620~~273,000 of which $1116,~~120~~523,000 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.

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 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.

The Federal Reserve may require us to commit capital resources to support the Bank.

The Federal Reserve requires a bank holding company to act as a source of financial and managerial strength to a subsidiary bank and to commit resources to support such subsidiary bank. Under the “source of strength” doctrine, the Federal Reserve may require a bank holding company to make capital injections into a troubled subsidiary bank and may charge the bank holding company with engaging in unsafe and unsound practices for failure to commit resources to such a subsidiary bank. In addition, the Dodd-Frank Act directs the federal bank regulators to require that all companies that directly or indirectly control an insured depository institution serve as a source of strength for the institution. Under these requirements, in the future, we could be required to provide financial assistance to our Bank if the Bank experiences financial distress.

A capital injection may be required at times when we do not have the resources to provide it, and therefore we may be required to borrow the funds. In the event of a bank holding company’s bankruptcy, the bankruptcy trustee will assume any commitment by the holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank. Moreover, bankruptcy law provides that claims based on any such commitment will be entitled to a priority of payment over the claims of the holding company’s general unsecured creditors, including the holders of its note obligations. Thus, any borrowing that must be done by the holding company in order to make the required capital injection becomes more difficult and expensive and will adversely impact the holding company’s cash flows, financial condition, results of operations and prospects.

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 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.

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. On April 14, 2014, the Company repurchased 729 shares of the 2,129 shares of Series A Preferred Stock outstanding at par. The repurchase will save the Company approximately $66,000 in dividend expenses annually. As of December 31, ~~2014~~2015, 1,400 shares of Series A Preferred Stock and 164 shares of Series B Preferred Stock were outstanding. 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.

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.

2730

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 space at 1201 Knox Abbot Drive, Cayce, South Carolina, which weoffices ~~had~~are ~~previously~~ owned ~~prior~~by tothe ~~entering into a sale-leaseback transaction in 2010 and subsequently repurchased during 2013~~Bank. We have a leased branch located at 2023 Sunset Boulevard, West Columbia, South Carolina. We believe ~~these~~that ~~premises~~upon ~~will~~expiration beof ~~adequate~~the ~~for~~lease ~~present~~we ~~and~~will ~~anticipated~~be able ~~needs~~to ~~and~~extend ~~that~~the welease ~~have~~on ~~adequate insurance~~satisfactory terms or relocate to ~~cover~~another ~~our~~acceptable ~~premises~~location. WeAlthough ~~believe~~the ~~that~~properties ~~upon~~owned ~~expiration~~and ofleased are ~~the~~generally ~~lease~~considered weadequate ~~will~~for bepresent ~~able~~and toanticipated ~~extend~~needs, ~~the~~we ~~lease~~have ona ~~satisfactory terms~~continuing orprogram ~~relocate~~of tomodernization, ~~another~~expansion ~~acceptable~~and, when ~~location~~necessary, occasional replacement of facilities.

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

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:

2014	High		Low
2015	High		Low
First Quarter	$	34.8510	$	3.3058
Second Quarter		46.00		34.3010
Third Quarter		37.7850		35.6051
Fourth Quarter		38.8700		35.5175
2013	High		Low
First Quarter	$	4.00	$	2.25
Second Quarter		4.15		4.00
Third Quarter		4.55		4.00
Fourth Quarter		4.35		3.85

As of March 3, 2015, there were 1,764,439 shares of common stock outstanding held by approximately 1,685 shareholders of record.

2014	High		Low
First Quarter	$	3.85	$	3.30
Second Quarter		4.00		3.30
Third Quarter		3.78		3.60
Fourth Quarter		3.87		3.51

As of March 4, 2016, there were 1,765,939 shares of common stock outstanding held by approximately 1,661 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.

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. On April 14, 2014, the Company repurchased 729 shares of the 2,129 shares of Series A Preferred Stock outstanding at par. The repurchase will save the Company approximately $66,000 in dividend expenses annually. As of December 31, ~~2014~~2015, 1,400 shares of Series A Preferred Stock and 164 shares of Series B Preferred Stock were outstanding.

2932

The following table sets forth equity compensation plan information at December 31, ~~2014~~2015.

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)		~~167~~166,~~944~~444	$	6.86		149,655
Equity compensation plans not approved by security holders (2)		80,000	$	10.00		—
Total		~~247~~246,~~944~~444	$	8.43		149,655

(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.

3033

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, ~~2014~~2015 and ~~2013~~2014, analyzes our financial condition as of December 31, ~~2014~~2015 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 $1350,~~357,740~~854 and $1,~~022~~357,~~759 for~~740 for the years ended December 31, ~~2014~~2015 and ~~2013~~2014, respectively. Net income before income ~~tax~~taxes ~~benefit~~ was $~~501~~556,~~315~~325 for the year ended ~~December~~ December 31, ~~2014~~2015, aan ~~decrease~~increase of $7955,~~797~~010, compared to income before tax benefit of $~~581~~501,~~112~~315 for the year ended December 31, ~~2013~~2014. The reversal of the deferred tax asset valuation allowance at December 31, 2014 ~~and 2013~~ contributed $856,425 ~~and $441,647~~ to our net income~~, respectively~~. The ~~decrease~~increase in net income before income taxes in ~~2014~~2015 resulted from aan ~~decrease~~increase of $~~142~~187,~~907~~703 in noninterest income and aan ~~decrease~~increase of $~~204~~46,~~988~~445 in net interest income. Noninterest expense ~~decreased~~increased from $3,~~975~~754,~~975~~877 for the year ended December 31, ~~2013~~2014 to $34,~~754~~072,~~877~~015 for the year ended December 31, ~~2014~~2015. We also recorded a provision for loan losses of $~~358~~220,000 and $~~405~~358,000 for the years ended December 31, 2015 ~~2014~~ and ~~2013~~2014, respectively.

At December 31, ~~2014~~2015, total assets were $~~112~~109,~~922~~141,~~086~~050 compared to $112,~~538~~922,~~793~~086 at December 31, ~~2013~~2014, ~~for~~a andecrease ~~increase~~ of $~~383~~3,~~293~~781,036, or 03.34%. The ~~increase~~decrease in assets resulted from ana ~~increase~~decrease in our securities portfolio of $6,157,657 partially offset by an increase in the loan portfolio of $~~464~~2,~~407~~553,840 in ~~2014~~2015. Interest-earning assets comprised approximately 91% ~~and 92.7%~~ of total assets at December 31, ~~2014~~2015 and December 31, ~~2013, respectively~~2014. Gross loans totaled $7880,~~426~~980,~~868~~ 708 at December 31, ~~2014~~2015, an increase of $~~464~~2,~~407~~553,840, or 0 3.593%, from $7778,~~962~~426,~~461~~868 at December 31, ~~2013~~2014. In addition, we transferred loans in the amount of $~~788~~459,~~921~~000 to other real estate owned during the year ended December 31, ~~2014~~2015, compared to $~~251~~788,~~386~~921 in the year ended December 31, ~~2013~~2014. Investment securities were $2519,~~339~~181,~~059~~402 at December 31, ~~2014~~2015, a decrease of $26,~~335~~157,~~358~~657, or 824.43%, from $2725,~~674~~339,~~417~~059 at December 31, ~~2013~~2014. There was no investment in overnight federal funds at December 31, ~~2014~~2015 and ~~2013~~2014.

Deposits totaled $8790,~~958~~541,~~312~~366 at December 31, ~~2014~~2015, a $32,~~178~~583,~~145~~054, or 32.489%, ~~decrease~~increase from $9187,~~130~~958,~~457~~312 at December 31, ~~2013~~2014. Shareholders’ equity was $13,~~344~~559,~~948~~606 and $1213,~~408~~344,~~617~~948 at December 31, ~~2014~~2015 and December 31, ~~2013~~2014, 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~~were ~~been~~ adversely affected by the economic downturn beginning in the latter ~~half~~ half of 2007. At that time, 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 2013 but declined throughout 2014 and 2015. The Bank’s management continues to aggressively manage the level ~~and~~ and number of delinquent borrowers. Delinquencies were evenly distributed across portfolios and non-accruing loans were primarily ~~concentrated~~ concentrated in real estate loans.

As of December 31, ~~2014~~2015, approximately 85% 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 $710,~~973~~538,~~835~~852 of construction, land development and other land loans as of December 31, ~~2014~~2015, most of which are on ~~properties~~ properties located within the Columbia MSA and consist primarily of loans to individuals or closely held real estate holding companies ~~where~~ where the borrower was holding property for current and/or future personal use. Additionally, $1,~~631~~778,~~904~~ 621 of all construction, land development, and other land loans are single family residential construction loans intended for use as a primary residence.

Non-performing assets decreased ~~during~~slightly during the year ended December 31, ~~2014~~2015. As of December 31, ~~2014~~2015, our non-performing assets equaled $2,~~595~~597,~~086~~376, or 2.2938% of assets, as compared to $2,~~800~~595,~~181~~086, or 2.4829% of assets, as of December 31, ~~2013~~2014. For the year ended December 31, ~~2014~~ 2015, we recorded a provision for loan losses of $~~358~~220,000 and net loan charge-offs of $~~663~~147,~~517~~012, or 0.8018% of average loans, as compared to to a $~~405~~358,000 provision for loan losses and net loan charge-offs of $~~387~~663,~~742~~517, or 0.5084% of average loans, for the year ended December 31, ~~2013~~2014.

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, ~~2014~~2015, 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 non deductibility 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,~~181~~228,~~782~~227 for the year ended December 31, ~~2014~~2015, aan ~~decrease~~increase of $~~204~~46,~~988~~445 or 41.6711% over net interest income of $4,~~386~~181,~~770~~782 for the year ended December 31, ~~2013~~2014. Interest income of $4,~~584~~587,~~468~~619 for the year ended December 31, ~~2014~~2015 included $34,~~915~~061,~~092~~370 on loans, $~~644~~494,~~834~~852 on investment securities and $2431,~~542~~397 on federal funds sold and nonmarketable equity securities. Loan interest and related fees ~~decreased~~increased $~~274~~146,~~258~~278, or 63.5574%, during ~~2014~~2015, due to aan ~~decrease~~increase in the loan portfolio volume and interest rates. Total interest expense of $~~402~~359,~~686~~392 for the year ended December 31, ~~2014~~2015 included $~~345~~304,~~220~~866 related to deposit accounts and $5754,~~466~~526 on federal funds purchased and FHLB borrowings. Interest expense on deposits decreased $6340,~~534~~354, or 151.757%, during ~~2014~~2015 due to the decrease in deposit rates and ~~volume~~increase in noninterest bearing accounts during ~~2014~~2015.

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.

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Average Balances, Income and Expenses, and Rates

	For the Year Ended December 31, 2014							For the Year Ended December 31, 2013							For the Year Ended December 31, 2012
	For the Year Ended December 31, 2015							For the Year Ended December 31, 2014							For the Year Ended December 31, 2013
	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	$	~~209~~757	$	12		0.26	%	$	~~101~~209	$	—1		—0.26	%	$	~~553~~101	$	1—		~~0.18~~—	%
Investment securities and FHLB stock		2621,~~832~~502		~~669~~524		2.4944	%		26,~~684~~832		~~664~~669		2.4849	%		2726,~~712~~684		~~749~~664		2.7048	%
Loans receivable(1)		7780,~~669~~508		34,~~915~~061		5.04	%		7977,~~925~~669		43,~~189~~915		5.2404	%		8479,~~093~~925		4,~~570~~189		5.4324	%
Total earning assets		~~104~~102,~~710~~767		4,~~585~~587		4.3846	%		~~106~~104,710		4,~~853~~585		4.5538	%		~~112~~106,~~358~~710		54,~~320~~853		4.7455	%
Noninterest-earning assets		79,~~920~~016							57,~~440~~920							65,~~058~~440
Total assets	$	~~112~~111,~~630~~783						$	112,~~150~~630						$	~~118~~112,~~416~~150
Interest-bearing liabilities:
Interest bearing transaction accounts	$	69,~~786~~089		1217		0.1819	%	$	56,~~696~~786		1012		0.18	%	$	45,~~877~~696		810		0.1618	%
Savings & money market		4441,~~245~~821		~~120~~110		0.2726	%		4544,~~460~~245		~~161~~120		0.3627	%		4945,~~982~~460		~~280~~161		0.5636	%
Time deposits		2521,~~678~~446		~~213~~178		0.83	%		2925,~~054~~678		~~253~~213		0.8783	%		3229,~~458~~054		~~345~~253		10.0687	%
Advances from FHLB		9,~~002~~719		5553		0.6053	%		49,~~821~~002		3955		0.8160	%		64,~~608~~821		~~100~~39		10.5181	%
Federal funds purchased and repurchase agreement		~~492~~386		32		0.51	%		~~521~~492		3		0.5351	%		~~208~~521		13		0.4853	%
Total interest-bearing liabilities		8682,~~203~~461		~~403~~360		0.4743	%		8586,~~552~~203		~~466~~403		0.5447	%		9485,~~133~~552		~~734~~466		0.7854	%
Noninterest-bearing liabilities		1416,~~096~~090							14,~~334~~096							1114,~~429~~334
Shareholders’ equity		12,331							12,264							12,854
Shareholders' equity		13,232							12,331							12,264
Total liabilities and shareholders’ equity	$	112,630						$	112,150						$	118,416
Total liabilities and shareholders' equity	$	111,783						$	112,630						$	112,150
Net interest spread						34.9103	%						43.0191	%						34.9601	%
Net interest margin			$	4,~~182~~227		34.9912	%			$	4,~~387~~182		43.1199	%			$	4,~~586~~387		4.0811	%

(1) Loan fees, which are immaterial, are included in interest income. There were $1763,~~153,991~~924 in nonaccrual loans for ~~2014~~2015 and $1,~~255~~153,~~947~~991 in nonaccrual loans in ~~2013~~2014. 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, ~~2014~~2015 was 34.9912%, aan ~~decrease~~increase of ~~twelve~~13 basis points from the net interest margin of 43.1199% for the year ended December 31, ~~2013~~2014. The net interest margin is calculated by dividing net interest income by year-to-date average earning assets. This decrease can be attributed to the earning asset yield on loans declining due to competition. 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 $~~104~~102,~~710~~767,000 for the year ended December 31, ~~2014~~2015, ~~decreasing~~a decrease from $~~106~~104,710,000 for the year ended December 31, ~~2013~~2014. Our net interest spread was 34.9103% for the year ended December 31, ~~2014~~2015. 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.

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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.

	2014 Compared to 2013									2013 Compared to 2012
	2015 Compared to 2014									2014 Compared to 2013
(dollars in thousands)	Total Change			Change in Volume			Change in Rate			Total Change			Change in Volume			Change in Rate
Interest-earning assets:
Federal funds sold	$	12		$	1		$	—		$	(1	)	$	(1	)	$	—
Investment securities and FHLB stock		5(145	)		3(130	)		2(15	)		~~(85~~5	)		743			~~(159~~2	)
Loans		~~(274~~146	)		~~(131~~143	)		~~(143~~3	)		(~~381~~274	)		(~~124~~131	)		(~~257~~143	)
Total interest income		~~(268~~3	)		~~(127~~14	)		(~~141~~12	)		(~~467~~268	)		(51127	)		(~~416~~141	)
Interest-bearing liabilities:
Interest-bearing deposits		(7940	)		(2031	)		(599	)		(~~209~~79	)		(5320	)		(~~156~~59	)
FHLB advances		16(2	)		274			(116	)		~~(61~~16	)		~~(22~~27	)		(3911	)
Federal funds purchased and repurchase agreement		—(1	)		—(1	)		—			2—			2—			—
Total interest expense		(6343	)		7(28	)		(7015	)		(~~268~~63	)		~~(73~~7	)		(~~195~~70	)
Net interest income	$	(~~205~~40	)	$	~~(134~~14	)	$	~~(71~~3	)	$	(~~199~~205	)	$	22(134	)	$	(~~221~~71	)

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 income. 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, ~~2014~~2015 was $~~358~~220,000, a decrease of $47138,000 or 1138.65% over our provision of $~~405~~358,000 for the year ended December 31, ~~2013.~~ 2014. The allowance as a percentage of gross loans ~~decreased~~increased from 1.6828% as of December 31, ~~2013~~2014 to 1.2833% as of December 31, ~~2014 due~~2015 due to management’s evaluation of the adequacy of the reserve for possible loan losses given the size, mix, and quality of ~~the~~ the current loan portfolio. Management also relies on our history of past-dues and charge-offs, as well as peer data, to determine our loan loss allowance.

3538

Noninterest Income

Noninterest income for the year ended December 31, ~~2014~~2015 was $~~432~~620,~~410~~113 compared to $~~575~~432,~~317~~410 for the year ended December 31, ~~2013~~2014. This ~~decrease~~increase is primarily related to aan ~~decrease~~increase in gains on sales of securities available-for-sale which totaled $71114,~~145~~393 for the year ended December 31, ~~2014~~2015, compared to $~~222~~71,~~297~~145 in ~~2013. This decrease compared to 2013 was primarily due to restructuring the investment portfolio to shorten the duration in~~ 2014. For the year ended December 31, ~~2014~~2015, mortgage loan origination fees were $3173,~~150~~131, aan ~~decrease~~increase of $3841,~~104~~981, or ~~55.8~~or 59%, from ~~2013~~2014, due to the ~~decrease~~increase in the volume of mortgage loans originated. Service charges on deposit accounts increased from $291,190 for the year ended December 31, 2014 to $376,413 for the year ended December 31, 2015.

Noninterest Expenses

The following table sets forth information related to our noninterest expenses for the year ended December 31, ~~2014~~2015 and ~~2013~~2014.

	2014			2013
	2015			2014
Compensation and benefits	$	1,~~896~~873,~~824~~526		$	1,~~810~~896,~~856~~824
Occupancy and equipment		~~669~~742,~~519~~511			~~832~~669,~~211~~519
Data processing and related costs		~~363~~361,~~269~~984			~~335~~363,~~087~~269
Marketing, advertising and shareholder communications		8550,~~970~~691			8085,~~632~~970
Legal and audit		~~241~~321,~~047~~185			~~179~~241,~~851~~047
Other professional fees		1031,~~906~~904			10,~~242~~906
Supplies and postage		5744,~~274~~813			6257,~~580~~274
Insurance		47,~~893~~570			4447,~~897~~893
Credit related expenses		~~324~~(534	)		~~17,498~~324
Regulatory fees and FDIC insurance		~~124~~129,~~558~~871			~~131~~124,~~430~~558
Net cost of operations of other real estate owned		32231,~~316~~385			~~257~~32,~~643~~316
Other		~~224~~237,~~977~~109			~~213~~224,~~048~~977
Total noninterest expense	$	34,~~754~~072,~~877~~015		$	3,~~975~~754,~~975~~877

Noninterest expense was $34,~~754~~072,~~877~~014 for the year ended December 31, ~~2014~~2015, compared to $3,~~975~~754,~~975~~877 for the year ended December 31, ~~2013~~2014. The most significant component of noninterest expense is compensation and benefits, which totaled $1,~~896~~873,~~824~~526 for the year ended December 31, ~~2014~~2015, compared to $1,~~810~~896,~~856~~824 for the year ended December 31, ~~2013~~2014. The ~~increase~~slight decrease is ~~primarily~~due ~~related~~ to anreduction ~~increase~~ in ~~salaries~~staffing ~~due to employee performance~~hours. Occupancy and equipment expense of $~~669~~742,~~519~~510 in ~~2014~~2015 ~~decreased~~increased from $~~832~~669,~~211~~519 in ~~2013~~2014 mainly due to ~~the~~increase ~~repurchase~~in ofproperty ~~the~~taxes ~~Knox~~and ~~Abbott property~~technology services. Legal and audit fees increased from $~~179~~241,~~851~~047 in ~~2013~~2014 to $~~241~~321,~~047~~185 in ~~2014~~2015 as a result of increased legal ~~fees~~and ~~related to~~audit ~~work~~fees ~~out~~relating ofto ~~problem~~an ~~loans~~employee issue and ~~increase~~increased in audit ~~fees~~functions. Net cost of operations of other real estate expenses ~~decreased~~increased from $~~257~~32,~~643~~ 316 in ~~2013~~2014 to $32231,~~316~~ 385 in ~~2014~~2015 as a result of aan ~~decrease~~increase in writedowns of real estate owned during the year. Regulatory fees and FDIC insurance ~~decreased~~increased slightly from $~~131~~124,~~430~~558 in ~~2013~~2014 to $~~124~~129,~~558~~871 in ~~2014~~2015, primarily due to aan ~~decrease~~increase in the asset base used by the FDIC insurance ~~assessments~~ assessments base used to calculate the fees.

Income Taxes

The Company had taxable income for the years ended December 31, ~~2014~~2015 and ~~2013~~2014. 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 was needed at December 31, ~~2013~~2015. Management’s judgment is based on estimates concerning future income earned and historical earnings for the year ended December 31, ~~2014~~2015. 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 its net deferred tax assets. ~~Therefore, the majority of the valuation allowance was reduced by $1,142,949 in 2014 and $812,237 in 2013.~~

3639

Investments

At December 31, ~~2014~~2015, our available for sale investment securities portfolio was $2115,~~173~~268,~~560~~221 and represented approximately ~~18.7~~14% of our total assets. Available for ~~sale~~ sale investment securities decreased $25,~~471~~905,~~680~~339 from $2321,~~645~~173,~~240~~560 at December 31, ~~2013~~2014. Our portfolio consisted of Small Business ~~Administration~~ Administration Securities of $87,~~700~~969,~~577~~694, mortgage-backed securities of $13,~~948~~280,~~933~~589, state, county and municipal investment securities of $3,~~129~~527,~~037~~681, ~~U.S. government sponsored agencies of $6,596,536,~~ and corporate bonds of $~~798~~490,~~477~~257.

The amortized costs and fair values of investment securities at December 31, ~~2014~~2015, 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

~~606~~408,~~051~~249

~~612~~407,~~663~~829

—

Due after one through five years

35,~~527~~196,~~971~~139

35,~~504~~113,~~581~~913

—1,084,055

—1,099,510

Due after five through ten years

179,~~166~~827,~~877~~469

179,~~056~~746,~~316~~479

1,~~621~~693,~~498~~196

1,~~645~~678,~~586~~841

Due after ten years

—

1635,~~823,201~~030

1604,~~827,124~~770

Total securities

2115,~~300~~431,~~899~~857

2115,~~173~~268,~~560~~221

3,~~444~~412,~~699~~281

3,~~472~~383,~~710~~121

At December 31, ~~2014~~2015 and ~~2013~~2014, we had $3,~~444~~412,~~699~~281 and $3,~~475~~444,~~977~~699, respectively, in 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 $1011,~~119~~882,~~786~~419 and $910,~~267~~119,~~270~~786 at December 31, ~~2014~~2015 and ~~2013~~2014, respectively, were pledged to secure public deposits, as as required by law.

Proceeds from sales of available-for-sale securities during ~~2014~~2015 and ~~2013~~2014 were $135,~~568~~414,~~814~~786 and $813,~~509~~568,~~386~~814, respectively. Net gains of $71114,~~145~~393 and $~~222~~71,~~297~~145 were recognized on these sales in ~~2014~~2015 and ~~2013~~2014, respectively.

We held $~~720~~500,~~800~~900 of non-marketable equity securities, which consisted of FHLB stock of $~~618~~398,~~800~~900 and Pacific Coast Bankers Bank stock of $102,000, at December 31, ~~2014~~2015. 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, ~~2014~~2015 were $7880,~~426~~980,~~868~~708, or ~~75.5~~81% of interest-earning assets and 6974.41% of total assets, compared to $7778,~~962~~426,~~461~~868, or 7375.85% of interest-earning assets and 69.34% of total assets, at December 31, ~~2013~~2014. Due to the economic environment, the Bank made selective decisions related to originating loans in ~~2014~~2015. Loans originated in ~~2014~~2015 typically had debt service coverage ratios, debt to income ratios, loan to value ratios, and credit quality indicators that meet policy minimums. Management’s selectivity resulted in an increase of loan originations in for the year ended December 31, ~~2014~~2015. In addition, as the Bank moved into its ~~eighth~~ninth 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 85% of loans outstanding at December 31, ~~2014~~2015 and ~~86% at December 31, 2013~~2014. 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 13% of our loan portfolio at December 31, ~~2014~~2015 and ~~12% at December 31, 2013~~2014.

Our construction, land development, and other land loans represented approximately 1013% and 1110% of our loan portfolio at December 31, ~~2014~~2015 and ~~2013~~2014, respectively.

The following table summarizes the composition of our loan portfolio as of December 31, ~~2014~~2015 and ~~2013~~2014:

	December 31, 2014						December 31, 2013
	December 31, 2015						December 31, 2014
	Amount			Percentage of Total			Amount			Percentage of Total
Real Estate:
Commercial Real Estate	$	3032,~~280~~539,~~899~~464			3940	%	$	2830,~~760~~280,~~723~~899			3739	%
Construction, Land Development, & Other Land		710,~~973~~538,~~835~~852			1013	%		87,~~198~~973,~~696~~835			1110	%
Residential		11,~~560~~491,~~614~~959			1514	%		1211,~~617~~560,~~198~~614			1615	%
Residential Home Equity Lines of Credit (HELOCs)		1614,~~995~~525,~~363~~638			2118	%		1716,~~388~~995,~~327~~363			2221	%
Total Real Estate		6669,~~810~~095,~~711~~913			85	%		66,~~964~~810,~~944~~711			8685	%
Commercial		10,~~308~~503,~~132~~730			13	%		910,~~703~~308,~~862~~132			1213	%
Consumer		1,~~308~~381,~~025~~065			2	%		1,~~293~~308,~~655~~025			2	%
Gross loans		7880,~~426~~980,~~868~~708			100	%		7778,~~962~~426,~~461~~868			100	%
Less allowance for loan losses		(1,~~006~~079,~~794~~782	)					(1,~~312~~006,~~311~~794	)
Total loans, net	$	7779,~~420~~900,~~074~~926					$	7677,~~650~~420,~~150~~074

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.

38The following table summarizes the loan maturity distribution by composition and interest rate types at December 31, 2015.

The following table summarizes the loan maturity distribution by composition and interest rate types at December 31, 2014.

	One Year or Less		After one but within five years		After five years		Total
Commercial Real Estate	$	5,931,079	$	25,966,284	$	642,101	$	32,539,464
Construction Land Development, and Other Land		3,262,140		6,242,042		1,034,670		10,538,852
Residential Mortgage		2,694,313		7,701,525		1,096,121		11,491,959
Residential Home Equity Lines of Credit		—		32,437		14,493,201		14,525,638
Total Real Estate		11,887,532		39,942,288		17,266,093		69,095,913


Commercial		2,826,880		7,254,630		422,220		10,503,730
Consumer		229,156		807,122		344,787		1,381,065
Total Gross Loans, net of deferred loan fees	$	14,943,568	$	48,004,040	$	18,033,100	$	80,980,708



Gross Loans maturing after one year with
Fixed interest rates							$	45,322,267
Floating interest rates								20,714,873
Total							$	66,037,140

	One Year or Less		After one but within five years		After five years		Total
Commercial Real Estate	$	3,499,308	$	25,984,853	$	796,738	$	30,280,899
Construction Land Development, and Other Land		3,537,111		3,721,068		715,656		7,973,835
Residential Mortgage		2,796,983		7,763,797		999,834		11,560,614
Residential Home Equity Lines of Credit		240,526		78,614		16,676,223		16,995,363
Total Real Estate		10,073,928		37,548,332		19,188,451		66,810,711
Commercial		2,298,540		6,893,308		1,116,284		10,308,132
Consumer		246,902		875,152		185,971		1,308,025
Total Gross Loans, net of deferred loan fees	$	12,619,370	$	45,316,792	$	20,490,706	$	78,426,868
Gross Loans maturing after one year with
Fixed interest rates							$	44,046,678
Floating interest rates								21,760,820
Total							$	65,807,498

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,~~006~~079,~~794~~782 and $1,~~312~~006,~~311~~794 as of December 31, ~~2014~~2015 and December 31, ~~2013~~2014, respectively, and represented 1.2833% of outstanding loans at December 31, ~~2014~~2015 and 1.6828% of outstanding loans at December 31, ~~2013~~2014. 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~~collectibility 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~~collectibility 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.

3942

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 recent downturn in the real estate market has resulted in an increase in loan delinquencies, defaults and foreclosures, and we believe these trends may 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 $21,~~658~~808,~~476~~488 and $42,~~448~~658,~~601~~476 in impaired loans at December 31, ~~2014~~2015 and December 31, ~~2013~~2014, respectively. At December 31, ~~2014~~2015, 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 $~~232~~350,~~144~~792 and $~~456~~232,~~133~~144 at December 31, ~~2014~~2015 and December 31, ~~2013~~2014, respectively.

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.

4043

The following table presents a summary related to our allowance for loan losses for the years ended December 31, ~~2014~~2015 and ~~2013~~2014:

	2014			2013
	2015			2014
Balance at the beginning of period	$	1,~~312~~006,~~311~~794		$	1,~~295~~312,~~053~~311
Charge-offs:
Commercial		46108,~~916~~893			7046,~~951~~916
Residential		1124,~~034~~292			9311,~~201~~034
Commercial Real Estate		~~332,299~~—			58332,~~362~~299
Construction, Land Development and Other Land		—			—
Residential – HELOCs		~~290~~94,~~696~~668			~~140~~290,~~000~~696
Consumer		~~7,572~~870			547,~~514~~572
Total Charged-off	$	~~688~~228,~~517~~723		$	~~417~~688,~~028~~517
Recoveries:
Residential		~~181~~—			~~738~~181
Commercial Real Estate		—70,000			—
Commercial		510,~~540~~115			275,~~691~~540
Residential - HELOCs		191,~~279~~596			~~857~~19,279
Total Recoveries		2581,~~000~~711			2925,~~286~~000
Net Charge-offs		~~663~~147,~~517~~012			~~387~~663,~~742~~517
Provision for Loan Loss		~~358~~220,000			~~405~~358,000
Balance at end of period	$	1,~~006~~079,~~794~~782		$	1,~~312~~006,~~311~~794
Total loans at end of period	$	7880,~~426~~980,~~868~~708		$	7778,~~962~~426,~~461~~868
Average loans outstanding	$	7780,~~669~~334,000		$	7977,~~925~~669,000
As a percentage of average loans:
Net loans charged-off		0.8518	%		0.4985	%
Provision for loan losses		0.4627	%		0.5146	%
Allowance for loan losses as a percentage of:
Year end loans		1.2833	%		1.6828	%
Average loans outstanding		1.3734	%		1.6437	%

4144

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.

	2014					2013
	2015					2014
	Amount		% of loans in category			Amount		% of loans in category
Commercial	$	~~174~~179,~~737~~176		13	%	$	~~234~~174,~~069~~737		1213	%
Commercial Real Estate		62158,~~460~~362		3940	%		~~104~~62,~~705~~460		3739	%
Construction, Land Development and Other Land		1368,~~157~~355		1013	%		8013,~~213~~157		1110	%
Consumer		42301,~~299~~590		2	%		3942,~~792~~299		2	%
Residential Mortgage		6483,~~651~~014		1514	%		~~228~~64,~~771~~651		1615	%
Residential HELOCs		~~476~~183,~~045~~909		2118	%		~~624~~476,~~739~~045		2221	%
Unallocated		~~173~~105,~~445~~376		N/A			22173,445		N/A
Total	$	1,~~006~~079,~~794~~782		100	%	$	1,~~312~~006,~~311~~794		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, 2014 and 2013:

	December 31,
	2014			2013
	2015			2014
Other real estate owned	$	1,~~441~~710,~~095~~235		$	1,~~544~~441,~~234~~095
Non-accrual loans		1763,~~153,991~~924			1,~~255~~153,~~947~~991
Accruing loans 90 days or more past due		—			—
Total non-performing assets	$	2,~~595~~474,~~086~~159		$	2,~~800~~595,~~181~~086
As a percentage of gross loans:		3.3105	%		3.5931	%

The Bank had net charge-offs on loans in the amount of $~~663~~147,~~517~~012 for the year ended December 31, ~~2014~~2015, compared to $~~387~~663,~~742~~517 charged off in ~~2013~~2014. At December 31, ~~2014~~2015, there were six loans in non-accrual status totaling $1763,~~153,991~~924 compared to 13six loans in nonaccrual status that ~~totaling~~totaled $1,~~255~~153,~~947~~991 at ~~December~~ December 31, ~~2013~~2014. There were no loans contractually past due 90 days or more still accruing interest at December 31, ~~2014~~2015 and ~~December~~ December 31, ~~2013~~2014. There were ~~six~~five loans restructured or otherwise impaired totaling $1553,~~176,190~~359 not already included in nonaccrual ~~status~~ status at December 31, ~~2014~~2015. At December 31, ~~2014~~2015 and ~~2013~~2014, impaired loans totaled $21,~~658~~808,~~476~~488 and $42,~~448~~658,~~601~~476, respectively. Management 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.

4245

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, ~~2014~~2015 and ~~2013~~2014, we received approximately $233,~~883~~567 and $23,~~739~~883 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 $5665,~~591~~308 and $6656,~~814~~591, 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. 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, ~~2014~~2015 and ~~2013~~2014, potential problem loans that were not already categorized as nonaccrual totaled $21,~~015~~809,~~148~~032 and $2,~~837~~015,~~041~~148, 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, ~~2014~~2015 and ~~2013~~2014 were $8790,~~958~~541,~~312~~366 and $9187,~~130~~958,~~457~~312, 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 ~~2014~~2015 and ~~2013~~2014.

	2014					2013
	2015					2014
	Average Amount		Rate			Average Amount		Rate
Non-interest bearing demand deposits	$	1315,~~832~~887,~~579~~626		—	%	$	1413,~~164~~832,~~287~~579		— %	%
Interest-bearing checking		69,~~786,~~089,437		0.1819			56,~~695~~786,~~579~~089		0.1718
Money market		4239,~~915~~776,~~814~~584		0.27			4442,~~316~~915,~~767~~814		0.3627
Savings		12,~~329~~044,~~634~~757		0.1817			1,~~142~~329,~~886~~634		0.2318
Time deposits less than $100,000		118,~~617~~670,~~528~~132		0.76			1211,~~950~~617,~~489~~528		0.8676
Time deposits $100,000 and over		1412,~~060~~775,~~312~~854		0.88			1614,~~103~~060,~~530~~312		0.8988
Total	$	9088,~~541~~244,~~956~~390		0.4542	%	$	9490,~~373~~541,~~538~~956		0.5345	%

Core deposits, which exclude time deposits of $100,000 or more and wholesale certificates of deposit, provide a relatively stable funding source for our loan portfolio and other earning assets. Our core deposits were $7576,~~759~~317,~~021~~616 at December 31, ~~2014~~2015, compared to $75,~~762~~759,~~335~~021 at December 31, ~~2013~~2014. Our loan-to-deposit ratio was 89.24% and 8589.62% at December 31, ~~2014~~2015 and ~~2013~~2014, respectively. Due to the current interest rate environment in our market, we did not renew any internet certificates of deposit as a funding source when we were able to procure funds in the local market. We did not have any brokered certificates of deposit purchased at December 31, ~~2014~~2015 and December 31, ~~2013~~2014.

43The maturity distribution of our time deposits of $250,000 or more time deposits at December 31, 2015 was as follows:

The maturity distribution of our time deposits of $100,000 or more time deposits at December 31, 2014 was as follows:

Three months or less	$	2,697,670
Over three through six months		1,829,879
Over six through twelve months		7,641,146
Over twelve months		2,689 ,520
Total	$	14,858,215

Three months or less	$	1,940,447
Over three through six months		2,150,662
Over six through twelve months		4,788,183
Over twelve months		3,319,999
Total	$	12,199,291

Borrowings and lines of credit

At December 31, ~~2014~~2015, 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 $6,750,000 in unused federal funds on a one to 20 day basis, and $2,500,000 in unused federal funds on a one to 30 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, 2015 and 2014, we had no borrowings outstanding on these lines. ~~At December 31, 2013, we had $1,768,000 outstanding in federal funds purchased.~~

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, ~~2014~~2015 and December 31, ~~2013~~2014, we had $115,~~500~~000,000 and $711,~~000~~500,000 outstanding, respectively. ~~The~~During 2015 and 2014, the Bank borrowed the funds to reduce the cost of funds on money used to fund loans. The Bank has remaining credit availability of $1116,~~120~~523,000 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~~Amount			~~Maturity~~Grant Date		Maturity Date	Interest Rate
$	~~1,000,000~~	$	122,500,000	~~/17/2014~~	9/24/2015	3	2/1724/~~2015~~2016		0.2439	%
$	~~2,000,000~~	$	122,500,000	~~/17/2014~~	9/24/2013	4	9/1723/~~2015~~2016		0.2995	%
$	1,500,000		11	/25/2014		4	/24/2015		0.26	%
$	1,000,000		12	/12/2014		5	/12/2015		0.29	%
$	1,000,000		8	/11/2011		8	/11/2015		1.07	%
$	2,500,000		9	/24/2013		9	/24/2015		0.51	%
$	2,500,000		9	/24/2013		9	/23/2016		0.95	%

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 $13,~~344~~559,~~948~~606 at December 31, ~~2014~~2015, an increase of $~~936~~214,~~331~~658 from $1213,~~408~~344,~~617~~948 at December 31, ~~2013~~2014. The increase is primarily due to net income of $1350,~~357~~854,~~740,~~ partially offset by a $~~451~~22,~~317~~865 change in unrealized income on investment securities available for sale during ~~2014~~ 2015 and dividends paid on preferred stock of $~~149~~140,~~046~~761.

44The Basel III capital rules, which were released in July 2013, implement new capital standards and apply to all national and state banks and savings associations regardless of size and bank holding companies and savings and loan holding companies with $500 million or more in total consolidated assets. The requirements in the rule began to phase in on January 1, 2015 for the Bank, and the requirements in the rule will be fully phased in by January 1, 2019. Under the rule, the following minimum capital requirements apply to the Bank:

~~The Federal Reserve and bank regulatory agencies require bank holding companies and financial institutions to maintain capital at adequate levels based on~~ a ~~percentage~~new ofcommon ~~assets and~~equity ~~off-balance~~Tier ~~sheet~~1 ~~exposures, adjusted for~~ risk-based ~~weights ranging from 0% to 100%. The Federal Reserve guidelines contain an exemption from the~~ capital ~~requirements~~ratio ~~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~~4. ~~Although our class of common stock is registered under Section 12 of the Securities Exchange Act of 1934~~5%, 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~~based ~~assets. Tier 1~~ capital ~~consists~~ratio of ~~common~~6% ~~shareholders’~~(increased ~~equity,~~from ~~excluding~~ the ~~unrealized gain or~~former 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 04% ~~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~~requirement), ~~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.~~
Ata ~~the~~total ~~Bank~~risk-based ~~level, we are subject to various regulatory~~ capital ~~requirements~~ratio ~~administered~~of by8% ~~the~~(unchanged ~~federal~~from ~~banking agencies. Under~~ the ~~regulations adopted by the federal regulatory~~former ~~authorities~~requirement), ~~a bank will be categorized as:~~and
~~· 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~~4% or(also ~~greater,~~unchanged ~~and~~from isthe ~~not~~former ~~subject to any order or written directive by any such regulatory authority to meet and maintain a specific capital level for any capital measure~~requirement).

·Under ~~Adequately~~the ~~capitalized~~rule, ifTier 1 capital is redefined to include two components: Common Equity Tier 1 capital and additional Tier 1 capital. The new and highest form of capital, Common Equity Tier 1 capital, consists solely of common stock (plus related surplus), retained earnings, accumulated other comprehensive income, and limited amounts of minority interests that are in the ~~institution~~form ~~has~~of acommon ~~total~~stock. ~~risk-based~~Additional Tier 1 capital ~~ratio~~includes other perpetual instruments historically included in Tier 1 capital, such as noncumulative perpetual preferred stock. Tier 2 capital consists of 8instruments that currently qualify in Tier 2 capital plus instruments that the rule has disqualified from Tier 1 capital treatment.0% orCumulative ~~greater~~perpetual preferred stock, aformerly includable in Tier 1 ~~risk-based~~capital, is now included only in Tier 2 capital. Accumulated ~~ratio~~other comprehensive income (AOCI) is presumptively included in Common Equity Tier 1 capital and often would operate to reduce this category of 4capital.0% orThe ~~greater,~~rule provided a ~~leverage~~one-time ~~ratio~~opportunity at the end of 4the first quarter of 2015 for covered banking organizations to opt out of much of this treatment of AOCI.0% orWe ~~greater,~~made ~~and~~this isopt-out ~~not~~election ~~categorized~~and, as ~~well~~a ~~capitalized~~result, will retain the pre-existing treatment for AOCI.

~~· 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%.~~47

·In ~~Significantly~~addition, ~~undercapitalized~~in iforder ~~the~~to ~~institution~~avoid ~~has~~restrictions on capital distributions or discretionary bonus payments to executives, a ~~total~~covered banking organization must maintain a “capital conservation buffer” on top of its minimum risk-based capital ~~ratio~~requirements. This buffer must consist solely of ~~less~~Tier ~~than~~1 ~~6.0%~~Common Equity, abut the buffer applies to all three measurements (Common Equity Tier 1, ~~risk-based~~Tier 1 capital ~~ratio~~and total capital). The capital conservation buffer will be phased in incrementally over time, becoming fully effective on January 1, 2019, and will consist of an ~~less~~additional ~~than~~amount 3of common equity equal to 2.05% of risk-weighted assets. As of January 1, or2016, the Bank is required to hold a ~~leverage~~capital ~~ratio~~conservation buffer of ~~less~~0.625%, ~~than~~increasing 3by that amount each successive year until 2019.~~0%.~~

·Under ~~Critically undercapitalized if~~ the ~~institution’s~~regulations ~~tangible~~adopted ~~equity~~by isthe ~~equal~~federal regulatory toauthorities, orthe ~~less~~Bank ~~than~~will ~~2.0%~~be ofcategorized ~~average quarterly tangible assets.~~as:

~~In addition,~~Well ancapitalized if the institution ~~may~~(i) behas ~~downgraded~~total ~~to,~~risk-based orcapital ratio ~~deemed~~of to10% beor ingreater, a(ii) ~~capital~~has ~~category~~a ~~that~~Tier is1 ~~lower~~risk-based ~~than indicated by its~~ capital ~~ratios~~ ifratio itof is8% ~~determined to be in an unsafe~~ or ~~unsound~~greater, ~~condition~~(iii) orhas ifa itcommon ~~receives~~equity anTier ~~unsatisfactory~~1 ~~examination rating with~~risk-based ~~respect~~capital toratio ~~certain~~of ~~matters~~6.5% Aor ~~bank’s~~greater, ~~capital~~(iv) ~~category~~has isa ~~determined~~leverage ~~solely~~capital ~~for~~ratio ~~the purpose~~ of ~~applying~~5% ~~prompt~~or ~~corrective action regulations~~greater, and ~~the~~(v) ~~capital~~is ~~category~~not ~~may~~subject ~~not~~to ~~constitute~~any anorder ~~accurate~~or ~~representation~~written ofdirective ato ~~bank’s~~meet ~~overall~~and ~~financial~~maintain ~~condition~~a orspecific ~~prospects~~capital level for ~~other~~any ~~purposes~~capital measure.

~~The~~Adequately ~~following~~capitalized ~~table~~if ~~sets~~the ~~forth~~institution ~~the~~(i) ~~Bank’s~~has a total risk-based capital ~~ratios~~ratio atof ~~December~~8% 31or greater, ~~2014~~(ii) ~~and~~has ~~2013.~~a AsTier 1 risk-based capital ratio of ~~December~~6% 31or greater, ~~2014~~(iii) ~~and~~has ~~2013~~a common equity Tier 1 risk-based capital ratio of 4.5% or greater, ~~the~~and ~~Bank~~(iv) ~~was~~has ~~considered~~a ~~“well~~leverage ~~capitalized”~~capital ratio of 4% or greater.

	2014				2013
Total risk-based capital	$	12,697	15.87	%	$	13,102	16.47	%
Tier 1 risk-based capital		11,697	14.62	%		12,103	15.22	%
Leverage capital		11,697	10.57	%		12,103	10.80	%

Undercapitalized if the institution (i) has a total risk-based capital ratio of less than 8%, (ii) has a Tier 1 risk-based capital ratio of less than 6%, (iii) has a common equity Tier 1 risk-based capital ratio of less than 4.5% or greater, or (iv) has a leverage capital ratio of less than 4%.

45Significantly undercapitalized if the institution (i) has a total risk-based capital ratio of less than 6%, (ii) has a Tier 1 risk-based capital ratio of less than 4%, (iii) has a common equity Tier 1 risk-based capital ratio of less than 3% or greater, or (iv) has a leverage capital ratio of less than 3%.

Critically undercapitalized if the institution has a ratio of tangible equity to total assets that is equal to or less than 2%.

In addition, the Bank 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. The 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 the Bank’s overall financial condition or prospects for other purposes.

The following table sets forth the Bank’s capital ratios at December 31, 2015 and 2014. As of December 31, 2015 and 2014, the Bank was considered “well capitalized”.

	2015				2014

Total risk-based capital	$	13,162	15.75	%	$	12,697	15.87	%
Tier 1 risk-based capital		12,108	14.49	%		11,697	14.62	%
Leverage capital		12,108	10.97	%		11,697	10.57	%
CET1 capital		12,108	14.49	%		—	—

Because the Company’s total assets were less than $500 million at December 31, 2015, the Company is not subject to the new capital requirements established the Basel III capital rules. In addition, pursuant to the Federal Reserve’s Small Bank Holding Company Policy, which was amended in 2014, the Federal Reserve exempts certain bank holding and savings and loan holding companies from the capital requirements discussed above. The exemption applies only to bank holding companies with less than $1 billion (formerly $500 million) in consolidated assets that: (i) are not engaged in significant nonbanking activities either directly or through a nonbank subsidiary; (ii) do not conduct significant off-balance sheet activities (including securitization and asset management or administration) either directly or through a nonbank subsidiary; and (iii) do not have a material amount of debt or equity securities outstanding (other than trust preferred securities) that are registered with the SEC. The Company qualifies for this exemption and, thus, is required to meet applicable capital standards on a bank-only basis. However, bank holding companies with assets of less than $1 billion are subject to various restrictions on debt including requirements that debt is retired within 25 years of being incurred, that the debt to equity ratio is .30 to 1 within 12 years of the incurrence of debt and that dividends generally cannot be paid if the debt to equity ratio exceeds 1 to 1.

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.

On April 14, 2014, the Company repurchased 729 shares of the 2,129 shares of Series A Preferred Stock outstanding at par. The repurchase will save the Company approximately $66,000 in dividend expenses annually. As of December 31, ~~2014~~2015, 1,400 shares of Series A Preferred Stock and 164 shares of Series B Preferred Stock were outstanding. The outstanding shares of preferred stock will receive preferential treatment in the event of liquidation, dissolution or winding up of the Company.

As noted under “Supervision and Regulation – Basel Capital Standards,” in July 2013, the federal bank regulatory agencies approved a final rule to implement the Basel III regulatory capital reforms among other changes required by the Dodd-Frank Act. The framework requires banking organizations to hold more and higher quality capital, which acts as a financial cushion to absorb losses, taking into account the impact of risk. The approved rule includes a new minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5% as well as a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets. The rule also raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4% to 6% and includes a minimum leverage ratio of 4% for all banking institutions. For the largest, most internationally active banking organizations, the rule includes a new minimum supplementary leverage ratio that takes into account off-balance sheet exposures. In terms of quality of capital, the final rule emphasizes common equity tier 1 capital and implements strict eligibility criteria for regulatory capital instruments. It also changes the methodology for calculating risk-weighted assets to enhance risk sensitivity. The final rule became effective on January 1, 2015 and applies to all depository institutions, top-tier bank holding companies with total consolidated assets of $500 million or more (which does not include the Company) and top-tier savings and loan holding companies. It is management’s belief that, as of December 31, 2014, the Bank would have met all capital adequacy requirements under Basel III on a fully phased-in basis if such requirements were effective at that time.

Return on Equity and Assets

The following table shows the return on average assets (net income divided by average total assets), return on average equity (net income divided by average equity), and equity to assets ratio (average equity divided by average total assets) for the years ended December 31, ~~2014~~2015 and ~~2013~~2014.

	2014			2013
	2015			2014
Return on average assets		0.9431	%		0.9194	%
Return on average equity		82.6165	%		8.3461	%
Equity to assets ratio		11.5880	%		1011.9458	%

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, ~~2014~~2015, we had issued commitments to extend credit of approximately $1315,~~267~~181,000 through various types of lending arrangements. There were two standby letters of credit included in the commitments for $4840,000. Fixed rate commitments were $~~272~~1,993,000 and variable rate commitments were $1213,~~995~~188,000.

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, ~~2014~~2015, our liquid assets, consisting of cash and due from banks, amounted to $32,~~034~~993,~~889~~284, or approximately 2.6974% of total assets. Our investment securities available for sale at December 31, ~~2014~~2015 amounted to $2115,~~173~~268,~~560~~221, or approximately 1813.79% 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, ~~2014~~2015, $1011,~~119~~901,~~786~~935 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 $1215,~~550~~050,000. Availability on these lines of credit was $1215,~~550~~050,000 at December 31, ~~2014~~2015. 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, ~~2014~~2015, we had borrowed $115,~~500~~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, ~~2014~~2015 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.

	Within three months			After Three but within twelve months			After one but within five years			After five years			Total
Interest-earning assets:(in thousands)
Investment securities	$	2,142		$	1,013		$	7,484		$	8,738		$19,377
Loans		31,331			10,633			37,226			1,791		80,981
Total interest-earning assets		33,473		$	11,646		$	44,710		$	10,529		$100,358

Interest-bearing liabilities:(in thousands)

Interest-bearing checking	$	9,447		$	—		$	—		$	—		$9,447
Money market and savings		41,986			—			—			—		41,986
Time deposits		3,552			12,875			6,129			15		22,571

Fed Funds Purchased		—			—			—

FHLB Advances		2,500			2,500			—			—		5,000
Total interest-bearing Liabilities	$	57,485		$	15,375		$	6,129		$	15		$79,004

Period gap (in thousands)	$	(24,012	)	$	(3,729	)	$	38,581		$	10,514		$21,354
Cumulative gap (in thousands)	$	(24,012	)	$	(27,741	)	$	10,840		$	21,354

Ratio of cumulative gap to total interest-earning assets		(22.0	)%		(25.42	)%		9.93	%		19.57	%

	Within three months			After Three but within twelve months			After one but within five years			After five years			Total
Interest-earning assets:(in thousands)
Investment securities	$	3,343		$	1,117		$	5,390		$	15,490		$	25,340
Loans		33,306			7,144			35,493			2,484			78,427
Total interest-earning assets		36,649		$	8,261		$	40,883		$	17,974		$	103,767
Interest-bearing liabilities:(in thousands)
Interest-bearing checking	$	8,005		$	—		$	—		$	—		$	8,005
Money market and savings		43,485			—			—			—			43,485
Time deposits		4,423			11,195			6,295			—			21,913
Fed Funds Purchased		—			—			—			—
FHLB Advances		1,000			8,000			2,500			—			11,500
Total interest-bearing
Liabilities	$	56,913		$	19,195		$	8,795		$	—		$	84,903
Period gap (in thousands)	$	(20,264	)	$	(10,934	)	$	32,088		$	17,974		$	18,864
Cumulative gap (in thousands)	$	(20,264	)	$	(31,198	)	$	890		$	18,864
Ratio of cumulative gap to total interest-earning assets		(19.52	)%		(30.06	)%		0.85	%		18.17	%

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

Not applicable.

4951

Item 8. Financial Statements and Supplementary Data

INDEX TO AUDITED FINANCIAL STATEMENTS

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Consolidated Financial Statements

and

Report of Independent Registered Public Accounting Firm

For the Years Ended December 31, ~~2014~~2015 and ~~2013~~2014

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Table of Contents

Page No.

	Page No.
Report of Independent Registered Public Accounting Firm	1
Consolidated Balance Sheets	2
Consolidated Statements of Income	3
Consolidated Statements of Comprehensive Income	4
Consolidated Statements of Changes in Shareholders’ Equity	5
Consolidated Statements of Cash Flows	6
Notes to Consolidated Financial Statements	7-33
Corporate Data	34

Report of Independent Registered Public Accounting Firm	1
Consolidated Balance Sheets	2
Consolidated Statements of Income	3
Consolidated Statements of Comprehensive Income	4
Consolidated Statements of Changes in Shareholders’ Equity	5
Consolidated Statements of Cash Flows	6
Notes to Consolidated Financial Statements	7-32
Corporate Data	33

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders

Congaree Bancshares, Inc. ~~and Subsidiary~~

~~Cayce~~We have audited the accompanying consolidated balance sheets of Congaree Bancshares, ~~South~~Inc. ~~Carolina~~and Subsidiary (the “Company”) as of December 31, 2015 and 2014, 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 financial statements based on our audits.

We have audited the accompanying consolidated balance sheets of Congaree Bancshares, Inc. and Subsidiary (the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for the years then ended. These consolidated 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 control 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, ~~2014~~2015 and ~~2013~~2014, 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 Decosimo, LLC

Columbia, South Carolina

March 27 25, ~~2015~~2016

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Consolidated Balance Sheets

	December 31,
	2014			2013
	2015			2014
Assets:
Cash and cash equivalents:
Cash and due from banks	$	32,~~034~~993,~~889~~284		$	13,~~638~~034,~~635~~889
Total cash and cash equivalents		32,~~034~~993,~~889~~284			13,~~638~~034,~~635~~889
Securities available-for-sale		2115,~~173~~268,~~560~~221			2321,~~645~~173,~~240~~560
Securities held-to-maturity (fair value of $3,472,710 and $3,249,235 at December 31, 2014 and 2013, respectively)		3,444,699			3,475,977
Securities held-to-maturity (fair value of $3,383,121 and $3,472,710 at December 31, 2015 and 2014, respectively)		3,412,281			3,444,699
Nonmarketable equity securities		~~720~~500,~~800~~900			~~553~~720,~~200~~800
Loans receivable		7880,~~426~~980,~~868~~708			7778,~~962~~426,~~461~~868
Less allowance for loan losses		1,~~006~~079,~~794~~782			1,~~312~~006,~~311~~794
Loans receivable, net		7779,~~420~~900,~~074~~926			7677,~~650~~420,~~150~~074
Premises, furniture and equipment, net		2,~~959~~783,~~222~~775			2,~~960~~959,~~583~~222
Accrued interest receivable		~~363~~367,~~444~~412			~~398~~363,~~498~~444
Other real estate owned		1,~~441~~710,~~095~~235			1,~~544~~441,~~234~~095
Deferred tax asset		21,~~156~~985,~~902~~168			12,~~479~~156,~~585~~902
Other assets		~~207~~218,~~401~~848			~~192~~207,~~691~~401
Total assets	$	~~112~~109,~~922~~141,~~086~~050		$	112,~~538~~922,~~793~~086
Liabilities:
Deposits:
Noninterest-bearing transaction accounts	$	1416,~~555~~536,~~810~~465		$	1214,~~925~~555,~~414~~810
Interest-bearing transaction accounts		89,~~005~~447,~~384~~087			58,~~667~~005,~~203~~384
Savings and money market		4341,~~484~~986,~~515~~056			4443,~~032~~484,~~562~~515
Time deposits $100,000 and over		1214,~~199~~223,~~291~~750			1512,~~368~~199,~~122~~291
Other time deposits		98,~~713~~348,~~312~~008			139,~~137~~713,~~156~~312
Total deposits		8790,~~958~~541,~~312~~366			9187,~~130~~958,~~457~~312
Federal funds purchased		—			1,768,000
Federal Home Loan Bank advances		5,000,000			11,500,000
Federal Home Loan Bank advances		11,500,000			7,000,000
Accrued interest payable		14,273			13,766
Accrued interest payable		13,766			14,127
Other liabilities		25,805			105,060
Other liabilities		105,060			217,592
Total liabilities		95,581,444			99,577,138
Total liabilities		99,577,138			100,130,176
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; 1,400 and 2,129 shares issued and outstanding as at December 31, 2014 and December 31, 2013, respectively		1,400,000			2,117,147
Series A cumulative perpetual preferred stock; 1,400 shares issued and outstanding		1,400,000			1,400,000
Series B cumulative perpetual preferred stock; 164 shares issued and outstanding		164,000			~~166~~164,~~352~~000
Common stock, $.01 par value, 10,000,000 shares authorized; 1,764,439 shares issued and outstanding		17,644			17,644
Common stock, $.01 par value, 10,000,000 shares authorized; 1,765,939 and 1,764,439 shares issued and outstanding at December 31, 2015 and 2014, respectively		17,659			17,644
Capital surplus		17,~~693~~721,~~644~~059			17,~~688~~693,~~324~~644
Accumulated deficit		(5,~~850~~640,~~277~~184	)		(75,~~049~~850,~~470~~277	)
Accumulated other comprehensive loss		(80102,~~063~~928	)		(~~531~~80,~~380~~063	)
Total shareholders’ equity		13,~~344~~559,~~948~~606			1213,~~408~~344,~~617~~948
Total liabilities and shareholders’ equity	$	~~112~~109,~~922~~141,~~086~~050		$	112,~~538~~922,~~793~~086

See notes to consolidated financial statements.

-2-

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Consolidated Statements of Income

	For the years ended December 31,
	2014			2013
	2015			2014
Interest income:
Loans, including fees	$	34,~~915~~061,~~092~~370		$	43,~~189~~915,~~350~~092
Investment securities, taxable		~~644~~494,~~834~~852			~~648~~644,~~595~~834
Investment securities, non-taxable		—			2,203
Federal funds sold and other		31,397			24,542
Federal funds sold and other		24,542			12,842
Total		4,587,619			4,584,468
Total		4,584,468			4,852,990
Interest expense:
Time deposits $100,000 and over		~~124~~116,~~042~~481			~~142~~124,~~549~~042
Other deposits		~~221~~188,~~178~~385			~~281~~221,~~733~~178
Other borrowings		5754,~~466~~526			4157,~~938~~466
Total		~~402~~359,~~686~~392			~~466~~402,~~220~~686
Net interest income		4,~~181~~228,~~782~~227			4,~~386~~181,~~770~~782
Provision for loan losses		~~358~~220,000			~~405~~358,000
Net interest income after provision for loan losses		34,~~823~~008,~~782~~227			3,~~981~~823,~~770~~782
Noninterest income:
Service charges on deposit accounts		~~291~~376,~~190~~413			~~267~~291,~~201~~190
Residential mortgage origination fees		3173,~~150~~131			6931,~~254~~150
Gain on sales of securities available-for-sale		71114,~~145~~393			~~222~~71,~~297~~145
Other		3856,~~925~~176			1638,~~565~~925
Total noninterest income		~~432~~620,~~410~~113			~~575~~432,~~317~~410
Noninterest expenses:
Salaries and employee benefits		1,~~896~~873,~~824~~526			1,~~810~~896,~~856~~824
Net occupancy		~~311~~327,~~524~~900			~~518~~311,~~846~~524
Furniture and equipment		~~357~~414,~~995~~610			~~313~~357,~~365~~995
Professional fees		~~251~~353,~~953~~090			~~190~~251,~~093~~953
Data processing and other costs		~~363~~361,~~269~~984			~~335~~363,~~087~~269
Regulatory fees and FDIC assessment		~~124~~129,~~558~~871			~~131~~124,~~430~~558
Net cost of operation of other real estate owned		32231,~~316~~385			~~257~~32,~~643~~316
Other operating		~~416~~379,~~438~~649			~~418~~416,~~655~~438
Total noninterest expense		34,~~754~~072,~~877~~015			3,~~975~~754,~~975~~877
Income before income taxes		~~501~~556,~~315~~325			~~581~~501,~~112~~315
Income tax benefit		(856,425	)		(441,647	)
Income tax expense (benefit)		205,471			(856,425	)
Net income		1350,~~357,740~~854			1,~~022~~357,~~759~~740
Net accretion of preferred stock to redemption value		~~9,501~~—			179,~~798~~501
Preferred dividends		~~149~~140,~~046~~761			~~121~~149,~~211~~046
Net income available to common shareholders	$	1210,~~199,193~~093		$	~~883~~1,~~750~~199,193
Income per common share
Basic and diluted income per common share	$	0.6812		$	0.5068
Average common shares outstanding		1,~~764~~765,~~439~~189			1,764,439

See notes to consolidated financial statements.

-3-

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Consolidated ~~Condensed~~ Statements of Comprehensive Income

	For the years ended December 31,
	2014			2013
	2015			2014
Net Income	$	1350,~~357,740~~854		$	1,~~022~~357,~~759~~740
Other comprehensive income (loss):
Unrealized holding gains (losses) on securities available for sale, net of taxes of $250,902 at December 31, 2014 and $411,952 at December 31, 2013		498,273			(795,310	)
Unrealized holding gains on securities available for sale, net of taxes of $25,462 at December 31, 2015 and $250,902 at December 31, 2014		52,634			498,273
Reclassification adjustment for gains included in net income, net of taxes of $24,189 at December 31, 2014 and $75,581 at December 31, 2013		(46,956	)		(146,716	)
Reclassification adjustment for gains included in net income, net of taxes of $38,894 at December 31, 2015 and $24,189 at December 31, 2014		(75,499	)		(46,956	)
Other comprehensive income (loss)		~~451~~(22,~~317~~865	)		~~(942~~451,~~026~~317	)
Comprehensive Income	$	1327,~~809,057~~989		$	801,~~733~~809,057

See notes to consolidated financial statements.

-4-

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Shareholders’ Equity

For the years ended December 31, ~~2014~~2015 and ~~2013~~ 2014

	Preferred Stock						Common Stock				Capital		Accumulated			Accumulated Other Comprehensive
																Accumulated
	Shares			Amount			Shares		Amount		Surplus		Deficit			Income (Loss)			Total
																Other
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
	Preferred Stock						Common Stock				Capital		Accumulated			Comprehensive
Net Income														1,022,759						1,022,759
	Shares			Amount			Shares		Amount		Surplus		Deficit			Loss			Total
Other comprehensive loss																	(942,026	)		(942,026	)
Accretion of Series A discount on preferred stock					20,860									(20,860	)					—
Amortization of Series B premium on preferred stock					(3,062	)								3,062						—
Dividends on preferred stock														(121,211	)					(121,211	)
Balance, December 31, 2013		2,293			2,283,499			1,764,439		17,644		17,688,324		(7,049,470	)		(531,380	)		12,408,617
Net Income														1,357,740						1,357,740
Other comprehensive income																	451,317			451,317
Other comprehensive loss																	451,317			451,317
Stock option compensation expense												5,320								5,320
Repurchase of preferred stock		(729	)		(729,000	)														(729,000	)
Accretion of Series A discount on preferred stock					11,853									(11,853	)					—
Amortization of Series B premium on preferred stock					(2,352	)								2,352						—
Dividends on preferred stock														(149,046	)					(149,~~056~~046	)
Balance, December 31, 2014		1,564		$	1,564,000			1,764,439	$	17,644	$	17,693,644	$	(5,850,277	)	$	(80,063	)	$	13,344,948
Net Income														350,854						350,854
Other comprehensive income																	(22,865	)		(22,865	)
Stock option compensation expense												21,850								21,850
Issuance of common stock								1,500		15		5,565								5,580
Dividends on preferred stock														(140,761	)					(140,761	)
Balance, December 31, 2015		1,564		$	1,564,000			1,765,939	$	17,659	$	17,721,059	$	(5,640,184	)	$	(102,928	)	$	13,559,606

See notes to consolidated financial statements.

-5-

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

	For the years ended December 31,
	2014			2013
	2015			2014
Cash flows from operating activities:
Net income	$	1350,~~357,740~~854		$	1,~~022~~357,~~759~~740
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		~~358~~220,000			~~405~~358,000
Deferred income tax benefit		~~(904~~185,~~026~~166	)		(~~440~~904,~~612~~026	)
Stock based compensation expense		521,~~320~~850			—5,320
Depreciation and amortization expense		~~171~~191,~~940~~276			~~149~~171,~~667~~940
Discount accretion and premium amortization		~~119~~127,~~184~~391			~~104~~119,~~694~~184
Decrease in accrued interest receivable		35,054			64,762
(Increase) decrease in accrued interest receivable		(3,968	)		35,054
Decrease in accrued interest payable		(361	)		(8,230	)
Increase (decrease) in accrued interest payable		507			(361	)
Gain on sale of securities available-for-sale		(71114,~~145~~393	)		(~~222~~71,~~297~~145	)
Write downs on other real estate owned		—111,000			~~203,551~~—
(Gain) loss on sale of other real estate owned		(15,455	)		17,916
Loss (gain) on sale of other real estate owned		12,413			(15,455	)
Increase in other assets		(1411,~~710~~447	)		(4114,~~493~~710	)
(Decrease) increase in other liabilities		(112,532	)		38,554
Decrease in other liabilities		(79,255	)		(112,532	)
Net cash provided by operating activities		~~929~~1,~~009~~011,394			1929,~~294,271~~009
Cash flows from investing activities:
Purchase of securities available-for-sale		(112,~~216~~651,~~204~~606	)		(1011,~~680~~216,~~810~~204	)
Proceeds from maturities, calls, and paydowns of securities available-for-sale		~~780~~3,~~335~~125,282			~~709~~780,~~957~~335
Proceeds from sales of securities available-for-sale		135,~~568~~414,~~814~~786			813,~~509~~568,~~386~~814
Purchase of nonmarketable equity securities		~~(382,500~~—	)		(~~135~~382,~~000~~500	)
Proceeds from sales of nonmarketable equity securities		~~214~~219,900			~~136~~214,~~800~~900
Net (increase) decrease in loans receivable		(1,916,845	)		2,099,656
Net increase in loans receivable		(3,159,852	)		(1,916,845	)
Purchase of premises, furniture and equipment		(~~170~~15,~~579~~829	)		(2170,~~453,336~~579	)
Proceeds from sales of other real estate owned		~~907~~66,~~515~~447			~~700~~907,~~082~~515
Net cash provided (used) by investing activities		1,785,436			(1,113,265	)
Net cash provided by investing activities		2,999,128			1,785,436
Cash flows from financing activities:
Increase (decrease) in noninterest-bearing deposits		1,630,396			(2,158,079	)
Increase in noninterest-bearing deposits		1,980,655			1,630,396
Decrease in interest-bearing deposits		(4,802,541	)		(1,514,584	)
Increase (decrease) in interest-bearing deposits		602,399			(4,802,541	)
(Decrease) increase in federal funds purchased		~~(1,768,000~~—	)		(1,768,000	)
Increase in borrowings from FHLB		4,500,000			1,000,000
(Decrease) increase in borrowings from FHLB		(6,500,000	)		4,500,000
Repurchase of preferred stock		(729,000	)		—
Proceeds from issuance of common stock		5,580			—
Dividends paid on preferred stock		(149,046	)		(121,211	)
Repurchase of preferred stock		—			(729,000	)
Net cash used by financing activities		(1,318,191	)		(1,025,874	)
Dividends paid on preferred stock		(140,761	)		(149,046	)
Net increase (decrease) in cash and cash equivalents		1,396,254			(844,868	)
Net cash used by financing activities		(4,052,127	)		(1,318,191	)
Cash and cash equivalents, beginning of year		1,638,635			2,483,503
Net increase (decrease) in cash and cash equivalents		(41,605	)		1,396,254
Cash and cash equivalents, end of year	$	3,034,889		$	1,638,635
Cash and cash equivalents, beginning of year		3,034,889			1,638,635
Cash and cash equivalents, end of year	$	2,993,284		$	3,034,889
Supplemental cash flow information:
Interest paid on deposits and borrowed funds	$	~~403~~359,~~047~~392		$	~~474~~403,~~450~~047
Transfer of loans to other real estate	$	~~788~~459,~~921~~000		$	~~251~~788,~~386~~921
Cash paid for taxes	$	1715,~~884~~000		$	2917,~~782~~884

See notes to consolidated financial statements.

-6-

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization - Congaree Bancshares, Inc. (the “Company”) was incorporated to serve as a bank holding company for its subsidiary, Congaree State Bank (the “Bank”). The Bank commenced operations 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.

Merger – On January 5, 2016, Carolina Financial Corporation (“Carolina Financial”) and Congaree Bancshares, Inc. entered into an Agreement and Plan of Merger (the “merger agreement”), that provides for the acquisition of Congaree Bancshares, Inc. Under the terms of the merger agreement, Congaree will merge with and into CBAC, Inc., a South Carolina corporation and wholly owned subsidiary of Carolina Financial formed for the purpose of facilitating the merger, with Congaree Bancshares, Inc. being the surviving corporation (the “merger”). As soon as reasonably practicable thereafter, Congaree Bancshares, Inc. will merge up and into Carolina Financial, with Carolina Financial as the surviving entity. Simultaneously with the merger or immediately thereafter, Congaree State Bank will merge with and into CresCom Bank, and CresCom Bank will be the surviving bank (the “bank merger”). Both Carolina Financial and CresCom Bank will continue their existence under Delaware and South Carolina law, respectively, while Congaree Bancshares, Inc. and Congaree State Bank will cease to exist. Each share of Congaree Bancshares, Inc. common stock can be exchanged for either: (i) $8.10 in cash; (ii) 0.4806 shares of Carolina Financial common stock; or (iii) a combination of cash and shares of Carolina Financial common stock.

The merger is expected to be completed before the end of the second quarter of 2016; however, the merger requires approval of the Congaree Bancshares, Inc. shareholders at the special shareholder’s meeting and the necessary regulatory approvals.

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 Bank makes loans to individuals and small businesses for various personal and commercial purposes primarily in the Lexington County region of South Carolina. The Bank’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 Bank 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 Bank 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.

-7-

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

~~Investment~~In addition ~~Securities~~to -monitoring ~~Securities are~~potential ~~classified~~concentrations inof ~~one~~loans ofto ~~three~~particular ~~categories:~~borrowers ~~trading~~or groups of borrowers, ~~available~~industries ~~for~~and ~~sale~~geographic regions, ormanagement ~~held~~monitors exposure to ~~maturity.~~credit ~~Trading~~risk ~~securities~~from ~~are~~concentrations ~~bought~~of lending products and practices such as loans that ~~held~~subject ~~principally~~borrowers ~~for~~to ~~the~~substantial ~~purpose~~payment ofincreases ~~selling~~(e.g. ~~them~~principal indeferral ~~the~~periods, ~~near~~loans ~~term~~with initial interest-only periods, etc.) ~~Held~~and loans with high loan-to-value ~~maturity~~ratios. ~~securities~~Management has determined that there is no concentration of credit risk associated with its lending policies or practices. Additionally, there are ~~those~~industry ~~securities~~practices ~~for~~that ~~which~~could subject the Company to increased ~~Bank~~credit ~~has~~risk should economic conditions change over the ~~ability~~course ~~and~~of ~~intent~~a toloan’s ~~hold~~life. For example, the ~~securities~~Bank ~~until~~makes ~~maturity.~~variable ~~All~~rate loans ~~other~~and ~~securities~~fixed ~~not~~rate ~~included~~principal-amortizing inloans ~~trading~~with ormaturities ~~held~~prior to ~~maturity~~ ~~are~~the ~~classified~~loan asbeing ~~available~~fully ~~for~~paid ~~sale~~(i.e. Atballoon ~~December~~payment ~~31,~~loans). These ~~2014~~loans are underwritten and ~~2013~~monitored to manage the associated risks. Therefore, management believes that these particular practices do not subject the Bank ~~had~~to nounusual ~~trading~~credit ~~securities~~risk.

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, 2015 and 2014, 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, ~~2014~~2015 and ~~2013~~2014 was $~~618~~398,~~800~~900 and $~~451~~618,~~200~~800, respectively. The Company’s investment in Pacific Coast Bankers Bank stock at December 31, ~~2014~~2015 and ~~2013~~2014 was $102,000.

Loans Receivable - Loans are stated at their ~~upaid~~unpaid principal balance less any charge-offs. 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 to corroborate and challenge the internal loan grading system and methods used to determine the adequacy of the allowance for loan losses.

-8-

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Allowance for Loan Losses ~~(continued)~~ -– ~~Management~~An ~~believes the~~ allowance for loan losses is ~~adequate.~~established ~~While~~through ~~management~~a ~~uses available information~~provision tofor ~~recognize~~loan losses oncharged ~~loans,~~to ~~future~~expense. ~~additions~~Loans toare charged against the allowance ~~may~~for beloan ~~necessary~~losses ~~based~~when onmanagement ~~changes~~believes inthat ~~economic~~the collection ~~conditions.~~of Inthe ~~addition, regulatory~~principal ~~agencies,~~is asunlikely. anThe ~~integral~~allowance ~~part~~represents ofan ~~their~~amount, ~~examination process~~which, ~~periodically~~in ~~review~~management’s ~~the~~judgment, ~~allowance~~will ~~for~~be ~~loan losses. Such~~adequate ~~regulators may require additions~~ to ~~the~~absorb ~~allowance~~probable ~~based~~losses on ~~their~~existing ~~judgments~~loans ofthat ~~information~~may ~~available~~become ~~to them at the time of their examination~~uncollectible.

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 carry forward. 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. Advertising expenses totaled $3920,~~774~~380 and $4339,~~486~~774 for the year ended December 31, ~~2014~~2015 and ~~2013~~2014, respectively.

Income Per Share - Basic income per common share for ~~2014~~2015 and ~~2013~~2014 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, ~~2014~~ 2015 and ~~2013~~2014 due to the exercise price of all vested 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.

-9-

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

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.

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 $~~403~~359,~~047~~392 and $~~474~~403,~~450~~047 for the years ended December 31, ~~2014~~2015 and ~~2013~~2014, 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 $~~788~~459,~~921~~000 and $~~251~~788,~~386~~921 to other real estate owned during the years ended December 31, ~~2014~~ 2015 and ~~2013~~2014, respectively. The Bank did not transfer any investment securities between categories during the year ended December 31, ~~2014~~2015.

There were income tax payments during the years ended December 31, ~~2014~~2015 and ~~2013~~2014 in the amount of $1720,~~884~~285 and $2917,~~782~~884, 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.

restrictions from the regulators’ judgments based on information available to them at the time of their examination.

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 January 2014, the Financial Accounting Standards Board (the “FASB”) amended Receivables topic of the ~~Receivables—Troubled~~Accounting Standards ~~Debt~~Codification. ~~Restructurings~~The byamendments ~~Creditors~~are ~~subtopic~~intended ofto ~~the~~resolve ~~Codification~~diversity in practice with respect to ~~address~~when ~~the~~a ~~reclassification~~creditor ofshould reclassify a collateralized consumer mortgage ~~loans~~loan ~~collateralized by~~to ~~residential~~other real estate ~~upon~~owned ~~foreclosure~~(“OREO”). ~~The~~In addition, the amendments ~~clarify~~require ~~the~~a ~~criteria~~creditor reclassify ~~for~~a ~~concluding~~collateralized ~~that~~consumer anmortgage inloan ~~substance~~to ~~repossession or~~OREO ~~foreclosure~~upon ~~has~~obtaining ~~occurred,~~legal ~~and~~title ato ~~creditor~~the isreal ~~considered~~estate tocollateral, ~~have~~or ~~received~~the ~~physical~~borrower voluntarily ~~possession~~conveying ofall ~~residential~~interest in the real estate property ~~collateralizing~~ ato ~~consumer~~the ~~mortgage~~lender to satisfy the loan. ~~The~~through ~~amendments~~a ~~also~~deed ~~outline~~in ~~interim~~lieu ~~and~~of ~~annual~~foreclosure or ~~disclosure~~similar ~~requirements~~legal agreement. The amendments ~~will~~ bewere effective for the Company for ~~interim~~annual periods, and ~~annual~~interim ~~reporting~~periods within those annual periods beginning after December 15, 2014, with early implementation of the guidance permitted. ~~Companies~~In ~~are~~implementing ~~allowed~~this guidance, assets that are reclassified from real estate to ~~use~~loans ~~either~~are ameasured ~~modified~~at ~~retrospective~~the ~~transition~~carrying ~~method~~value orof athe ~~prospective~~real ~~transition~~estate ~~method~~at ~~when~~the ~~adopting~~date ~~this~~of ~~update~~adoption. Assets reclassified ~~Early~~from ~~adoption~~loans isto ~~permitted~~real estate are measured at the lower of the net amount of the loan receivable or the fair value of the real estate less costs to sell at the date of adoption. The Company ~~does~~applied ~~not~~the ~~expect~~amendments ~~these~~prospectively. These amendments todid not have a material effect on ~~its~~the Company’s financial statements.

-10-

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Recent Accounting Pronouncements, continued

In May ~~January~~ 2014, the FASB ~~amended~~issued ~~Receivables topic~~guidance ofto change the ~~Accounting~~recognition ~~Standards~~of ~~Codification.~~revenue ~~The~~from ~~amendments~~contracts ~~are intended to resolve diversity in practice~~ with ~~respect~~customers. toThe ~~when a~~core ~~creditor~~principle ~~should~~of ~~reclassify a collateralized consumer mortgage loan to other real estate owned (OREO). In addition,~~ the ~~amendments~~ ~~require~~new aguidance ~~creditor~~is ~~reclassify~~that aan ~~collateralized~~entity ~~consumer~~should ~~mortgage~~recognize ~~loan~~revenue to ~~OREO~~reflect ~~upon obtaining legal title to~~ the ~~real~~transfer ~~estate~~of ~~collateral,~~goods orand ~~the~~services ~~borrower~~to ~~voluntarily~~customers ~~conveying all interest~~ in ~~the~~an ~~real~~amount equal ~~estate property~~ to the ~~lender~~ toconsideration ~~satisfy~~ the ~~loan~~entity ~~through~~receives ~~a deed in lieu of foreclosure~~ or ~~similar~~expects ~~legal~~to ~~agreement~~receive. The ~~amendments~~guidance will be effective for the Company for ~~annual~~ reporting periods, ~~and interim periods within those annual period~~ beginning after December 15, ~~2014, with early implementation of the guidance permitted~~2017. In implementing this guidance, assets that are reclassified from real estate to loans are measured at the carrying value of the real estate at the date of adoption. Assets reclassified from loans to real estate are measured at the lower of the net amount of the loan receivable or the fair value of the real estate less costs to sell at the date of adoption. The Company will apply the ~~amendments~~guidance ~~prospectively~~ using a ~~modified~~full retrospective approach. The Company does not expect these amendments to have a material effect on its financial statements.

In May 2014, the FASB issued guidance to change the recognition of revenue from contracts with customers. The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to receive. The guidance will be effective for the Company for reporting periods beginning after December 15, 2016. The Company will apply the guidance using a full retrospective approach. The Company does not expect these amendments to have a material effect on its financial statements.

In June 2014, the FASB issued guidance which clarifies that performance targets associated with stock compensation should be treated as a performance condition and should not be reflected in the grant date fair value of the stock award. The amendments will be effective for the Company for fiscal years that begin after December 15, 2015. The Company will apply the guidance to all stock awards granted or modified after the amendments are effective. The Company does not expect these amendments to have a material effect on its financial statements.

In ~~August 2014,~~January 2015, the FASB issued guidance ~~that~~to iseliminate ~~intended~~from toU.S. ~~define~~Generally ~~management’s~~Accepted ~~responsibility~~Accounting toPrinciples ~~evaluate~~(“GAAP”) ~~whether~~the ~~there~~concept of isan ~~substantial doubt~~extraordinary ~~about~~item, anwhich ~~organization’s~~is ~~ability~~an toevent ~~continue~~or astransaction athat ~~going~~is ~~concern~~both ~~and~~unusual toin ~~provide~~nature ~~related~~and ~~footnote~~infrequently ~~disclosures~~occurring. InUnder ~~connection~~the ~~with~~new ~~preparing financial statements~~guidance, ~~management~~an entity will ~~need~~no tolonger ~~evaluate~~(1) ~~whether~~segregate ~~there~~an ~~are~~extraordinary ~~conditions~~item orfrom ~~events,~~the ~~considered~~results inof ~~the~~ordinary operations; (2) separately ~~aggregate,~~present ~~that~~an ~~raise~~extraordinary ~~substantial~~item ~~doubt~~on ~~about~~its ~~the~~income ~~organization’s~~statement, ~~ability~~net toof ~~continue~~tax, asafter aincome ~~going~~from ~~concern~~continuing ~~within~~operations; ~~one~~or ~~year~~(3) ~~after~~disclose income ~~the~~taxes ~~date~~and ~~that~~earnings-per-share ~~the~~data ~~financial~~applicable ~~statements~~to ~~are~~an ~~issued~~extraordinary item. The amendments will be effective for ~~the~~fiscal ~~Company~~years, ~~for~~and interim ~~annual~~periods ~~period~~within ~~ending~~those fiscal years, beginning after December 15, ~~2016~~2015, ~~and~~with ~~for~~early ~~annual~~adoption ~~periods~~permitted ~~and~~provided ~~interim~~that ~~periods~~the guidance ~~thereafter~~is applied from the beginning of the fiscal year of adoption. The Company will apply the guidance prospectively. The Company does not expect these amendments to have a material effect on its financial statements.

In February ~~January~~ 2015, the FASB issued guidance ~~that~~ ~~eliminated~~which amends the ~~concept~~consolidation ofrequirements ~~extraordinary~~and ~~items~~significantly ~~from~~changes ~~U.S.~~the ~~GAAP.~~consolidation analysis ~~Existing~~required under U.S. GAAP ~~required that an entity separately classify, present, and disclose extraordinary events and transactions~~. ~~The~~Although ~~amendments will eliminate~~ the ~~requirements~~amendments ~~for~~are ~~reporting~~expected ~~entities~~ to ~~consider~~result ~~whether~~in anthe ~~underlying~~deconsolidation ~~event~~of ormany ~~transaction is extraordinary~~entities, ~~however,~~ the ~~presentation and disclosure guidance for~~ ~~items~~Company ~~that are unusual in nature or occur infrequently~~ will beneed ~~retained and will be expanded~~ to ~~include~~reevaluate ~~items~~all ~~that~~its ~~are~~previous ~~both~~consolidation ~~unusual in nature and infrequently occurring~~conclusions. The amendments ~~are~~will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015., ~~The~~with ~~amendments~~early ~~may~~adoption bepermitted ~~applied~~(including ~~either prospectively or retrospectively to all prior periods presented~~during inan ~~the~~interim ~~financial~~period), ~~statements. Early adoption is permitted~~ provided that the guidance is applied ~~from~~as of the beginning of the ~~fiscal year~~annual ofperiod containing the adoption. date. The Company does not expect these amendments to have a material effect on its financial statements.

~~Other~~In June ~~accounting~~2015, ~~standards~~the ~~that~~FASB ~~have been~~ issued oramendments ~~proposed~~to byclarify the ~~FASB~~Accounting orStandards ~~other~~Codification ~~standards-setting~~(“ASC”), ~~bodies~~correct unintended application of guidance, and make minor improvements to the ASC that are not expected to have a ~~material~~significant ~~impact~~effect on ~~the~~current accounting ~~Company’s~~practice or create a significant administrative cost to most entities. The amendments were effective upon issuance ~~financial~~(June ~~position~~12, ~~results~~2015) offor ~~operations~~amendments orthat ~~cash~~do ~~flows~~not have transition guidance. Amendments that are subject to transition guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. The Company does not expect these amendments to have a material effect on its financial statements.

~~Reclassifications~~In August 2015, the FASB deferred the effective date of Accounting Standards Update (“ASU”) 2014-09, ~~Certain~~Revenue from Contracts ~~captions~~with ~~and~~Customers. ~~amounts~~As a result of the deferral, the guidance in ASU 2014-09 will be effective for the ~~2013~~Company ~~consolidated~~for ~~financial~~reporting ~~statements~~periods beginning ~~were~~after ~~reclassified~~December to15, ~~conform~~2017. ~~with~~The Company will apply the ~~2014~~guidance ~~presentation~~using a modified retrospective approach. The ~~reclassifications~~ ~~did~~Company does not expect these amendments to have ~~any~~a material effect on ~~the~~its ~~previously~~financial ~~reported net income or shareholders’ equity~~statements.

In August 2015, the FASB issued amendments to the Interest topic of the Accounting Standards Codification to clarify the SEC staff’s position on presenting and measuring debt issuance costs incurred in connection with line-of-credit arrangements. The amendments were effective upon issuance. The Company does not expect these amendments to have a material effect on its financial statements.

In February 2016, the FASB issued new guidance to change accounting for leases and that will generally require most leases to be recognized on the balance sheet. The new lease standard only contains targeted changes to accounting by lessors, however, lessees will be required to recognize most leases in their balance sheets as lease liabilities for lease payments and right-of-use assets representing the lessee’s rights to use the underlying assets for the lease terms for lease arrangements longer than 12 months. Under this approach, a lessee will account for most existing capital/finance leases as Type A leases and most existing operating leases as Type B leases. Type A and Type B leases have unique accounting and disclosure requirements. Existing sale-leaseback guidance, including guidance for real estate, will be replaced with a new model applicable to both lessees and lessors. The new guidance will be effective for fiscal years (and interim periods within those fiscal years) beginning after December 15, 2018. Early adoption is permitted for all companies and organizations. Management is currently analyzing the impact of the adoption of this guidance on the Company’s consolidated financial statements, including assessing changes that might be necessary to information technology systems, processes and internal controls to capture new data and address changes in financial reporting.

-11-

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Recent Accounting Pronouncements, continued

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.

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, ~~2014~~2015 and ~~2013~~2014, the requirement was met by the cash balance in the vault.

NOTE 3 - INVESTMENT SECURITIES

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


	Amortized		Gross Unrealized				Estimated
	Costs		Gains		Losses		Fair Value
December 31, 2015
Corporate bonds	$	500,000	$	—	$	9,743	$	490,257
Small Business Administration Securities		8,030,630		21,852		82,788		7,969,694
Mortgage-backed securities		3,370,245		17		89,673		3,280,589
State, county and municipal		3,530,982		11,945		15,246		3,527,681
	$	15,431,857	$	33,814	$	197,450	$	15,268,221

	Amortized		Gross Unrealized				Estimated
	Costs		Gains		Losses		Fair Value
December 31, 2014
Government sponsored enterprises	$	6,613,080	$	6,300	$	22,844	$	6,596,536
Corporate bonds		800,706		—		2,229		798,477
Small Business Administration Securities		8,787,157		15,390		101,970		8,700,577
Mortgage-backed securities		1,948,070		7,420		6,557		1,948,933
State, county and municipal		3,151,886		—		22,849		3,129,037
	$	21,300,899	$	29,110	$	156,449	$	21,173,560

	Amortized		Gross Unrealized				Estimated
	Costs		Gains		Losses		Fair Value
December 31, 2013
Government sponsored enterprises	$	998,229	$	—	$	84,909	$	913,320
Corporate bonds		500,000		—		2,565		497,435
Small Business Administration Securities		10,328,411		35		500,474		9,827,972
Mortgage-backed securities		8,668,091		6,495		40,940		8,633,646
State, county and municipal		3,955,878		—		183,011		3,772,867
	$	24,450,609	$	6,530	$	811,899	$	23,645,240

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


	Amortized		Gross Unrealized				Estimated
	Costs		Gains		Losses		Fair Value
December 31, 2015
State, county and municipal	$	3,412,281	$	15,455	$	44,615	$	3,383,121


	Amortized		Gross Unrealized				Estimated
	Costs		Gains		Losses		Fair Value
December 31, 2014
State, county and municipal	$	3,444,699	$	31,830	$	3,819	$	3,472,710

	Amortized		Gross Unrealized				Estimated
	Costs		Gains		Losses		Fair Value
December 31, 2013
State, county and municipal	$	3,475,977	$	—	$	226,742	$	3,249,235

Proceeds from sales of available-for-sale securities during 2015 and 2014 were $5,414,786 and $13,568,814, respectively. Gross gains of $114,393 were recognized on those sales in 2015, and gross gains of $102,039 and gross losses of $30,894 were recognized on those sales in 2014. There were no sales of held to maturity securities.

Proceeds from sales of available-for-sale securities during 2014 and 2013 were $13,568,814 and $8,509,386, respectively. Gross gains of $102,039 and gross losses of $30,894 were recognized on those sales in 2014, and gross gains of $222,297 were recognized on those sales in 2013. There were no losses recognized on those sales in 2013. There were no sales of held to maturity securities during 2014 and 2013.

-12-

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

NOTE 3 - INVESTMENT SECURITIES - continued

	Securities Available-for-Sale				Securities Held-to-Maturity
	Amortized		Estimated		Amortized		Estimated
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
	Cost		Fair Value		Cost		Fair Value
Due within one year	$	408,249	$	407,829	$	—	$	—
Due within one year	$	606,051	$	612,663	$	—	$	—
Due after one through five years		5,196,139		5,113,913		1,084,055		1,099,510
Due after one through five years		3,527,971		3,504,581		—		—
Due after five through ten years		9,827,469		9,746,479		1,693,196		1,678,841
Due after five through ten years		17,166,877		17,056,316		1,621,498		1,645,586
Due after ten years		—		—		635,030		604,770
Due after ten years		—		—		1,823,201		1,827,124
Total securities	$	15,431,857	$	15,268,221	$	3,412,281	$	3,383,121
Total securities	$	21,300,899	$	21,173,560	$	3,444,699	$	3,472,710

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, ~~2014~~2015.

	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	Value		Losses		Value		Losses		Value		Losses
Corporate Bonds	$	490,257	$	9,743	$	—	$	—	$	490,257	$	9,743
Government sponsored enterprises	$	5,016,725	$	2,403	$	978,439	$	20,441	$	5,995,164	$	22,844
Mortgage-backed securities		2,425,228		75,480		853,073		14,193		3,278,301		89,673
Corporate Bonds		298,477		2,229		—		—		298,477		2,229
Small Business Administration Securities		2,881,805		21,964		1,152,509		60,824		4,034,314		82,788
Mortgage-backed securities		—		—		934,730		6,557		934,730		6,557
State, county and municipals		2,114,908		15,246		—		—		2,114,908		15,246
Small Business Administration Securities		—		—		4,090,318		101,970		4,090,318		101,970
	$	7,912,198	$	122,433	$	2,005,582	$	75,017	$	9,917,780	$	197,450
State, county and municipals		1,292,753		8,418		1,836,284		14,431		3,129,037		22,849
	$	6,607,955	$	13,050	$	7,839,771	$	143,399	$	14,447,726	$	156,449

The following table shows gross unrealized losses and fair value of securities held-to-maturity, aggregated by investment category, and length of time that individual securities have been in a continuous unrealized loss position, at December 31, ~~2014~~2015.

	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	Value		Losses		Value		Losses		Value		Losses
State, county and municipal	$	2,283,612	$	44,615	$	—	$	—	$	2,283,612	$	44,615
State, county and municipal	$	518,456	$	3,819	$	—	$	—	$	518,456	$	3,819

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, ~~2013~~2014.

	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	Value		Losses		Value		Losses		Value		Losses
Government sponsored enterprises	$	5,016,725	$	2,403	$	978,439	$	20,441	$	5,995,164	$	22,844
Government sponsored enterprises	$	913,320	$	84,909	$	—	$	—	$	913,320	$	84,909
Corporate Bonds		298,477		2,229		—		—		298,477		2,229
Corporate Bonds		497,435		2,565		—		—		497,435		2,565
Mortgage-backed securities		—		—		934,730		6,557		934,730		6,557
Mortgage-backed securities		6,932,369		40,940		—		—		6,932,369		40,940
Small Business Administration Securities		—		—		4,090,318		101,970		4,090,318		101,970
Small Business Administration Securities		8,492,186		363,685		1,323,559		136,789		9,815,745		500,474
State, county and municipals		1,292,753		8,418		1,836,284		14,431		3,129,037		22,849
State, county and municipals		3,359,791		176,626		413,076		6,385		3,772,867		183,011
	$	6,607,955	$	13,050	$	7,839,771	$	143,399	$	14,447,726	$	156,449
	$	20,195,101	$	668,725	$	1,736,635	$	143,174	$	21,931,736	$	811,899

-13-

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

NOTE 3 - INVESTMENT SECURITIES - continued

	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	Value		Losses		Value		Losses		Value		Losses
State, county and municipal	$	518,456	$	3,819	$	—	$	—	$	518,456	$	3,819
State, county and municipal	$	3,249,235	$	226,742	$	—	$	—	$	3,249,235	$	226,742

Securities classified as available-for-sale are recorded at fair market value. At December 31, ~~2014~~2015, there were ~~nine~~two securities in a continuous unrealized loss position for more than twelve months. The Company has the ability and intent to hold these securities until such time that the value recovers or the securities mature. The Company believes, based on industry analyst reports and credit ratings, that the deterioration in value is attributable to changes in market interest rates and not the credit quality of the issuer; therefore, these losses are not considered other than temporary. At December 31, ~~2013~~2014, there were ~~two~~nine securities in a continuous unrealized loss position for more than twelve months.

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.

NOTE 4 - LOANS RECEIVABLE

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

	December 31, 2014						December 31, 2013
	December 31, 2015						December 31, 2014
	Amount			Percentage of Total			Amount			Percentage of Total
Real Estate:
Commercial Real Estate	$	3032,~~280~~539,~~899~~464			3940	%	$	2830,~~760~~280,~~723~~899			3739	%
Construction, Land Development, & Other Land		710,~~973~~538,~~835~~852			1013	%		87,~~198~~973,~~696~~835			1110	%
Residential		11,~~560~~491,~~614~~959			1514	%		1211,~~617~~560,~~198~~614			1615	%
Residential Home Equity Lines of Credit (HELOCs)		1614,~~995~~525,~~363~~638			2118	%		1716,~~388~~995,~~327~~363			2221	%
Total Real Estate		6669,~~810~~095,~~711~~913			85	%		66,~~964~~810,~~944~~711			8685	%
Commercial		10,~~308~~503,~~132~~730			13	%		910,~~703~~308,~~862~~132			1213	%
Consumer		1,~~308~~381,~~025~~065			2	%		1,~~293~~308,~~655~~025			2	%
Gross loans		7880,~~426~~980,~~868~~708			100	%		7778,~~962~~426,~~461~~868			100	%
Less allowance for loan losses		(1,~~006~~079,~~794~~782	)					(1,~~312~~006,~~311~~794	)
Total loans, net	$	7779,~~420~~900,~~074~~926					$	7677,~~650~~420,~~150~~074

-14-

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

NOTE 4 - LOANS RECEIVABLE - continued

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, 2014 and 2013~~:

December 31, 2015	Commercial		Commercial Real Estate		Construction, Land Development, and Other Land		Consumer		Residential		Residential HELOCs		Total
Grade
Pass	$	10,387,605	$	32,036,422	$	10,435,885	$	1,067,368	$	9,771,852	$	13,206,587	$	76,905,719
Special Mention		50,683		272,162		—		35,497		547,506		596,183		1,502,031
Substandard or Worse		65,442		230,880		102,967		278,200		1,172,601		722,868		2,572,958
Total	$	10,503,730	$	32,539,464	$	10,538,852	$	1,381,065	$	11,491,959	$	14,525,638	$	80,980,708

December 31, 2014	Commercial		Commercial Real Estate		Construction, Land Development, and Other Land		Consumer		Residential		Residential HELOCs		Total
Grade
Pass	$	9,410,911	$	28,455,409	$	7,637,360	$	1,202,892	$	10,162,188	$	15,305,931	$	72,174,691
Special Mention		712,318		1,133,160		336,475		67,312		252,524		581,249		3,083,038
Substandard or Worse		184,903		692,330		—		37,821		1,145,902		1,108,183		3,169,139
Total	$	10,308,132	$	30,280,899	$	7,973,835	$	1,308,025	$	11,560,614	$	16,995,363	$	78,426,868

December 31, 2013	Commercial		Commercial Real Estate		Construction, Land Development, and Other Land		Consumer		Residential		Residential HELOCs		Total
Grade
Pass	$	8,468,920	$	27,232,107	$	7,281,057	$	1,240,535	$	10,597,540	$	15,211,902	$	70,032,061
Special Mention		960,219		268,565		413,224		—		573,416		621,617		2,837,041
Substandard or Worse		274,723		1,260,051		504,415		53,120		1,446,242		1,554,808		5,093,359
Total	$	9,703,862	$	28,760,723	$	8,198,696	$	1,293,655	$	12,617,198	$	17,388,327	$	77,962,461

The following is an aging analysis of our loan portfolio at:

The following is an aging analysis of our loan portfolio at December 31, 2014 and 2013:

December 31, 2015	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	$	16,552	$	—	$	—	$	16,552	$	10,487,178	$	10,503,730	$	—
Commercial Real Estate		—		—		—		—		32,539,464		32,539,464		—
Construction, Land Development, & Other Land		51,518		99,389		102,967		253,874		10,284,978		10,538,852		—
Consumer		—		—		—		—		1,381,065		1,381,065		—
Residential		194,003		—		342,000		536,003		10,955,956		11,491,959		—
Residential HELOCs		—		—		283,736		283,736		14,241,902		14,525,638		—
Total	$	262,073	$	99,389	$	728,703	$	1,090,165	$	79,890,543	$	80,980,708	$	—

December 31, 2014	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	$	644,594	$	113,434	$	—	$	758,028	$	9,550,104	$	10,308,132	$	—
Commercial Real Estate		481,604		—		459,000		940,604		29,340,295		30,280,899		—
Construction, Land Development, & Other Land		—		—		—		—		7,973,835		7,973,835		—
Consumer		2,385		—		—		2,385		1,305,640		1,308,025		—
Residential		225,847		—		—		225,847		11,334,767		11,560,614		—
Residential HELOCs		—		157,747		162,236		319,983		16,675,380		16,995,363		—
Total	$	1,354,430	$	271,181	$	621,236	$	2,246,847	$	76,180,021	$	78,426,868	$	—

-15-

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

NOTE 4 - LOANS RECEIVABLE - continued

December 31, 2013

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

December 31, 2014

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

~~155~~644,~~128~~594

—113,434

~~49,066~~—

~~204~~758,~~194~~028

9,~~499~~550,~~668~~104

910,~~703~~308,~~862~~132

—

Commercial Real Estate

—481,604

~~4,820~~—

—459,000

4940,~~820~~604

2829,~~755~~340,~~903~~295

2830,~~760~~280,~~723~~899

—

Construction, Land Development, & Other Land

—

87,~~198~~973,~~696~~835

—

Consumer

92,~~024~~385

—

92,~~024~~385

1,~~284~~305,~~631~~640

1,~~293~~308,~~655~~025

—

Residential

~~249~~225,~~571~~847

~~84,128~~—

~~356,717~~—

~~690~~225,~~416~~847

11,~~926~~334,~~782~~767

1211,~~617~~560,~~198~~614

—

Residential HELOCs

~~184,975~~—

~~249~~157,~~787~~747

~~173~~162,~~977~~236

~~608~~319,~~739~~983

16,~~779~~675,~~588~~380

1716,~~388~~995,~~327~~363

—

Total

~~598~~1,~~698~~354,430

~~338~~271,~~735~~181

~~579~~621,~~760~~236

12,~~517~~246,~~193~~847

76,~~445~~180,~~268~~021

7778,~~962~~426,~~461~~868

—

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

	2014		2013
	2015		2014
Commercial	$	~~152~~35,~~255~~221	$	~~240~~152,~~824~~255
Commercial Real Estate		~~459,000~~—		~~484~~459,~~429~~000
Construction, Land Development, & Other Land		—102,967		—
Consumer		—		—
Residential		~~380~~342,~~500~~000		~~356~~380,~~717~~500
Residential HELOCs		~~162~~283,~~236~~736		~~173~~162,~~977~~236
Total	$	1763,~~153,991~~924	$	1,~~255~~153,~~947~~991

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, ~~2014~~2015 and ~~2013~~2014, we received approximately $233,~~883~~567 and $23,~~739~~883 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 $5665,~~591~~308 and $6656,~~814~~591, respectively.

The following table summarizes the allowance for loan losses and recorded investment in gross loans, by portfolio segment, at and for the years ~~ended December 31, 2014~~ ~~and 2013~~ended:

December 31, 2014	Commercial			Commercial Real Estate			Construction, Land Development & Other Land			Consumer			Residential			Residential - HELOCs			Unallocated			Total
December 31, 2015	Commercial			Commercial Real Estate			Construction, Land Development & Other Land			Consumer			Residential			Residential - HELOCs			Unallocated			Total
Allowance for Credit Losses
Beginning Balance	$	~~234~~174,~~069~~737		$	~~104~~62,~~705~~460		$	8013,~~213~~157		$	3942,~~792~~299		$	~~228~~64,~~771~~651		$	~~624~~476,~~739~~045		$	22173,445		$	1,~~312~~006,~~311~~794
Charge Offs		(46108,~~916~~893	)		~~(332,299~~—	)		—			(~~7,572~~870	)		(1124,~~034~~292	)		(~~290~~94,~~696~~668	)					(~~688~~228,~~517~~723	)
Recoveries		510,~~540~~115			—70,000			—			—			~~181~~—			191,~~279~~596			—			2581,~~000~~711
Provision		~~(17~~103,~~956~~217	)		~~290~~25,~~054~~902			~~(67~~55,~~056~~198	)		10260,~~079~~161			~~(153~~42,~~267~~655	)		~~122~~(199,~~723~~064	)		~~173~~(68,~~423~~069	)		~~358~~220,000
Ending Balance	$	~~174~~179,~~737~~176		$	62158,~~460~~362		$	1368,~~157~~355		$	42301,~~299~~590		$	6483,~~651~~014		$	~~476~~183,~~045~~909		$	~~173~~105,~~445~~376		$	1,~~006~~079,~~794~~782
Ending Balances:
Individually evaluated for impairment	$	4041,~~706~~528		$	—		$	—		$	24283,~~234~~843		$	125,~~669~~421		$	~~165,535~~—		$	—		$	~~232~~350,~~144~~792
Collectively evaluated for impairment	$	~~134~~137,~~031~~648		$	62158,~~460~~362		$	1368,~~157~~355		$	1817,~~065~~747		$	6257,~~982~~593		$	~~310~~183,~~510~~909		$	~~173~~105,~~445~~376		$	~~774~~728,~~650~~990
Loans Receivable:
Ending Balance - Total	$	10,~~308~~503,~~132~~730		$	3032,~~280~~539,~~899~~464		$	710,~~973~~538,~~835~~852		$	1,~~308~~381,~~025~~065		$	11,~~560~~491,~~614~~959		$	1614,~~995~~525,~~363~~638		$	—		$	7880,~~426~~980,~~868~~708
Ending Balances:
Individually evaluated for impairment	$	~~184~~65,~~903~~442		$	~~784~~315,~~527~~768		$	—102,967		$	98313,~~258~~697		$	1726,~~150,335~~878		$	~~440~~283,~~453~~736		$	—		$	21,~~658~~808,~~476~~488
Collectively evaluated for impairment	$	10,~~123~~438,~~229~~288		$	2932,~~496~~223,~~372~~696		$	710,~~973~~435,~~835~~885		$	1,~~209~~067,~~767~~368		$	10,~~410~~765,~~279~~081		$	1614,~~554~~241,~~910~~902		$	—		$	7579,~~768~~172,~~392~~220

-16-

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

~~NOTE~~Notes to 4Consolidated -Financial ~~LOANS RECEIVABLE – continued~~Statements

December 31, 2013	Commercial			Commercial Real Estate			Construction, Land Development & Other Land			Consumer			Residential			Residential - HELOCs			Unallocated			Total
Allowance for Credit Losses
Beginning Balance	$	159,584		$	134,886		$	91,154		$	81,839		$	291,333		$	444,969		$	91,288		$	1,295,053
Charge Offs		(70,951	)		(58,362	)		—			(54,514	)		(93,201	)		(140,000	)					(417,028	)
Recoveries		27,691			—			—			—			738			857			—			29,286
Provision		117,745			28,181			(10,941	)		12,467			29,901			318,913			(91,266	)		405,000
Ending Balance	$	234,069		$	104,705		$	80,213		$	39,792		$	228,771		$	624,739		$	22		$	1,312,311
Ending Balances:
Individually evaluated for impairment	$	86,590		$	12,465		$	—		$	1,834		$	151,172		$	204,072		$	—		$	456,133
Collectively evaluated for impairment	$	147,479		$	92,240		$	80,213		$	37,958		$	77,599		$	420,667		$	22		$	856,178
Loans Receivable:
Ending Balance - Total	$	9,703,862		$	28,760,723		$	8,198,696		$	1,293,655		$	12,617,198		$	17,388,327		$	—		$	77,962,461
Ending Balances:
Individually evaluated for impairment	$	274,723		$	1,357,671		$	504,415		$	40,385		$	1,571,036		$	700,371		$	—		$	4,448,601
Collectively evaluated for impairment	$	9,429,139		$	27,403,052		$	7,694,281		$	1,253,270		$	11,046,162		$	16,687,956		$	—		$	73,513,860

NOTE 4 - LOANS RECEIVABLE - continued

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 $108,335 and $175,226 in interest income on loans that were impaired during the years ended December 31, 2014, and 2013, respectively.

December 31, 2014	Commercial			Commercial Real Estate			Construction, Land Development & Other Land			Consumer			Residential			Residential - HELOCs			Unallocated		Total
Allowance for Credit Losses
Beginning Balance	$	234,069		$	104,705		$	80,213		$	39,792		$	228,771		$	624,739		$	22	$	1,312,311
Charge Offs		(46,916	)		(332,299	)		—			(7,572	)		(11,034	)		(290,696	)				(688,517	)
Recoveries		5,540			—			—			—			181			19,279			—		25,000
Provision		(17,956	)		290,054			(67,056	)		10,079			(153,267	)		122,723			173,423		358,000
Ending Balance	$	174,737		$	62,460		$	13,157		$	42,299		$	64,651		$	476,045		$	173,445	$	1,006,794

Ending Balances:
Individually evaluated for impairment	$	40,706		$	—		$	—		$	24,234		$	1,669		$	165,535		$	—	$	232,144
Collectively evaluated for impairment	$	134,031		$	62,460		$	13,157		$	18,065		$	62,982		$	310,510		$	173,445	$	774,650

Loans Receivable:
Ending Balance - Total	$	10,308,132		$	30,280,899		$	7,973,835		$	1,308,025		$	11,560,614		$	16,995,363		$	—	$	78,426,868

Ending Balances:
Individually evaluated for impairment	$	184,903		$	784,527		$	—		$	98,258		$	1,150,335		$	440,453		$	—	$	2,658,476
Collectively evaluated for impairment	$	10,123,229		$	29,496,372		$	7,973,835		$	1,209,767		$	10,410,279		$	16,554,910		$	—	$	75,768,392

AtThe ~~December~~Company considers ~~31,~~a ~~2014,~~loan ~~the~~to ~~Company~~be ~~had 13~~ impaired ~~loans~~when ~~totaling $2,658,476~~it oris ~~3.4%~~probable ofthat ~~gross~~it ~~loans.~~will Atbe ~~December~~unable ~~31,~~to ~~2013,~~collect ~~the~~all ~~Company~~amounts ~~had~~of 25principal ~~impaired~~and ~~loans~~interest ~~totaling~~due according ~~$4,448,601~~to orthe ~~5.7%~~original terms of ~~gross loans.~~the ~~There~~loan ~~were~~agreement. noThe ~~loans~~Company’s ~~that~~analysis ~~were~~under ~~contractually~~generally ~~past~~accepted ~~due~~accounting 90principles indicates ~~days~~that orthe ~~more~~level ~~and~~of ~~still~~the ~~accruing~~allowance ~~interest~~for atloan ~~December~~losses ~~31,~~is ~~2014~~appropriate ~~or 2013.~~to ~~There~~cover ~~were~~estimated ~~six~~credit ~~loans~~losses ~~restructured~~on orindividually ~~otherwise~~evaluated loans ~~impaired~~as ~~totaling~~well ~~$1,176,190~~as ~~not~~estimated ~~already~~credit ~~included~~losses inherent in ~~nonaccrual~~the ~~status~~remainder ~~at December~~of ~~31,~~the ~~2014~~portfolio. ~~There~~We ~~were~~recognized ~~seven~~$54,808 ~~loans~~and ~~restructured~~$108,335 orin ~~otherwise~~interest income ~~impaired~~on ~~totaling~~loans ~~$1,763,021~~that ~~not~~were ~~already~~impaired ~~included~~during inthe ~~nonaccrual status~~years atended December 31, ~~2013~~2015, and 2014, respectively.

~~The~~At ~~following~~December is31, an2015, ~~analysis~~the ofCompany had ~~our~~12 impaired ~~loan~~loans ~~portfolio~~totaling ~~detailing~~ $1,808,488 or 2.2% of gross loans. At December 31, 2014, the ~~related~~Company ~~allowance~~had ~~recorded~~13 impaired loans totaling $2,658,476 or 3.4% of gross loans. There were no loans that were contractually past due 90 days or more and still accruing interest at December 31, 2015 or 2014. ~~and~~There ~~2013:~~were five loans restructured or otherwise impaired totaling $553,359 not already included in nonaccrual status at December 31, 2015. There were six loans restructured or otherwise impaired totaling $1,176,190 not already included in nonaccrual status at December 31, 2014.

December 31, 2014	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate		784,527		902,746		—		1,222,163		36,050
Construction, Land Development, & Other Land		—		—		—		—		—
Consumer		—		—		—		—		—
Residential		936,667		936,667		—		1,028,010		39,938
Residential HELOC		162,236		162,236		—		204,071		564
With an allowance recorded
Commercial	$	184,903	$	184,903	$	40,706	$	192,328	$	9,500
Commercial Real Estate		—		—		—		—		—
Construction, Land Development, & Other Land		—		—		—		—		—
Consumer		98,258		227,570		24,234		100,914		3,231
Residential		213,668		220,256		1,669		220,987		12,792
Residential HELOC		278,217		278,217		165,535		278,255		6,260
Total
Commercial	$	184,903	$	184,903	$	40,706	$	192,328	$	9,500
Commercial Real Estate		784,527		902,746		—		1,222,163		36,050
Construction, Land Development, & Other Land		—		—		—		—		—
Consumer		98,258		227,570		24,234		100,914		3,231
Residential		1,150,335		1,156,923		1,669		1,248,997		52,730
Residential HELOC		440,453		440,453		165,535		482,326		6,824
	$	2,658,476	$	2,912,595	$	232,144	$	3,246,728	$	108,335

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

December 31, 2015	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate		315,768		315,768		—		—		21,134
Construction, Land Development, & Other Land		102,967		102,967		—		102,078		2,322
Consumer		—		—		—		—		—
Residential		428,375		452,954		—		320,679		3,218
Residential HELOC		283,736		283,736		—		312,472		1,245

With an allowance recorded
Commercial	$	65,442	$	65,442	$	41,528	$	68,886	$	2,132
Commercial Real Estate		—		—		—		—		—
Construction, Land Development, & Other Land		—		—		—		—		—
Consumer		313,697		313,697		283,843		315,089		7,369
Residential		298,503		305,475		25,421		304,688		17,388
Residential HELOC		—		—		—		—		—

Total
Commercial	$	65,442	$	65,442	$	41,528	$	68,886	$	2,132
Commercial Real Estate		315,768		315,768		—		—		21,134
Construction, Land Development, & Other Land		102,967		102,967		—		102,078		2,322
Consumer		313,697		313,697		283,843		315,089		7,369
Residential		726,878		758,429		25,421		625,367		20,606
Residential HELOC		283,736		283,736		—		312,472		1,245
	$	1,808,488	$	1,840,039	$	350,792	$	1,423,892	$	54,808

-17-

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

NOTE 4 - LOANS RECEIVABLE - continued

December 31, 2013

Recorded Investment

Unpaid Principal Balance

Related Allowance

Average Recorded Investment

Interest Income Recognized

December 31, 2014

Recorded Investment

Unpaid Principal Balance

Related Allowance

Average Recorded Investment

Interest Income Recognized

With no related allowance recorded

Commercial

~~43,146~~—

—

~~71,122~~—

~~472~~—

Commercial Real Estate

~~333~~784,~~777~~527

~~333~~902,~~777~~746

—

~~336~~1,~~454~~222,163

2236,~~173~~050

Construction, Land Development, & Other Land

~~504,415~~—

—

~~498,473~~—

~~25,270~~—

Consumer

—

Residential

~~464~~936,~~459~~667

~~520~~936,~~872~~667

—

~~519~~1,~~387~~028,010

2639,~~174~~938

Residential HELOC

~~282~~162,~~100~~236

—

~~405~~204,~~732~~071

~~13,620~~564

With an allowance recorded

Commercial

~~231~~184,~~577~~903

8640,~~590~~706

~~182~~192,~~450~~328

29,~~590~~500

Commercial Real Estate

~~1,023,894~~—

~~1,043,918~~—

~~12,465~~—

~~1,377,871~~—

~~11,860~~—

Construction, Land Development, & Other Land

—

Consumer

4098,~~385~~258

40227,~~385~~570

124,~~834~~234

41100,~~697~~914

13,~~251~~231

Residential

1213,~~106,577~~668

1220,~~112,809~~256

~~151~~1,~~172~~669

1220,~~091,522~~987

5812,~~487~~792

Residential HELOC

~~418~~278,~~271~~217

~~547~~278,~~584~~217

~~204~~165,~~072~~535

~~419~~278,~~485~~255

136,~~329~~260

Total

Commercial

~~274~~184,~~723~~903

8640,~~590~~706

~~253~~192,~~572~~328

39,~~062~~500

Commercial Real Estate

1784,~~357,671~~527

1902,~~377,695~~746

~~12,465~~—

1,~~714~~222,~~325~~163

3436,~~033~~050

Construction, Land Development, & Other Land

~~504,415~~—

—

~~498,473~~—

~~25,270~~—

Consumer

4098,~~385~~258

40227,~~385~~570

124,~~834~~234

41100,~~697~~914

13,~~251~~231

Residential

1,~~571~~150,~~036~~335

1,~~633~~156,~~681~~923

~~151~~1,~~172~~669

1,~~610~~248,~~909~~997

8452,~~661~~730

Residential HELOC

~~700~~440,~~371~~453

~~829~~440,~~684~~453

~~204~~165,~~072~~535

~~825~~482,~~217~~326

266,~~949~~824

42,~~448~~658,~~601~~476

42,~~660~~912,~~583~~595

~~456~~232,~~133~~144

43,~~944~~246,~~193~~728

~~175~~108,~~226~~335

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, ~~2014~~2015 and December 31, ~~2013~~2014, we had 86 loans totaling $1656,~~338,450~~841 and 138 loans totaling $21,~~475~~338,~~208~~450, respectively, which we considered to be TDRs. We did not modified any loans that were considered to be TDRs for the twelve months ended December 31, ~~2014. During the twelve months ended December~~ ~~31,~~2015 ~~2013, we modified two loans that were considered to be TDRs. We modified the interest rate~~ and ~~term~~2014 ~~for these loans~~respectively.

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.

-18-

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.

There were no loans restructured within the ~~last~~previous twelve months that defaulted during the year ended December 31, 2015 or 2014. The Bank considers any loans that are 30 days or more days past due to be in default.

The following table summarizes the recorded investment in TDRs before and after their modifications during the year ended December 31, 2013:

	For the year ended December 31, 2013
			Pre-Modification		Post-Modification
			Outstanding		Outstanding
	Number		Recorded		Recorded
	of Contracts		Investment		Investment
Troubled Debt Restructurings
Commercial		2	$	72,179	$	69,962
			$	72,179	$	69,962

There were no loans restructured within the last twelve months that defaulted during the year ended December 31, 2013. The Bank considers any loans that are 30 days or more days past due to be in default.

NOTE 5 - PREMISES, FURNITURE AND EQUIPMENT

Premises, furniture and equipment consisted of the following:

	December 31,
	2014		2013
	2015		2014
Land	$	1,013,000	$	1,013,000
Building and improvements		1,770,753		1,~~766~~770,~~348~~753
Furniture and equipment		1,~~435~~451,~~842~~671		1,~~269~~435,~~668~~842
Automobiles		9818,~~496~~073		98,496
Total		4,~~318~~253,~~091~~497		4,~~147~~318,~~512~~091
Less, accumulated depreciation		1,358,869		1,186,929
Less accumulated depreciation		1,469,722		1,358,869
Premises, furniture and equipment, net	$	2,~~959~~783,~~222~~775	$	2,~~960~~959,~~583~~222

Depreciation expense was $~~171~~191,~~940~~276 and $~~149~~171,~~667~~ 940 for the years ended ~~2014~~2015 and ~~2013~~2014, respectively.

NOTE 6 - OTHER REAL ESTATE OWNED

Transactions in other real estate owned for the years ended December 31, ~~2014~~2015 and ~~2013~~2014 are summarized below:

	2014			2013
	2015			2014
Balance, beginning of year	$	1,~~544~~441,~~234~~095		$	21,~~214~~544,~~397~~234
Additions		~~788~~459,~~921~~000			~~251~~788,~~386~~921
Sales		(~~892~~78,~~060~~860	)		(~~717~~892,~~998~~060	)
Write downs		—(111,000	)		~~(203,551~~—	)
Balance, end of year	$	1,~~441~~710,~~095~~235		$	1,~~544~~441,~~234~~095

-19-

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

NOTE 7 - DEPOSITS

At December 31, ~~2014~~2015 and ~~2013~~2014, the Company had time deposits exceeding the FDIC insurance limit of $15,~~912~~742,~~378~~720 and $1,~~961~~912,~~173~~378, respectively. The related interest expense for the years ended December 31, ~~2014~~2015 and ~~2013~~2014 was $1713,~~643~~583 and $2017,~~306~~643, respectively.

At December 31, ~~2014~~2015, the scheduled maturities of time deposits were as follows:

Maturing In:	~~Maturing In:~~	Amount	~~Amount~~
	2015		$	15,647,850
2016		$	16,427,444
	2016			2,963,274
2017			4,087,290
	2017			1,882,478
2018			840,461
	2018			826,490
2019			835,758
	2019			592,511
2020			380,805
Total	~~Total~~	$	$22,571,758	~~21,912,603~~

The Company did not have any third party brokered deposits at December 31, ~~2014~~2015 and ~~2013~~2014.

NOTE 8 - FHLB ADVANCES

At December 31, ~~2014~~2015 and December 31, ~~2013~~2014, we had $115,~~500~~000,000 and $711,~~000~~500,000 advances outstanding, respectively. FHLB advances at December 31, ~~2014~~2015 consisted of the following:

Interest Basis	Current Rate			Maturity		Outstanding Balance
Fixed		0.2439	%		~~March~~February 1724, ~~2015~~2016	$	12,~~000~~500,000
Fixed		0.29	%		April 17, 2015	$	2,000,000
Fixed		0.26	%		April 24, 2015	$	1,500,000
Fixed		0.29	%		May 12, 2015	$	1,000,000
Fixed		1.07	%		August 11, 2015	$	1,000,000
Fixed		0.51	%		September 24, 2015	$	2,500,000
Fixed		0.95	%		September 23, 2016	$	2,500,000

NOTE 9 - STOCK COMPENSATION PLAN

Under the terms of employment agreements with the Chief Business Development Officer and the Chief Financial Officer ~~(CFO)~~, stock options were granted to each as part of their compensation and benefits package in 2006. Under these agreements, the Chief Business Development Officer was granted options to purchase 61,755 shares of common stock and the CFO was granted options to purchase 44,110 shares of common stock. All options granted to the executive officers vested 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. On September 17, 2014, the Company granted options to purchase 25,600 shares of common stock to the Chief Executive Officer, options to purchase 21,600 shares of common stock to the Chief Financial Officer, and options to purchase 18,400 shares of common stock to the Chief Business Development Officer, and options to purchase 16,125 shares of common stock to the board of directors. All options granted to the executive officers and directors vest over three years. The options have an exercise price of $3.72 per share and terminate ten years after the date of grant. The Plan has 149,655 shares available to grant at December 31, 2014 with 167,944 options still outstanding.

~~options~~The toCompany recognized ~~purchase 18~~$21,~~400~~850 ~~shares~~ of ~~common~~ stock-based toemployee ~~the~~compensation ~~Chief~~expense ~~Business~~associated ~~Development~~with ~~Officer,~~its ~~and options to purchase 16,125 shares of common~~ stock tooption ~~the~~grants ~~board~~during ~~of directors~~2015. ~~All~~ ~~options~~The ~~granted~~Company recognized to the ~~executive~~compensation ~~officers~~expense ~~and~~for ~~directors~~stock ~~vest~~option ~~over~~grants ~~three~~with ~~years.~~graded ~~The~~vesting ~~options~~schedules ~~have~~on ana ~~exercise~~straight-line ~~price~~basis ofover ~~$3.72 per share and terminate ten years after~~ the ~~date of grant. The Plan has 149,655 shares available to grant at December 31, 2014~~requisite ~~with~~service ~~167,944~~period ~~options~~of ~~still~~the ~~outstanding~~award.

The Company recognized $5,320 of stock-based employee compensation expense associated with its stock option grants during 2014. 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, 2013, all the compensation cost related to stock option grants had been recognized.

-20-

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, ~~2014~~2015 and ~~2013~~2014 is as follows:

	2014				2013
	2015				2014
			Weighted				Weighted
			Average				Average
			Exercise				Exercise
	Shares		Price		Shares		Price
Outstanding, beginning of year		71167,~~819~~944	$	106.0041		71,819	$	10.00
Granted during the year		~~96,125~~—		~~3.72~~—		—96,125		—3.72
Exercised during the year		—1,500		—3.72		—		—
Forfeited during the year		—		—		—		—
Outstanding, end of year		~~167~~166,~~944~~444	$	6.4143		71167,~~819~~944	$	106.0041
Options exercisable at year end		~~167~~166,~~944~~444	$	6.4143		71167,~~819~~944	$	106.0041

The weighted average contractual life of the options outstanding as of December 31, ~~2014~~2015 is 1.7072 years. There was no aggregate intrinsic value of options outstanding or exercisable at December 31, ~~2014~~2015 and ~~2013~~2014. ~~All of the options outstanding as of December 31, 2013 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 vested 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).

At December 31, ~~2014~~2015, 80,000 shares underlying outstanding warrants were exercisable. There was no compensation expense related to warrants for the years ended December 31, ~~2014~~ 2015 and ~~2013~~2014. As of December 31, ~~2014~~2015, all the compensation cost related to stock warrants had been recognized.

NOTE 11 - INCOME TAXES

Income tax expense (benefit) is summarized as follows:

	Years ended December 31,
	2014			2013
	2015			2014
Current expense (benefit):
Federal	$	2311,~~699~~078		$	~~(24~~23,~~081~~699	)
State		239,~~902~~230			23,~~046~~902
Total current		4720,~~601~~308			(147,~~035~~601	)
Deferred income tax expense		~~238~~185,~~923~~163			~~371~~238,~~625~~923
Change in valuation allowance		~~(1,142,949~~—	)		(~~812~~1,~~237~~142,949	)
Total income tax benefit	$	(856,425	)	$	(441,647	)
Total income tax expense (benefit)	$	205,471		$	(856,425	)

-21-

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,
	2014			2013
	2015			2014
Deferred tax assets:
Allowance for loan losses	$	81106,~~921~~746		$	~~250~~81,~~352~~921
Net operating loss carryforward		1,~~900~~612,~~536~~488			1,~~835~~900,~~505~~536
Organization and start-up costs		~~134~~114,~~028~~413			~~153~~134,~~643~~028
Unrealized loss on securities available for sale		4760,~~116~~545			~~273~~47,~~825~~116
Other		~~211~~266,~~830~~656			~~309~~211,~~462~~830
Total deferred tax assets		2,~~375~~160,~~431~~848			2,~~822~~375,~~787~~431
Valuation allowance		(32,446	)		(132,~~175,395~~446	)
Net deferred tax assets		2,~~342~~128,~~985~~402			12,~~647~~342,~~392~~985
Deferred tax liabilities:
Accumulated depreciation		~~106~~71,~~704~~773			82106,~~669~~704
Prepaid expenses		2923,~~634~~195			3629,~~487~~634
Loan origination costs		4948,~~745~~266			4849,~~651~~745
Total deferred tax liabilities		~~186~~143,~~083~~234			~~167~~186,~~807~~083
Net deferred tax asset	$	21,~~156~~985,~~902~~168		$	12,~~479~~156,~~585~~902

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’s judgment is based on estimates concerning future income earned and historical earnings. 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 its net deferred tax assets. ~~Therefore, the majority of the valuation allowance was reduced by $1,142,949 in 2014.~~ The remaining valuation allowance relates to the parent company’s state operating loss carryforwards for which realizability is uncertain. ~~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 $54,~~504~~655,~~262~~899 and a state net operating loss of $~~881~~893,~~417~~395 as of December 31, ~~2014~~2015. These net operating losses begin to expire in the years ~~2026~~ ~~through~~2027 ~~2034~~and 2026, respectively.

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:

	2014			2013
	2015			2014
Tax expense at statutory rate	$	~~170~~189,~~447~~151		$	~~197~~170,~~578~~447
State income, net of federal income tax benefit		298,~~571~~595			3029,~~421~~571
Tax return adjustment to actual		~~1,408~~—			~~158~~1,~~630~~408
Change in valuation allowance		~~(1,142,949~~—	)		(~~812~~1,~~237~~142,949	)
Other		857,~~098~~725			~~(16~~85,~~039~~098	)
Income tax benefit	$	(856,425	)	$	(441,647	)
Income tax expense (benefit)	$	205,471		$	(856,425	)

The ~~Company~~ 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 in accordance with ASC Topic 740. Tax returns for ~~2011~~2012 and subsequent years are subject to examination by taxing authorities.

-22-

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 persons not related to the lender 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, ~~2014~~2015 and ~~2013~~2014:

	2014			2013
	2015			2014
Balance, January 1	$	23,~~927~~320,~~654~~732		$	32,~~543~~927,~~347~~654
Disbursements		~~773~~420,~~081~~595			~~225~~773,~~669~~081
Repayments		(~~380~~1,~~003~~506,024	)		(~~841~~380,~~362~~003	)
Balance, December 31,	$	32,~~320~~235,~~732~~303		$	23,~~927~~320,~~654~~732

Deposits by directors, including their affiliates and executive officers, at December 31, ~~2014~~2015 and ~~2013~~2014 were $23,~~030~~143,~~114~~239 and $12,~~880~~030,~~286~~114, respectively.

NOTE 13 - LEASES

The Company entered into an agreement in 2007 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 property was sold for $2,300,000. In October 2013, the Company purchased this property back for $2,330,000, from the lessor.

Minimum rental commitments as of December 31, ~~2014~~2015 are as follows:

	2015			$	178,126
2016		$	180,257
	2016				181,689
2017			183,863
	2017				185,322
2018			187,540
	2018				189,029
2019			191,291
	2019 and thereafter				790,001
2020 and thereafter			593,835
Total	~~Total~~	$	1,336,786	$	~~1,524,167~~

The leases have various renewal options and require increased rentals under various standard percentages. Rental expenses of $~~173~~176,~~258~~723 and $~~371~~173,~~619~~ 258 for the years ended December 31, ~~2014~~2015 and ~~2013~~2014, respectively. Net of rental income, charged to occupancy and equipment expense in ~~2014~~2015 and ~~2013~~2014 were $~~110~~117,~~691~~ 901 and $~~316~~110,~~533~~691 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.

-23-

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, therefore, are not considered in the calculation of dilutive earnings per share as the effect is not deemed to be dilutive.

	2014		2013
	2015		2014
Net income per common share - basic computation:
Net income available to common shareholders	$	1210,~~199,193~~093	$	~~883~~1,~~750~~199,193
Average common shares outstanding - basic		1,~~764~~765,~~439~~189		1,764,439
Basic and diluted income per common share	$	0.6812	$	0.5068

NOTE 16 - REGULATORY CAPITAL REQUIREMENTS

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.

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.

~~The~~In ~~following~~July ~~table~~2013, federal ~~summarizes~~bank ~~the~~regulatory agencies issued final rules to revise their risk-based capital requirements and the method for calculating ~~amounts~~risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain ~~ratios~~provisions of the Dodd-Frank Act (“Basel III”). On January 1, 2015, the Basel III rules became effective and include transition provisions which implement certain portions of the rules through January 1, 2019. The rules will apply to all national and state banks, such as the Bank, and savings associations and most bank holding companies and savings and loan holding companies. Bank holding companies with less than $500 million in total consolidated assets, such as the ~~regulatory~~Company, are not subject to the final rules, nor are savings and loan holding companies substantially engaged in commercial activities or insurance underwriting. Under the final rules, minimum requirements atwill ~~December~~increase ~~31:~~for both the quantity and quality of capital held by the Bank, which acts as a financial cushion to absorb losses, taking into account the impact of risk. The approved rule includes a new minimum ratio of common equity Tier 1 capital to risk-weighted assets (“CET1”) of 4.5% and a capital conservation buffer of 2.5% of risk-weighted assets, which when fully phased-in, effectively results in a minimum CET1 ratio of 7.0%. Basel III also raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% (which, with the capital conservation buffer, effectively results in a minimum Tier 1 capital ratio of 8.5% when fully phased-in), effectively results in a minimum total capital to risk-weighted assets ratio of 10.5% (with the capital conservation buffer fully phased-in), and requires a minimum leverage ratio of 4.0%. Basel III also makes changes to the risk weights for certain assets and off-balance sheet exposures. Management expects that the capital ratios for the Bank under Basel III will continue to exceed the well-capitalized minimum capital requirements.

											To Be Well-
											Capitalized Under
						For Capital					Prompt Corrective
(Dollars in thousands)	Actual					Adequacy Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
December 31, 2014
Total capital (to risk-weighted assets)	$	12,697		15.87	%	$	6,400		8.00	%	$	8,071		10.00	%
Tier 1 capital (to risk-weighted assets)		11,697		14.62	%		3,200		4.00	%		4,800		6.00	%
Tier 1 capital (to average assets)		11,697		10.57	%		4,427		4.00	%		5,533		5.00	%
December 31, 2013
Total capital (to risk-weighted assets)	$	13,102		16.47	%	$	6,364		8.00	%	$	7,953		10.00	%
Tier 1 capital (to risk-weighted assets)		12,103		15.22	%		3,181		4.00	%		4,772		6.00	%
Tier 1 capital (to average assets)		12,103		10.80	%		4,483		4.00	%		5,604		5.00	%

As of December 31, 2014 and December 31, 2013, the Bank was considered “well-capitalized” under the regulatory capital framework.

-24-

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

NOTE 16 - REGULATORY CAPITAL REQUIREMENTS - 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
(Dollars in thousands)	Actual					Adequacy Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
December 31, 2015
Total capital (to risk-weighted assets)	$	13,162		15.75	%	$	6,686		8.00	%	$	8,357		10.00	%
Tier 1 capital (to risk-weighted assets)		12,108		14.49	%		5,014		6.00	%		6,686		8.00	%
Tier 1 capital (to average assets)		12,108		10.97	%		4,416		4.00	%		5,519		5.00	%
CET1 (to risk weighted assets)		12,108		14.49	%		3,761		4.50	%		5,432		6.50	%

December 31, 2014
Total capital (to risk-weighted assets)	$	12,697		15.87	%	$	6,400		8.00	%	$	8,071		10.00	%
Tier 1 capital (to risk-weighted assets)		11,697		14.62	%		3,200		4.00	%		4,800		6.00	%
Tier 1 capital (to average assets)		11,697		10.57	%		4,427		4.00	%		5,533		5.00	%

As of December 31, 2015 and December 31, 2014, the Bank was considered “well-capitalized” under the regulatory capital framework.

NOTE 17 - UNUSED LINES OF CREDIT

As of December 31, ~~2014~~2015 and ~~2013~~2014, the Company had unused lines of credit to purchase federal funds from unrelated banks totaling $1215,~~550~~050,000 and $12,550,000, 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, ~~2014~~2015 was $1116,~~120~~523,000.

NOTE 18 - RESTRICTIONS ON DIVIDENDS, LOANS, OR ADVANCES

As a bank holding company, the Company’s 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.

The Company is a legal entity separate and distinct from the Bank and does not conduct stand-alone operations. Therefore, the Company’s 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 SCBFI, 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 SCBFI. 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 SCBFI 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 $13,267,090 and $10,711,010 at December 31, 2014 and 2013, 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, 2014 and 2013, 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 $48,000 and $38,000 in letters of credit outstanding as of December 31, 2014 and 2013 respectively.

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CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

NOTE 19 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

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 $15,181,233 and $13,267,090 at December 31, 2015 and 2014, 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, 2015 and 2014, 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 $40,000 and $48,000 in letters of credit outstanding as of December 31, 2015 and 2014 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. On February 15, 2014, the dividend rate on the Series A Preferred Stock increased from 5% per year (approximately $121,210 annually) to 9% per year (approximately $206,370 annually). The Series B Preferred Stock 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. This repurchase saved the Company approximately$58,000 and $104,000 in dividend expenses for the years ended 2014 and 2013, respectively. The remaining 2,129 shares of Series A Preferred Stock and 164 shares of Series B Preferred Stock 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 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.

On April 14, 2014, the Company repurchased 729 shares of the 2,129 shares of Series A Preferred Stock outstanding at par. The repurchase will save the Company approximately $66,000 in dividend expenses annually. As of December 31, 2014, 1,400 shares of Series A Preferred Stock and 164 shares of Series B Preferred Stock were outstanding. The outstanding shares of preferred stock will receive preferential treatment in the event of liquidation, dissolution or winding up of the Company.-26-

CONGAREE BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

NOTE 20 - PREFERRED STOCK - continued

On April 14, 2014, the Company repurchased 729 shares of the 2,129 shares of Series A Preferred Stock outstanding at par. The repurchase will save the Company approximately $66,000 in dividend expenses annually. As of December 31, 2015, 1,400 shares of Series A Preferred Stock and 164 shares of Series B Preferred Stock were outstanding. The outstanding shares of preferred stock will receive preferential treatment in the event of liquidation, dissolution or winding up of the Company.

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.

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CONGAREE BANCSHARES, INC. AND SUBSIDIARY

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

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.

Filing Compare · Congaree Bancshares Inc